Explained: The fight over Auckland Airport’s redevelopment

Sunday, 15 September 2024

Price increases by Auckland Airport have airlines up in arms. Those charges will be passed onto passengers and it’s started an intense stand-off which the Commerce Commission is adjudicating. Jetstar has even said fee increases will make it difficult for its domestic operations here to be commercially viable. Lloyd Burr reports.

For the vast majority of visitors to New Zealand, Auckland Airport is where they arrive and set foot in New Zealand, and where they leave. There’s no denying it’s an important gateway with an important role.

Similarly, Auckland’s domestic terminal plays a vital role. It’s the country’s busiest and most important - as both a transiting airport or an origin/destination.

But both terminals are old and in need of an overhaul. The international terminal has been slowly getting an upgrade over the last few years and the domestic terminal has had a few ad hoc changes to extend its life.

But a bigger overhaul is needed to modernise Auckland Airport, especially the domestic terminal. And most big players agree.

This is where the shit fight comes in - and I call it that because it’s messy and there’s a lot of people in disagreement.

There’s disagreement over how the overhaul should be implemented, how it should look, and how much it should cost. There’s a stoush over what size it should be, what costs are acceptable, and what excessive profits are being made. I could go on. There’s pretty much every question being asked by someone, somewhere, along the way.

Proposed fee hikes

Every time a passenger plane lands at an airport, there’s a ‘landing fee’ the airline must pay, which is calculated based on how many passengers are on board. The fee is passed on to the passenger via their ticket price and it helps pay for the airport infrastructure (runways, taxiways, terminals etc) and operation costs (baggage handling, staff, security etc).

Auckland Airport has been consulting with airlines on what’s called Price-Setting Event 4 (PSE4) which are the proposed fees for 2023-2027, and Price-Setting Event 5 (PSE5) for proposed fees from 2028-2032. These will help pay for the redevelopment.

Problem is, those proposals aren’t public and airlines had to sign non-disclosure agreements when being consulted on them. What makes it trickier is that the fee hike proposals have kept changing at different parts of the consultation, with ‘high paths’ and ‘low paths’.

However, the Qantas Group’s submission claims this is what they are:

• Domestic fees per passenger: $6.73 in 2023 rising to $30.30 in 2032 (350% increase).

• International fees per passenger: $23.39 in 2023 to $79.95 in 2032 (240% increase).

Those Qantas figures were put to Auckland Airport, who did not agree with them.

“None of our forecasts show anywhere near the prices airlines claim and we consider these assertions totally misleading”.

Stuff asked the airport for its high and low path fee increases over the same period as the Qantas figures but they didn’t supply them. Instead, they said this: “We haven’t set prices out to 2032, only to 2027. Prices are set every five years because they rely on big variables such as interest rates and cost of construction. We will consult airlines again for the 2027-2032 prices, but we see a viable pathway for domestic jet charges to average $25 over PSE5”.

“Our charges will be going up $1.76 per year on average and at the end of 2027 will be $15.45 for domestic and $10.70 for regional.”

It didn’t supply the equivalent figures for international flights.

What’s it for?

We all know Auckland’s domestic terminal is a bit of a dog and needs an upgrade. Auckland Airport’s solution has a price tag of around $6.6b (other estimates from airlines are higher) and would see the domestic jet terminal merge with the international terminal.

It will also upgrade security screening capacity, add more passenger gates, upgrade baggage systems, resurface the runway and upgrade other facilities like car parks and retail offerings.

That’s the first phase. The next phases will see the regional terminal (that’s where the propeller planes park) moved so it’s part of the new joint terminal. There are long-term plans for a second runway too, if needed.

While it’s been consulting since 2012 on the plans, in recent years there’s been contention over the cost, scale and need for some of the elements the airport is proposing.

(When asked Auckland Airport said the cost of the new domestic jet terminal is $2.2 billion.

“Overall, we are forecast to spend $5.5 billion on assets that will be recovered through aeronautical charges to airlines, with an additional $1.1 billion of investment in other regulated airport assets that are funded through commercial contracts.”)

