Commerce watchdog calls for controls on Auckland Airport again

By NZPA

Tuesday 6th August 2002

The Commerce Commission has confirmed it believes controls should be placed on Auckland International Airport.

The 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.

A report released in July last year came to exactly the same conclusion, before the Government sent the commission away to consider wider matters.

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.

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 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.

However, the commission said it believed Auckland's asset base used to set prices was overvalued by $189.9 million, Wellington by $54.9 million and Christchurch by $38 million.

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

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.

The commission has also been looking at the operations of electricity lines companies at the Government's request. Those companies would appear to be next to have their charges questioned.

Auckland Airport tumbled on the sharemarket after the report was released.

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.

Auckland Airport management was in a meeting this morning following the report's release.

Infratil, the two-thirds owner of Wellington Airport, was down 2c to 181 on the sharemarket this morning.

Although Auckland Airport has been a star performer over recent months, it is kept in check by the pending sale of a cornerstone 25 percent stake by the Auckland city council.

Forsyth Barr Frater Williams broker Richard Burton said the recommendation increased the uncertainty in the stock created by the stock overhang.

"Certainly it's not going to help the price ... With the second term of the Government (price controls) are probably more likely."

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