Decision on form of airport price controls some months away

By NZPA

Tuesday 6th August 2002

A decision on how Auckland International Airport prices should be controlled is still some time away despite a report today recommending controls.

The Commerce Commission's long-running investigation into the charges imposed on airlines has also concluded that controls on Wellington and Christchurch International Airports are not necessary at the stage.

The latest recommendation from the Government's competition watchdog comes after a four year process and Commerce Minister Paul Swain said he would now take another four months to decide on what, if any, action should be taken.

Auckland Airport's share price tumbled on the sharemarket in reaction to the report's release. The airport, which handles 70 percent of the country's passenger arrivals and departments, lost more than 4 percent of its value in early trade, sliding 18c to $3.98 before recovering slightly.

Peter Stokes of JB Were said the report did not remove uncertainty over the stock.

"It means that for some time we won't know exactly what the result's going to be, it's going to hang over the stock until the end of the year.

"All we've got is a report that says it recommends price controls should be imposed, for Auckland anyway, and the question of what form of price control fell outside of this inquiry," Mr Stokes said.

"We won't know specifically if there's any price controls or what they are until Christmas, and that hangs over the stock."

Commission chairman John Belgrave said its investigation estimated efficient prices, compared with those actually charged.

The commission estimated Auckland had earned around $4 million more a year than it should have and Wellington $1.3 million.

The commission also estimated that future returns at Auckland would be around $3.8 million a year more than was justified, while Wellington's would be $684,000 before any proposed increase in charges was taken into account. Christchurch would probably not earn as much as it could justify.

It downgraded Auckland's asset base by about 40 percent to $189 million, and Wellington's by a similar amount to $55 million.

Mr Belgrave said the Commerce Act did not allow the recovery of past returns, and he was unsure if the commission could recoup the amount it estimated airports had overcharged.

Consumers should benefit from price controls, reducing landing fees which was likely to be reflected in lower prices. Regardless of the outcome, the report at least provided an alternative to current charging structures, he said.

The commission essentially believes all the airports are overvaluing their assets and then using that valuation to justify the charges set due to their virtual monopoly.

In Wellington's and Christchurch's cases the commission said the imposition of charges was not justified, but warned if Wellington "imposes a significant increase in charges" then the commission would find against it.

The report took into account Wellington Airport's recent 10 percent increase in landing charges.

The commission did not specify what form of control should be imposed but noted "less intrusive, and lower cost, forms of control than price cap regulation ... are likely to be available".

The airports have argued against any price control saying airlines work together in the negotiations and airports are legally forced to consult on charges.

The commission disagreed concluding "there are insufficient constraints" on the airports and very low chance of competitors entering the market. Airlines had little choice but to pay a charge when the demand for flights originated from an area serviced by the airport.

The airports use the value of their assets to justify charges needed to get a fair return to shareholders.

Like other utility companies such as electricity line companies, airports value their assets at the price it would take to set up the entire structure from scratch.

Auckland had placed too high a value on land and in particular that acquired to perhaps build another runway in the future. The commission also felt that too high a value was being placed on specialist equipment by the airports.

The conclusions on valuations and methods used to reach them were not unanimous, with two of the five panel members disagreeing and recording their view that controls were neither necessary nor desirable.

The commission believed after the cost of regulation was taken into account the imposition of controls would save airlines about $2 million a year in charges at Auckland. The costs would outweigh the benefits at Wellington and Christchurch on current charges.

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