The Commerce Commission investigated (as it does every five years) and in July, it released a draft report. While the report said Auckland Airport was “targeting excess returns” of between $193.4m and $226.5m, it also said the redevelopment plans “appear appropriate”.

It has prompted a flurry of opposing submissions in response, which are summarised below.

The Qantas Group

The Australian airline group - which owns and operates both the Qantas and Jetstar brands - hasn’t held back on how it feels about the airport’s plans and how it will impact its operations.

It claims New Zealand’s economy (Gross Domestic Product or GDP) will shrink by at least 1% if Auckland Airport’s planned fee hikes for passengers go ahead.

That equates to an annual economic hit of $3.8b, based on the 2023 GDP figure of $387b.

But the concerns don’t stop there. Stuff understands Jetstar has warned the fee increases will make it difficult for its domestic operations here to be commercially viable - although this has been redacted from the report.

“This sharp escalation in prices results from a monopoly infrastructure provider over-investing and overcharging under a capital plan and design that exceeds industry requirements,” its letter from September 3 says.

“The proposed capital plan far exceeds what is needed, adding significant pressure in an already high-cost New Zealand operating environment”.

The submission is full of large chunks of redactions, so its full reasoning isn't publicly available - nor is it clear who actually wrote the letter. It’s also erroneously addressed to the “New Zealand Competition Commission” which doesn’t exist.

Nonetheless, its concerns about the “very significant impact on the aviation sector, consumers and the New Zealand economy” are made plain.

It warns of an annual reduction of at least 1.5 million passengers using Auckland and significant flow-on effects for tourism, domestic travel, job losses and other economic activity.

Over the next 10 years, it says its passenger demand will drop by 6% if each of the hikes goes ahead.

“Neither airline customers nor the New Zealand economy should wear the burden of conscious over-investment or over-collection,” it says.

Then there’s the Perth comparison.

Perth Airport is in the process of being rebuilt to merge its international and domestic terminals, in part to make it easier for domestic flights to connect to new ultra-long haul routes to London, Rome and Paris.

The upgrade includes a new runway, new taxiways, a new terminal, and 50 parking spots for aircraft (but not all connected via airbridges - many are remote and require buses).

Qantas says Auckland Airport’s plan is “two to three times the overall cost of the Perth Airport development”.

“This is as a result of the design footprint being nearly twice the size necessary, and the costs of construction being nearly twice benchmark expectations,” it says.

Auckland Airport responds

- On Jetstar possibly leaving the NZ market: “We value our partnership with Jetstar and the services the airline brings to NZ consumers. In the year to June 2024, Jetstar has increased airline seat capacity in the New Zealand market by 29% to support growth in their business”.

- On GDP potentially shrinking by 1%: “No. Auckland Airport plays a critical role as New Zealand’s gateway, supporting travel, trade and tourism. Our infrastructure programme will reduce the current capacity constraints and support growth in New Zealand’s economy”.

- On potentially reducing passenger demand by 6%: “We have no interest in gold plating airport infrastructure and making travel unaffordable. In fact, delivering additional capacity – more choice of flights and airlines – is what keeps airfares in check”.

- On potential over-investing and over-charging: “We are confident that we are delivering the much-needed upgrade and renewal of an airport that serves as the gateway for more than 18 million travellers and $26 billion in annual trade,” it says, adding the Commerce Commission “confirmed Auckland Airport’s infrastructure programme was on the right track”.

- On the Perth comparison: “It’s comparable to Auckland Airport’s $3.9 billion for the programme of work that includes the Domestic Jet Terminal”.

Air New Zealand

The national carrier’s protestations have been highly publicised and there’s clearly beef between the airline and the airport. Air NZ had supported the airport upgrade since discussions began in 2012 but withdrew its support in 2022 after the plans and costs changed.

The airline submitted two new documents totalling 68 pages. In short, it says the airport has a “consistent track record of targeting excess profits” and the redevelopment is “deliberately inefficient” and lacks innovation.

