Bernard Hickey argues Infratil and the Wellington Council should take the risk of investing NZ$300 mln to extend the Wellington Airport, not the region's ratepayers and the nation's taxpayers in general

Bernard Hickey argues Infratil and the Wellington Council should take the risk of investing NZ$300 mln to extend the Wellington Airport, not the region's ratepayers and the nation's taxpayers in general

By Bernard Hickey

As a Wellingtonian, I would love nothing more than a longer runway that gave me the choice of direct flights to Asia and America. It would save me the trouble and expense of having to schlep up to Auckland and then walk the gauntlet through the car parks and past the fuel tanks to the International terminal.

Potentially, it would encourage more direct international tourism to my city and also boost demand for foreign education. As a Wellington property owner, the one thing I'd love more than a fancier airport is the sort of house price inflation that Auckland -- the current beneficiary of all those direct flights -- gets from all those tourists, students and foreign buyers of houses.

Like a lot of Wellingtonians, I'm a little frustrated at living in a 'dying city' -- as the Prime Minister once famously said -- where house prices have risen 3% in the last six years while Auckland house prices have risen 83%.

Even John Key acknowledged in August that others would like to see the sort of Auckland-style foreign visitor and investor joy in their cities.

"I go around the rest of the country and people say to me 'Can we have a few of those Chinese buyers in Wellington and other parts of New Zealand because actually we want our house prices to go up'," Mr Key said back then.

So it's no wonder Wellingtonians would like a bit of help from John 'Dying City' Key to juice up economic growth with some Government-funded infrastructure spending to give the Capital a bit more of that Auckland-style foreign-powered economic growth.

And here comes the request.

This week Wellington Airport detailed its business case for a 354 metre extension of the runway out into the sea near Moa Point. It would cost around NZ$300 million and generate net benefits for the nation of around NZ$2 billion. In theory, it would allow the fancy new long-haul 787 and A350 planes to fly direct from Asia and North America to Wellington, although there is some vagueness about whether planes could fly all the way to the likes of Vancouver, San Francisco, Beijing or Tokyo with full loads of fuel and cargo. Pilots also have some doubts over whether these fully laden planes can be safely flown in and out of Wellington.

But aside from the pesky details and speculation of which flights and when, the catch is the Airport, which is 34% owned by Wellington Council and 66% owned by listed infrastructure investor Infratil, would like the Wellington Region's councils to put up NZ$150 million of that money. The rest would be paid for by the Airport and the central Government, which of course means the taxpayers of New Zealand more broadly.

The airport's logic seems compelling. Surely if an extra dollar is spent and it returns $7 to the nation then of course taxpayers and the Government in particular would benefit through higher GST and other taxpayers?

But it all depends on whether the flights would actually come. Wellington may be New Zealand's most popular local destination for local tourists, but foreigners tend to fly over it or ignore it completely. Without a Lord of the Rings museum or some snow-capped mountains or a fancy casino, Wellington seems a bit off the beaten track. There is a hefty batch of chickens and eggs in this debate, but the lack of things for foreigners to do and see can't be ignored.

And the history of build-it-and-they-will-come airport extensions in Australia and New Zealand is just plain awful. Wellington's ratepayers should have a chat to the local politicians in Invercargill, Rotorua, Hamilton and Canberra, who all spent millions on the promise of direct international flights, only to see them either dry up and go away or never arrive at all.

In all the business cases put forward this week, there were no assurances or deals to guarantee direct flights. Air New Zealand is openly hostile, given it has invested in creating a hub in Auckland and no doubt is not keen on competing foreign carriers flying into Wellington.

The fallout for Wellington airport travellers if the airlines don't come would be significant. The Airport would have to increase landing charges for domestic travellers. Ticket prices could increase by an extra NZ$10 per ticket to pay for the airport's share of the NZ$300 million investment if the foreign airlines don't come.. Meanwhile, ratepayers and taxpayers would also be out of pocket.

The Government's initial reaction this week was understandably sceptical, arguing that if the business case was so strong then Infratil and the Council should stump up all the money.

"It remains mystifying why a private company whose parent made NZ$385 million last year thinks it needs taxpayers to pay for this," Economic Development Minister Steven Joyce tweeted in response to a pro-extension front page from the local newspaper.

Mr Joyce argued that the best judge of the likely direct flights should be the airport. It should make that judgement and take that risk.

