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• Final Report Part IV
• Part A - Main Report
• 8. Auckland Airport
• Asset Base

• Infrastructure Development

• Archive

• Airfield Inquiry

• Final Report Part IV

• Non-Land (Specialised) Assets
• Land
  • AIAL Land Valuation
  • Zoning and Designation
  • Estimates of Opportunity Cost
    • Second Runway Land
    • Eastern Approaches Land and Wiroa Island
    • Operational Land
  • Adjustments for Holding and Levelling Costs
  • Seabed
  • Seawall
  • Reclaimed Seabed
  • Land Approaches
  • Second Runway Land
  • Conclusion
• Appropriate Asset Base

8.57 In Chapter 5, the Commission established principles for determining the appropriate asset base for airfield activities. The asset base for AIAL is now determined.

8.58 The airfield assets of AIAL can be separated into land and non-land assets. Non-land assets are considered first. The most significant non-land assets are the runways, taxiways and aprons that sit on that land (the sealed surfaces) and supporting infrastructure.

Non-Land (Specialised) Assets

8.59 In Chapter 5, the Commission concluded that, for reasons of economic efficiency, assets should normally be valued at opportunity cost, unless they are specialised, when some higher value is required in order to prevent investors' funds from being expropriated and dynamic efficiency harmed (as the opportunity cost of specialised assets is likely to be at or close to zero). In the case of airports, the Commission considers that depreciated historic cost should be used for the specialised airfield assets.

8.60 The starting point for determining the value attached to AIAL's non-land airfield assets in the asset base are the values attributed to those assets by AIAL. Up until 30 June 1999, AIAL valued all its non-land assets at vesting value depreciated, with any new assets included at depreciated historic cost (DHC). On 30 June 1999, AIAL revalued buildings, infrastructure and sealed surfaces assets to optimised depreciated replacement cost (ODRC), and since then has included any additions to these assets at DHC. Vehicles and Plant (the remaining non-land asset grouping) were not revalued and continue to be included at vesting value depreciated, with any new assets included at DHC.

8.61 To arrive at an airfield asset base for AIAL that includes non-land assets at DHC, only one adjustment is required - removal of revaluations above DHC. The 30 June 1999 revaluations of buildings, infrastructure and sealed surfaces have been removed from the Commission's analysis, and associated adjustments have been made to the depreciation of those assets from 2000 onwards.²⁹⁵

8.62 In Chapter 5, the Commission noted that the dimensions and structure of AIAL's sealed surfaces were largely determined by Civil Aviation Authority requirements and international standards, and that the current runway length was necessary to meet the operating requirements of the aircraft using the airport. As such, the Commission does not optimise any sealed surfaces. The Commission similarly does not optimise any buildings, infrastructure, or vehicles and plant assets.

Land

8.63 Compared to other utilities and infrastructure providers, land is a significant asset for airports. In Chapter 5, the Commission reached the following general conclusions on the valuation of airfield land:

• Airfield land should be valued at its opportunity cost, namely its value in its best alternative use in the event that airport were closed (highest alternative use value).
• The opportunity cost would be the higher of the value with or without the sealed surfaces (the latter incorporating the net costs of removing the sealed surfaces).
• Any land holding and levelling outlays, and seawall and reclamation outlays, should be valued as specialised sunk assets at depreciated historic cost. These values should not include any amounts associated with such assets that are already included in the opportunity cost of the land, in order to avoid double-counting.

AIAL Land Valuation

8.64 As with non-land assets, the starting point for determining the value attached to AIAL's airfield land in the asset base are the values attributed to that land by AIAL. Up until 30 June 1999, AIAL valued all its land at vesting value, with any new assets included at cost. On 30 June 1999, AIAL revalued all land to optimised replacement cost (ORC), with any acquisitions since being included at cost.

8.65 At 30 June 1999, AIAL attributed the following values to airfield land:

Table 13: 30 June 1999 Valuation of AIAL Airfield Land

8.66 During the consultation on charges between AIAL and its substantial customers over 1999 and 2000, the airlines made a number of submissions on the area and value of land included by AIAL in its 30 June 1999 valuation (which it proposed to use for pricing purposes). As a result, AIAL made adjustments to the area and value of airfield land included in its final prices determined on 22 August 2000. The adjustments were as follows:

• Approximately 73 hectares of reclaimed seabed were reclassified as operational airfield land.
• Wiroa Island was included at a lower per hectare value of $70,000.
• All untitled seabed was removed, with only the unreclaimed seabed at the western end of the runway remaining.
• The seawall was removed (as it was included as part of civil works).
• The area of second runway land was reduced to only that part relating to airfield activities.

