Commerce Commission scored a D Fail on its homework calculating cost of capital for airports in the latest round of airport services pricing, with coding errors skewing calculations. Result: chaos in the bespoke High Court appeal process currently underway deciding how much airports can charge airlines for services provided.
Major international airports throughout the country operate as local monopolies. There are no alternative passenger and cargo facilities within Auckland, Wellington or Christchurch to land and service wide-body jets.
Landing and service charges are set by the Commerce Commission. This requires detailed analysis to determine what is a fair return on each airport’s extensive infrastructure.
One critical component is an assessment of each airport company’s weighted cost of capital: primarily, the cost of equity and the cost of debt; capital used to finance airport assets.
All bread and butter stuff for experts in finance.
The High Court was told airports discovered statistical errors in Commerce Commission’s 2023 pricing determination, after the determination appeal process was underway. Incorrect inputs had been applied to a programming language called R.
Airport pricing appeals follow a bespoke process.
An appeal is a re-hearing. The High Court can only consider information put before the Commission prior to its pricing determination.
The Airports Association said this means its appeal will continue with the knowledge that the Commission’s figures are wrong, while all parties are unable to acknowledge in course of the appeal why the figures are wrong; despite this error being known to everyone in the courtroom.
Airports Association wants the current determination scrapped, with the Commerce Commission going back to square one, starting a new pricing determination all over again.
While recognising its mistake, the Commission is unwilling to amend its current determination; that would prejudice the appeal process currently underway.
In the High Court, Justice Radich ruled the better way forward is to have Airports Association continue with its current appeal. After disputed points of principle have been resolved in court, the Commission can be invited to apply its corrected cost of capital formula to the court’s ruling.
Points of principle in issue are: how future traffic levels are to be assessed, given the historical record is warped by disruption caused by travel bans imposed during the covid-19 pandemic, and; what businesses should be used as comparators when assessing an appropriate return on capital.
High Court appeals from Commerce Commission pricing determinations are heard by a three-person panel: a judge and two lay assessors having expertise in finance and economics.
NZ Airports Association v. Commerce Commission – High Court (19.12.24)
25.055