It's hard to argue against that from a New Zealand taxpayer point of view. If Wellington wants to blow its money on a white elephant extension then local ratepayers and local airport shareholders should take that risk, not taxpayers in Invercargill, Hamilton and Rotorua.

The complication comes when investors look at the way the central Government takes bets on the use of motorways generally and some rail in particular, essentially subsidising public assets. Why should airport transport infrastructure be any different, the runway extension's proponents would ask?

The difference is that the airports are user pays and in this case mostly privately owned. When an extension doesn't pay then ticket prices go up through the landing charges passed on by the airlines. If it works, then taxpayers have subsidised the profits of a private company.

The danger for Wellingtonians is they pay twice -- through higher rates and through higher ticket prices on domestic flights. On second thoughts, I'm not quite so enthusiastic.

It's a risk and it may well be a risk worth taking. But it's a risk that informed airport shareholders should take, rather than ratepayers and taxpayers in general.  

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A version of this article first appeared in the Herald on Sunday. It is here with permission.

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43 Comments

I agree on the business case, a 7 to 1 return should be a no brainer for any commercial organisation. Of course peak oil = planes gone in 20 years. The council is the rate payers, so no thanks.

You're not still going on about peak oil are you? Have you seen the price of oil? If anything I would say we are at peak demand - electric cars will quickly eliminate almost all commuter demand for oils and electric heavy vehicles will happen in the next 20 years.

Peak oil is a geological fact as we are on a finite planet. Do you actually understand the term "peak oil" by the way?

The price of oil bears no reflection on the cost to produce when there is not the demand, ie economics over-ride in the short term giving huge price volatility.

"Peak demand" is a misnomer. Its driven by the state of an economy (bad) and the developing nation's demand (who are 5billion v 2billion in the developed world) is climbing. So there is no real evidence that GDP has decoupled from oil consumption, ie roughly for 4% GDP growth we need 2% more oil.

EVs are again expensive to produce in massive quantity when the source of materials for the batteries is limited. Now it may well be we'll see big improvements still, but its a long ways off. For hvy vehilces over long distances, no battery tech is unlikely to ever be a goer, hence we need to electrify the trunk lines.

"The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end, not because we have a lack of oil." - Sheikh Zaki Yamani, former Saudi Arabian oil minister

.....ummmmm so why the chaos in the Middle East my friend? It's all about the black stuff or do you watch Fox TV perhaps?

and you seriously believe that?

The cost of batteries is going down all of the time, it won't be long until EV's are cheaper than petrol cars (as they have significantly less components).

Looking at the past to predict oil consumption is a fools game. In the past there wasn't a way of cheaply storing electricity, in the future (and even the present) there is. Oil prices would have to drop a lot to compete with electricity prices.

uh...no, on many levels.

Just take one aspect, how well do you think jumbo jets / airplanes will fly using batteries?

Jumbo jets like the Boeing 787-9 ? I think that they fly pretty well, there were some issues with the earlier model's batteries but the 787-9 seems pretty good. Air New Zealand's units are very comfy inside.

and the main engines are battery powered? LOL.

it is the Prius of the aircraft world (ie. the forerunner of electrification that demonstrates the technology's viability so that customers aren't freaked out by the next iteration). The tech exists but we still need to convince consumers that it is what they want.

I really like the concept of coal fired aeroplanes. Passengers in economy double as stokers. Its a win - win.

steam punk....:)

Aren't demand, supply and price supposed to be linked?

- Why did demand peak? Answer oil became expensive.
- Why did oil become expensive? Not enough supply to meet demand.
- Why cheap now? Increased supply in response to high price and reduced demand from consumers.
- What will cheap oil prices cause? Increased demand and reduced supply.
- What will increased demand and reduced supply do to oil prices eventually?

Like clock-work the estimated vehicle miles traveled in the USA is increasing again in response to low price:
http://www.citylab.com/commute/2015/11/peak-car-us-driving-america-vmt-v...

Remember, the current price per barrel is now under the break-even price for many oil producers. If you think the current oil price is sustainable in the long-term then you'll be in for a rude surprise (unless economies tank through a major economic implosion).

"Why cheap now? Increased supply in response to high price and reduced demand from consumers."
How can they increase supply if we are at peak oil? Can't supply only drop in that scenario?

