Plainly, the claims being tossed around in the media last year that the new terminal envisaged by Auckland International Airport was a gold-plated “Taj Mahal” extravagance were false. With one notable exception, the Commerce Commission’s comprehensive investigation has ended up endorsing every other aspect of the airport’s building programme (and its pricing/charging decisions) as “reasonable” and /or “acceptable” within the terms of the Commerce Act. The new terminal will integrate the airport’s domestic and international functions, and is set to become operational in 2029 at the latest.
The exception has largely been rooted in disagreements between the Commission and the airport over the appropriate model for the calculation of a reasonable rate of return on the capital costs of the terminal build.
As the main consequence of this modelling, the airport was projecting a higher return on its capital than the Commission deemed to be reasonable, to the tune of circa $190 million over the relevant five year term from 2022. (The projected return was also above what the Commission decided were reasonable inflationary expectations as well.) Interestingly, the model favoured by the airport had sought to safeguard against the prospect of another pandemic, given the potential impact this could have on passenger volumes and revenue. Finally, the airport model had also sought to smooth out the rising curve between the current five year pricing period that ends in 2027 and the next one, based on an expectation of tougher times ahead for the aviation industry.
Ultimately, the Commerce Commission’s preferred “tilted annuity model of depreciation” – previously used in the Christchurch airport rebuild – meant that it concluded Auckland airport had estimated its targeted return on its priced services to be 8.73%, while the Commission felt that a value in the 7.28% to 7.82% range was more reasonable. Even so, when viewed in the context of a $5 billion building programme…a $190 million variance largely born of a clash over different accounting models (and differing assessments of future risk) is not peanuts, it isn’t highway robbery either. In the PPPs for major infrastructural projects, the government would be inclined to treat that level of cost differential spread over five years as a rounding error.
It is worth stressing this point. Item by item, the Commission has picked its way through the new terminal build, the details of its proposed scale and the cost increases required to deliver the efficiencies being pursued. It arrived at how the related aeronautical charges have been calculated, and whether they are consistent with the charging levels faced by international airlines at peer Australian airports. ( Apparently, they are.) As mentioned, the Commission found only that $190 million point of difference i.e. a 3.8 % bubble of excess on the $5 billion building programme being contemplated over a five year period.
Auckland airport immediately agreed to discount those aeronautical charges over the remaining two years of the current charging period. It is little wonder the airport conceded so readily on this point, given the other stakes in play in the Commission’s report, and which were found almost entirely in the airport’s favour. To the point where it is hard to see any other significant area where the airlines’ submissions have been endorsed by the Commission.
Here’s the thing. At best, the $190 million – even if it was handed back in full with interest – would make no discernible difference in the ticket prices being charged by the airlines, even if Air New Zealand and other airlines did choose to pass all the discounted aeronautical charges back to passengers in the form of reduced ticket prices. For the politicians and travelling public alike, it is worth underlining that there is no evidence that airport charges have been so wildly excessive as to justify Air New Zealand’s own recent decisions to raise its ticket prices for domestic travel through the roof.
Meaning: air traffic may be returning to pre-Covid levels, but airline ticket prices are not. No doubt, populist politicians on both sides of the House will feel tempted to make hay out of the public’s simmering anger at soaring ticket prices, but they need to finger the right culprit. Thanks to the Commerce Commission, we now know that it isn’t the airports. Hey, could it be the cost of jet aviation fuel which – reportedly – accounts for 25-40% of an airline’s operatting expenses? Nope. Evidently, the airlines can’t blame the cost of jet aviation fuel for the sharply elevated cost of flying around New Zealand.
Unfortunately, the public’s trust in the government’s credibility on this issue is bound to be clouded by perceptions of vested interests and lingering sympathies. The state, after all, owns a 51% majority stake in Air New Zealand. The Prime Minister himself is a former CEO of the airline. If the coalition government wants to present itself as the champion of a travelling public maddened by the steep cost of domestic air travel, it should resist the temptation to treat the airports as a convenient scapegoat.
Instead, it could start by looking closer to home, at its own aviation asset. It could start by demanding more public transparency from Air New Zealand about how the airline sets its ticket prices.
The wider context
The battle between these two monoliths has been a Godzilla versus King Kong contest, with the Commerce Commission as neutral referee. As has often been pointed out, Auckland International Airport is the gateway for the vast bulk of tourists entering this country, and for some 60% of this country’s inbound freight. The tired, 60 year old domestic terminal in particular, has long been overdue for remedial action.