8.67 The Commission considers that one further adjustment is necessary. The land described as ground handling area in Table 13 does not fall within the definition of airfield activities, so should be excluded. The revised figures are summarised in Table 14. These figures are the Commission's starting point for determining the appropriate value for AIAL's airfield land.

Table 14: 22 August 2000 Value of AIAL Airfield Land Used for Pricing

8.68 The largest parcel of airfield land is the operational airfield (the land that the current runways, taxiways and aprons sit on). AIAL's $305,000 per ha valuation of operational airfield land incorporated the following three components (making up the market value - existing use):

• The current purchase price of the land ($140,000 per ha) based on a hypothetical satellite city development.
• The interest costs of holding the land until developed into an airfield ($133,000 per ha).
• The costs of levelling the land before the runway is laid ($32,000 per ha).

8.69 The second largest parcel of land is that held for development of a possible second runway. AIAL valued this land at $140,000 per ha with no adjustments for holding or levelling costs, which AIAL considered appropriate given the land is covered by an airport designation and has an underlying rural zoning (but acknowledged future urban potential).

8.70 The remaining parcels of airfield land were all valued at a discounted figure of $70,000 per ha by AIAL for pricing purposes. This value reflected the fact that the eastern approaches land was more limited in its next best use (the land was zoned for rural purposes and urban uses were specifically prohibited), as well as the current function and utility of Wiroa Island and the seabed.

Zoning and Designation

8.71 All AIAL airfield land is covered by a specific airport designation. The designation permits some commercial activity, but it is limited to that which is "ancillary to" or "connected with" aeronautical type activity. The underlying zonings of the various parcels of airfield land at Auckland International Airport, and the permitted activities, are summarised as follows:

• The operational airfield land, second runway land and Wiroa Island are zoned Airport, in recognition of the likely continued use and development of Auckland International Airport (even without an airport designation). The Airport zone permits a range of activities that are appropriate in association with the Airport and do not give rise to significant adverse effects on the Airport itself or the resource management strategy for Manukau City.
• The eastern approaches land is part of the Mangere-Puhinui Heritage zone. The zone encompasses those rural areas which, in addition to the general values of the Mangere-Puhinui area, have high landscape values and significant natural and/or cultural heritage values. The zoning protects against encroachment on airport activities by urban uses. Non-farming activities are subjected to a more rigorous assessment of adverse effects than in the Mangere-Puhinui rural zone, due to the greater potential for such effects.²⁹⁶

Estimates of Opportunity Cost

8.72 For each of the various types of airfield land owned by AIAL, the Commission has derived an estimate of opportunity cost - the highest alternative use value (excluding holding and levelling costs). In deriving its estimates, the Commission has considered:

• Whether the values attributed to the land by AIAL constitute an opportunity cost valuation.
• Any submissions made by the airlines as to the appropriate opportunity cost figure for AIAL's airfield land.
• Any submissions made by AIAL as to the value of AIAL's land in its next best use (other than as an airfield).
• The permitted uses of the land, as dictated by its zoning and designation (outlined above), indicating possible alternative uses. The likelihood of changes in zoning is also considered, as it has implications for the next best alternative use.
• The impact of existing infrastructure at, and adjacent to, Auckland International Airport on the appropriate opportunity cost value of AIAL's airfield land.
• Advice obtained from Telfer Young on the appropriate opportunity cost values (or range of values) for AIAL's airfield land.²⁹⁷

8.73 Opportunity cost estimates derived are based on an assessment of the proceeds that would be obtained from an orderly sale of the land (in economically manageable parcels) over such time period as would likely be needed to achieve the highest and best alternative use value of that land. They are not estimates of the proceeds that would be obtained by the sale of AIAL's airfield land in a single parcel tomorrow (this would be akin to "scrap" value).

Second Runway Land

8.74 The second runway land is zoned airport in recognition of the likely continued use and development of Auckland International Airport (even without an airport designation). AIAL has valued the second runway land at a value of $140,000 per ha on the basis that the land has acknowledged future urban potential.