"why cheap now" well price volatility and bad impacts was expected by some.

"Some observers, such as petroleum industry experts Kenneth S. Deffeyes and Matthew Simmons, predict negative global economy implications following a post-peak production decline and oil price increase because of the high dependence of most modern industrial transport, agricultural, and industrial systems on the low cost and high availability of oil"

The term "peak oil" is about conventional oil, ie not un-conventional oils, ie the likes of US shale. So if you look at the conventional peak it is about 2005~2015 ie it reached a plateau in 2005 and has been flat since more or less. What has masked this flat (or even decline) has been US shale which has boomed.

It does seem crazy at the moment for Saudi to open all the valves unless their aim is to destroy the US shale industry. Meanwhile other oil producers like venezuela are getting distressed and when iran starts to get going, oh boy. So low oil prices for how long? until maybe a big oil producer collapses? hmm that could get ugly.

Simple, we are not at peak oil yet. Conventional oil peaked in 2005 but extraction of more expensive unconventional oil and condensates has increased to give net growth in total crude and condensate production.

This is one of the reasons the current oil price will have to rise again in the near future. Supply has already started to decline in unconventional fields in response to current price.

Sort of but that is a bit complicated in real life. Supply peaked first in 2004~5, price peaked in 2008. Then the excessive price caused the GFC.

Though while demand in the developed world has peaked and declined demand in the developing world continues to grow. On top of that there is no evidence that GDP growth has disconnected from the demand for more oil to do it. For 4% GDP we need roughly 2% more oil, so if demand is indeed down either GDP is make believe, its debt doing it or the disconnect has happened. Personally I think its mostly the first two.

A landing spot for Hot Air balloons perhaps? Albeit slightly under water of course.

Bernard didn't you move to Wellington because you were anti aucklands house price growth? Aren't cheap houses a good thing?

I think Bernard writes with 'tongue in cheek' when he said that Wellington and other stable house price places aspire to have a housing market more like Auckland.

I'd like to see the extension go ahead but feel that central government, as opposed to WCC is the more logical partner for Infratil given CG's use of long haul services, particularly to Asia and then onto Europe. (Provided the aircraft can do WGN direct to Singapore).

Someone in CG should do the calculation in terms of potential savings, rather than just dismiss the idea outright. This National government always just jumps in on a conversation based on ideology as opposed to researched/considered analysis.

If the returns are that good? why do the tax payer or rate payer need to be involved?

Taxpayers are already on the hook via Air New Zealand - hence domestic travellers pay monopoly ticket prices. Should the Wellington runway extension go ahead and Big-Air arrives in town, guess what happens to the value of Air New Zealand's monopoly protected share price

Given the conflict, it is in central governments interest not to finance (or encourage) the expansion because it would automatically erode the value of its holding in Air New Zealand by (approximately) the same amount

See Stephen Hulme's comment below

Surely you do not expect the idle rich to cough up a few extra dollars to pay for their own travel expenses, tax deductible jets and all and also that dwindling supply of oil resources you keep reminding us about Steven.

No it is the masses who will pay. And so they damn well should.

Some people need to be set an example, as to just how the other half lives.

And that also includes our own set of First Class miss-fits flying around and to the Beehive.

So watch yer manners laddie. Wellington is home to all of em at one time or another.

And you also pay for that privilege too.

Quite why, not so sure, I would not employ a one of em. But you silly mugs keep voting for them.

Truth be really, really told.

The 2 billion quoted has nothing to do with the profit for the airport were it to extend. The 2 billion is the benefit to the nation, from a quick glance at the report mostly this goes to users (who presumably save money by avoiding connecting flights) and the Wellington area through increased visitors/tourism.

All very well and good, but if the majority of the benefits are going to locals, why would Infratil stump up all the cash? The numbers we're quoting here have no relation to the business case for them.

deja vu - the Don Quixote Airport

Reminiscent of Spain's Ciudad Airport - built in 2010 - on a hope and a prayer with huge expectations
Check out Ciudad Real Spain Airport - the €1 billion ghost airport - sold to the Chinese for €10,000
Who plan to turn it into a global aviation transport-freight hub
How much is that in $ dollars
Click through the photos - magnificent
http://www.theguardian.com/world/2015/jul/17/don-quixote-airport-buildin...