Air New Zealand’s main argument is around the proposed size of the new domestic terminal. It hired global design and engineering firm ARUP to compare Auckland Airport’s proposed domestic terminal with others around the world. It concluded the proposal is twice as big as it needs to be. It also blasts the airport for using New York’s JFK Airport as a benchmark, calling it an “inappropriate comparison”.

It also claims there hasn’t been genuine consultation.

Auckland Airport responds

- On the claim the new domestic terminal is too big: “We are building for the next 50 years, not the next four quarters. Our new domestic jet terminal will add a much needed extra 26% domestic seat capacity, enabling greater competition which puts downward pressure on airfares. We are also adding 44% more space to process passengers and reduce queuing time”.

- On the claim of excessive profits: “Airport charges at Auckland make up just 4-6% of an average domestic airfare. Auckland Airport’s domestic charges have been 40-50% lower than similar airports for many years and at the end of our current pricing period will remain at or below other New Zealand Airports”.

BARNZ

The Board of Airline Representatives NZ (BARNZ) submitted on behalf of its 25 member airlines (nearly all international carriers flying here). You can see their membership here by the way.

It’s a blistering read when it comes to Auckland Airport’s profit margins. “It would be more remarkable had AIAL not targeted excess profits,” it says, adding that airlines have come to expect that Auckland Airport will target excess profits when setting prices.

“There is no other regulated company which is permitted to over-charge its customers so excessively and for so long”. It points out the regulatory regime doesn’t penalise airports who set prices like this.

It is critical of the airport’s consultation process being carried out under non-disclosure agreements. The cost of the expansion has ballooned too, and following concerns being raised by airlines the project cost was recalculated and the end result was “more than it had been at the beginning of the process”.

BARNZ says the airport’s consultation on the cost of the redevelopment “was a facade”, and with regards to the airport’s innovation, it brutally says it “has not been able to identify any”.

Auckland Airport responds

- On the claim consultation has been “a facade”: “Consultation with airlines has been underway for around a decade with more than 21 different concept designs thoroughly looked at, including consideration of an alternative design tabled after consultation had concluded by Air NZ. However, we carefully considered this design, but it simply isn’t viable: a bridge to nowhere; no room for essential security screening; lack of space for government agencies; and missing a delivery facility for the hundreds of trucks that bring in goods each week so the airport can operate, to name a few examples”.

- On the claim of a lack of innovation: “We take a broader view of innovation and look to opportunities beyond blue sky thinking or ‘first in the world’ initiatives. That covers everything from how we continue improving service levels, add additional capacity and make sure expenditure is kept in check. This is what delivers real benefits for the travellers using our airport every day”.

– On NDAs, it said: “Confidentially agreements used during consultation between airlines and Auckland Airport are two way - airline information shared during the process is also kept confidential. It allows the airport and airlines to freely share commercially sensitive information in order to make fully informed decisions, and allow Auckland Airport to share this information and comply with NZX listing rules.

“They in no way limit the information the Commerce Commission has to scrutinise Auckland Airport decision making - this information can and has been provided to the Commission as part of this review process.”

The IATA

The International Air Transport Association is a big deal. They represent over 330 airlines around the world and essentially set aviation standards. In short, when IATA speaks, the aviation world listens.

Its submission raises some serious concerns regarding Auckland Airport’s consultation process with the airlines which use the airport and what it cites as “irreversible decisions” being made.

“There is little information disclosed to indicate a transparent, reasonable, and structured consultation process,” the IATA submission says. It calls this a “major concern”.

“The fact that major airlines operating at AKL continue to challenge the scale of investment plans, cost increases and important elements such as passenger levels of service indicates a failure of the consultation process and underlying regulation that risks adversely impact users and consumers unless action is taken.”

There are also concerns about the size of the domestic terminal, similar to those raised by Air New Zealand.

It also points out the airport has moved up the rankings of the most expensive airports in terms of operating expenditure per passenger, from 43rd in 2022 to 26 in 2023.

