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Airport upgrades don’t justify targeted returns

Auckland International Airport's $1.8 billion infrastructure upgrade doesn't justify a 7.06 percent return on its regulated assets during the next five years, the Commerce Commission says. 

The regulator estimates Auckland Airport will generate an additional $37 million of profit beyond what it considers an appropriate return, but didn't go as far as to call all of those earnings excessive. The commission accepted there were risks associated with the major upgrade, but not enough to warrant the targeted returns. 

"We consider that the risks associated with the investment programme could justify a return that is slightly higher than our benchmark estimate," deputy chair Sue Begg said. "However, we aren’t persuaded that the full extent of Auckland’s targeted return is warranted."

The Commerce Commission reviews airport pricing on a semi-regular basis under an information disclosure regime meant to discourage operators from gouging customers. It gauges whether projected profits over a set period are excessive and that the services being offered do meet customer demands. 

Auckland Airport yesterday affirmed annual earnings guidance for underlying earnings of between $265 million and $275 million in the year ending June 30, up from $263.1 million. It told shareholders the airport is in a period of elevated investment to meet the swelling demand, with passenger numbers up 44 percent since 2012, the start of the previous regulated period. 

The commission said it wasn't concerned by the airport's investment plans, which will accommodate future growth, help manage congestion and improve service quality. The regulator also accepted the size of the investment elevated risks but didn't think it would affect the operator's cost of capital as much as Auckland Airport claimed. 

The airport is targeting a return of 6.99 percent on the bulk of its regulated assets and 7.9 percent on other regulated services. That amounts to a 7.06 percent return across the entire base. 

The regulator said the extra cost to consumers at the 6.99 percent target outweighed the risk of under-investment. It also said the 7.9 percent return on other services was too high. 

The commission said it was satisfied the information disclosure regime limited Auckland Airport's ability to extract excessive profits from customers. It didn't have significant concerns with the forecasts underpinning the operator's expected returns and didn't think projected growth in demand will lead to excessive profits. 

The Commerce Commission also reviewed Christchurch International Airport in this cycle, and found the South Island airport's targeted returns of 6.65 percent were reasonable and consistent with promoting long-term benefits for consumers. 

"We had no significant concerns with Christchurch Airport’s expenditure and demand forecasts, or the efficiency of its prices," Begg said. 

The regulator's report said Christchurch Airport had improved its transparency and consultation process since the previous pricing period and received favourable comments from airlines. However, the commission was concerned about the limited information provided on route incentive payments

"Christchurch Airport’s target return is significantly lower than when it previously set prices," the report said. 

The airport's $82 million capital spending programme through the period was also considered to be business as usual. 

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