And, reading on through the attached article - this gem
Two other brand-new passenger airports – Lleida in Catalonia and Castelló near Valencia – remain unused

Financial danger
White elephants, alien landing strips: welcome to the strange world of abandoned airports
http://www.skyscanner.net/news/14-worlds-most-amazing-abandoned-airports

The danger for Wellingtonians is they pay twice -- through higher rates and through higher ticket prices on domestic flights. On second thoughts, I'm not quite so enthusiastic.

The complexities of Wellington Airport's tax avoidance issues highlighted by Tim Hunter, a while back, should give rise to concern over who really pays for what now.

According to Brown "the airport calculates what the net profit after tax would have been, and then the city council gets 34 per cent of that, and then the remaining share of net profit after tax, and the amount of tax would have been paid, is taken by Infratil as a subvention payment". But if the loss-making Infratil subsidiary pays no tax, and the airport pays no tax, why does Infratil get paid extra to cover tax? Read more

Disclosure - I don't fly anywhere due to my abhorrence of Wellington Airport's gatekeeper collection agency endeavours. Fortunately, I am not in need or dependent upon such monopolistic undertakings.

I read this article and am very concerned that companies like Infratil with the willing collusion of the IRD and Government are ripping off the tax payer by avoiding their responsibilities. The article points out that Infratil have apparently maintained a loss producing company, losing 10s of millions since 2007 to avoid paying tax on the profits earned by other companies???! This has to be a significant con job on the tax payer right? No matter how it is wrapped in legal and financial speak. Surely this legislation was only intended for one off, unusual losses and not meant to open the door for an on going subterfuge?

Either that or the tax rate is too high so it becomes worthwhile to play complex games with lawyers and accountants rather than actually do real things like build airport extensions that give a lasting benefit to both shareholders and customers.

Businesses are our customers and they all pay GST (except banks and residential landlords of course, they are heavily protected species) and employ people who pay tax, so it is not really necessary to tax them heavily on profits as well.

And you can add Tauranga to the list of idiot Councils; in 1998 they spent millions on extending their airport - as they were told, never to ever get an international flight.

They just need an marketing guru to do advertising overseas; the like of direct flight from Gold Coast to Tauranga; one bogan city to another...

NZ is to small to need more than two point to point airports, one in the north island and one in the south island. the rest of the country can be fed by the hub systems, hubs being AKL, CHC,SYD, MEL, BRI
this seems more like a deal between our government the council and the company to cater for a few flights that will suit their needs

The owners should build it and pay the entire cost.

Isn't Infratil private company? Then why do we accept any model where they put their hand out to have tax payers subsidise their profit and capital growth? They charge like wounded bulls for the use of their assets with the clear expectation of making a very healthy profit. If they need help then perhaps a loan at commercial rates?

This appears to be a continuation of the situation where corporates think they are separate and above society, behaving more like parasites than the reality of needing society to exist. As an international company did they pay all the taxes due for money made in this country or did the current Government let them off in some way?

Adding to the above - if Infratil own 66% and Wellington 34% then if Wellington and/or the Government were to stump up 50% of the cost, then as a taxpayer, I would be expecting that the ration of ownership would be adjusted proportionately to reflect the contribution, or alternatively Infratil pay their $200 million. For the Government or Council to put up $100 mill then the taxpayer should be consulted. However as Bernard has insinuated, extending the runway in no way guarantees any form of increased return, only increased costs.

Read somewhere that the business case is built upon an assumed number of international flights - problem being that when you compare these to the Christchurch experience (a region with similar population, as well as being the 'hub' of the SI), they look rather 'optimistic'.

Would rather the government invest heavily in rail, both inter- and intra-city.
Need to keep your workforce mobile....need to build rail.....

electrify what we have.

Christmas Island Wellington direct is a market waiting to be cracked - guaranteed customers, growth market. No competition likely.

Its also worth noting Infratil's airport track record: 2009 Infratil forced the City of Lubeck to buy back Infratil's holding because passenger numbers failed to read an agreed threshold. 2013 Infratil reduced the value of both its UK airport assets from £14.5m to zero selling Manston Airport to a British company for £1. Prestwick was also expected to sell for the same.

Indepth economic critical analysis by Keith Johnson on his blog here is worth reading http://kjohnsonnz.blogspot.co.nz/ - posted 1 Dec.