Obviously, airlines and their passengers will benefit from the planned improvement in facilities which – among other things – will lift overall capacity, increase the speed in baggage handling, and boost turnaround times and border security. In line with the user pays ethos, the customers (airlines and passengers alike) will need to contribute their fair share for all of this.
True, the estimates for borrowing costs, landing charges, and rates of return from building and operating this crucial bit of tourism infrastructure have been set by a monopoly supplier (Auckland International Airport) that’s able to pass on its aeronautical charges to the airlines unhindered by competitive forces. Thankfully though, the airport’s estimates have now largely been signed off by the Commerce Commission, as striking a reasonable and acceptable balance.
Talk about monopoly mirror images, though. The airport’s main customer happens to be Air New Zealand, a neo-monopoly that enjoys an 86% market share of our airline industry. (In Australia, Qantas faces considerably more regulatory obligations than Air New Zealand does here, even though Qantas has a smaller market share, of 61-65%.) Much like Auckland airport, Air New Zealand itself is insulated from meaningful competition when it comes to the ticket prices that it sets for its domestic customers, especially on journeys to and from regional New Zealand.
Trusting in antitrust laws
This Commerce Commission report looks like being something of a landmark in New Zealand’s ability to monitor and regulate its monopoly/duopoly/cartel forms of market power. These concentrations of market power are pervasive in almost every sector of the New Zealand economy.
Ever wonder why we have the least competitive supermarket system, the least competitive banking system, the least competitive airline system, the most concentrated media industry, and (formerly) the least competitive telecommunications system in the developed world? Even the fertiliser industry has been dominated for decades by only two players, Ballance and Ravensdown. That’s how we roll. As consumers, we live and die within captive markets.
Part of that comes down to ideology, and part of it comes down to being a small, faraway country immunised by geography against learning from the mistakes of others. With hindsight, New Zealand was always too small to embark on a successful free market experiment. Our population was never going to be able to support the necessary levels of competition. Regardless, in the late 1980s, New Zealand began turning its state monopolies into private sector monopolies without bothering to protect the public adequately against the predatory pricing that the new owners proceeded to pursue, for the greater gain of their shareholders.
Within our political culture, strong antitrust laws (and the political will to enforce them) have been alien concepts. It may be small consolation…but the quality of this latest Commerce Commission report should reassure the public that the real problem with the savage increases in airline prices over the past 18 months has (very largely) been of Air New Zealand’s making.
That is where any remedial action by government should be focussed. Chances are, it won’t be. Did you know that the Prime Minister used to run an airline?
Footnote: Globally, it is now the accepted wisdom that markets need to be firmly regulated if they are to remain competitive. Otherwise, the natural order of things is for wealth and power to accumulate among fewer and fewer players, to the detriment of ordinary citizens and consumers. The de-regulation of financial markets is now recognised to have led directly to the Global Financial Crisis. Similarly, the de-regulation of the labour inspectorate in the early 1990s led directly to Pike River.
The coalition government seems to be intent on ignoring such lessons. Instead, we have a Ministry of Regulation aimed at stripping away the few remaining consumer protections in what has long been the least regulated economy in the developed world. Reportedly, ACT is also blocking any effective ant-trust actions to break up the supermarket duopoly.
Like the corporate chieftains he exists to serve, David Seymour seems to be living in a time-warp where markets are believed to be self – regulating. Even the Americans gave up that idea in 1890.
Great, Great Grandpa
On release in late 2019, the Four of Arrows album by Great Grandpa was either ignored, or damned with faint praise. Put it down to coming out on the eve of the pandemic and sounding like a folk-inflected guitar band in an indie genre already owned by Big Thief. Over the past six years though, the album has gradually grown in stature – such that one other band (Ratboys) chose to record in the same studio in Seattle, to try and capture some of its pixie dust for themselves.
Good call. Four of Arrows is a constantly rewarding album, with no filler. The fluidly changing melodic directions, surprising tonal shifts, distinctive vocal harmonies and wry, conversational lyrics all help to explain why this record inspires possessive affection. On “Bloom” for instance, thirtysomething career and creative anxieties take this form:
I get anxious on the weekends when I feel I’m wasting time/
But then I think about Tom Petty and how he wrote his best songs when he was 39/
Say I’m young enough to change
Please say I’m young enough…
Here’s the album opener “Dark Green Water”
The odds against the band being able to repeat the 2019 magic were pretty steep. Two key members are now raising a family together in Europe. Yet so far, the reviews for last month’s second album Patience, Moonbeam have been stellar. From the new album, here’s “Junior” …The track is a kaleidoscope of childhood memories, good and bad (they shot his dog!) to do with the neighbourhood environment, and love at first sight. It was written by and about the couple with the new baby, now living in Denmark.