The IATA calls for an independent review of the terminal, piers and other infrastructure before the airport proceeds any further.

Auckland Airport responds

- On the claim the new domestic terminal is too big: “Our design has been guided by international service quality standards that set out clear benchmarks for dwell spaces, processing areas and gate lounges. The new domestic jet terminal is a simple, cost-efficient design that has been independently costed and peer reviewed.”

- On the call for an independent review: “We are calling time on the delay tactics. Auckland Airport is getting on with building the resilient, fit-for-purpose airport that meets the needs of customers and to support our economy. Delaying infrastructure is not in our country’s best interests.”

A4ANZ

Airlines for Australia and New Zealand (A4ANZ) represents five airlines, of which three currently fly into Auckland (Qantas, Jetstar and Air NZ). Its submission isn’t as blistering as others, but makes some interesting points.

It’s concerned that fees for domestic jet service will more than double between 2023-2027 and fees for regional and international services will nearly double.

The proposed domestic terminal is “more akin to that of a high-end international terminal” and in the short term, will have access to fewer gates.

The group finds it “unsurprising” that the airport is targeting greater excessive profits than it usually targets, adding customers will end up paying $65m extra in fees over the five year period to 2028.

It hits out at the lack of regulation for New Zealand airports and points to Australia’s unregulated airports as an example of why change is needed. They are not a benchmark to replicate, but rather a model to be avoided, their submission says.

Auckland Airport responds

- Again, on the claim the new domestic terminal being too big: “Globally, travel is up 14% YOY in 2024. The future of airlines and airports is robust, and both are investing substantially in future capacity. Even if travel trends in New Zealand were half of those overseas, this number will fully support the footprint of Auckland Airport’s new integrated terminal build.”

LGNZ

Local Government New Zealand says Auckland Airport’s proposed fee hikes are an “existential threat to smaller airlines” and will challenge the viability of them to continue to operate.

“In a small market with few established players, this could mean a significant reduction in levels of service,” it says if those airline are unable to absorb the extra costs.

It urges the airport to “come up with a better plan” and deliver the upgrade “in a way that reduces pressure on charges to airlines”.

Auckland Airport responds

- On the claim of an existential threat to smaller airlines: “Smaller airlines are essential for providing connections to our regions and much needed competition to the regions, particularly in a market where Air NZ holds an 86% share. Auckland Airport provides significant support to smaller airlines, and they too will benefit from the investment we are making, such as airfield and pavement upgrades. Regardless of an airline's size or destination, it would be totally counter-intuitive and against the principles of our core business to do anything that would cause a material decline in travel”.

Christchurch Airport

The gateway to the South Island made a short submission which could be interpreted as a bit tongue-in-cheek.

It asked the Commerce Commission to include the fees it charges, which are the same for all domestic and international passengers.

It’s $14.10 for the 2024 year, which is less than half of what it claims Auckland Airport’s international fee is which it lists as $31.73.

Supporter: NZ Airports Association

Much of NZ Airports’ submission relates to coding errors in some of the data used by the Commerce Commission’s draft report. However, there are some non-error related comments.

The association is in favour of the airport’s redevelopment and the way it plans to pay for it. It says Auckland’s landing fees have been low for many years and it cautions the Commission from placing too much weight on the airlines’ submissions which have “clouded” the draft findings.

“There is a demonstrable pattern of airlines opposing decisions that do not suit their short-term interests,” it says.

“Airports NZ is pleased to see that the Commission has not been swayed by the self-interest of the airlines and recognises that Auckland Airport has acted appropriately to manage the risk of under-delivery”.

For transparency, it’s worth pointing out Auckland Airport’s CEO Carrie Hurihanganui sits on the board of the NZ Airports Association.

This article has been updated to add further clarity that the Commerce Commission investigates airports regularly. We added a link so readers can see the BARNZ executive committee. We added further details around the cost of the work. And we have added in a response from Auckland Airport on the issue of NDAs