8.75 During consultation with AIAL in 2000, Air New Zealand argued that the alternative use of AIAL's second runway land was rural. The airline submitted to AIAL that a land value of $70,000 per ha, based on comparable sales of undeveloped land within the airport designation, would be consistent with that produced by a rural land comparison.²⁹⁸

8.76 In the opinion of Manukau Consultants Limited - who provided advice to the airlines during their consultation with AIAL - the current zoning of the land would be similar in nature to the Mangere-Puhinui Rural Zone if the airport had never existed on the site.²⁹⁹

8.77 The Commission considers that the airlines' argument has some merit, given the surrounding land is all part of the protected Mangere-Puhinui Rural and Heritage zones within which urban development is severely restricted. The Manukau City Council's goal with the surrounding land is to retain the general rural nature of the land to ensure major adverse effects on the ecological, recreational, cultural, spiritual and landscaped values of the Manukauharbour are avoided and protected. In the Mangere-Puhinui area there are volcanic craters, a significant wildlife area, a kauri forest, and historic Maori pa sites. The Manukau City Council is co-ordinating a heritage project regarding the land north of the proposed second runway.³⁰⁰

8.78 However, the Commission considers that the airlines' argument may not necessarily apply to all of the second runway land. The argument is also based on the premise the airport never existed, not that it ceases to operate (after having existed). Parts of the second runway land may potentially be suitable, and allowed to be used, for residential or commercial uses. The restrictions that currently exist in the Mangere-Puhinui Rural zone may be reduced if the airport where to cease to operate. Whether or not residential or commercial uses would be permitted would depend on how the land would be re-zoned in the absence of the airport, which is unknown. Although, Telfer Young have advised that it is unlikely that all of the land would be rezoned for residential or commercial uses, instead the majority of the land is likely to retain its rural characteristics.

8.79 Given the uncertainty over alternative use, the Commission considers it appropriate to adopt a range as the estimate of the opportunity cost of second runway land. The value adopted by AIAL should be changed from $140,000 per ha to a range of $70,000 to $140,000 per ha. In principle, the Commission would like to be able to identify the potential alternative use of each parcel of hectare of the second runway land individually, and derive a single estimate of the opportunity cost of the land. However, the use of a realistic range is a practical alternative.

Eastern Approaches Land and Wiroa Island

8.80 The eastern approaches land is part of the Mangere-Puhinui Heritage zone, which essentially gives it an underlying rural zoning. Valuers advising BARNZ have noted that "should the designations which provide for the continued development of the airport be removed, the underlying rural type purpose of the land will remain" and the key strategic element of containing urban development for the Mangere-Puhinui area continue.³⁰¹ AIAL has recognised this in its valuation of the eastern approaches, which, as noted above, it has valued at $70,000 per ha reflecting the value of the land in its next best use (the land being zoned for rural purposes and urban uses being specifically prohibited).

8.81 While Wiroa Island is actually zoned Airport, AIAL has treated it in the same way it has treated the eastern approaches, and valued the land at $70,000. AIAL's rationale was that the utility of Wiroa Island was closer to that of the eastern approaches land than operational airfield land.

8.82 During consultation with AIAL in 2000, Air New Zealand argued that, in applying the $70,000 per ha rural value (for the second runway land) to the eastern approaches and Wiroa Island, it should be discounted by 50%, giving a value of $35,000 per ha.³⁰² As noted later, the airlines went on to argue that these assets should be optimised out altogether.

8.83 At the Conference, AIAL advised that land within the rural heritage zone had been purchased historically at prices ranging between $60,000 and $65,000 per ha. Also, similarly zoned land of this nature outside the airport designation was recently purchased for $75,000 per ha.³⁰³

8.84 The Commission considers that the $70,000 per ha value attributed to the eastern approaches land is a reasonable estimate of the land's opportunity cost. A $70,000 per ha value reflects an alternative rural use of the land. The Commission also considers that AIAL has appropriately used this value for Wiroa Island, as the function and utility of the land is essentially the same as that of the eastern approaches. These land parcels and the seabed are discussed (in more detail) below.

Operational Land

8.85 As noted above, AIAL's valuation of operational land includes a base value of $140,000 per ha, being the current purchase price of the land based on a hypothetical satellite city development. AIAL submitted that this was "the price that an independent purchaser could afford to pay to acquire an equivalent parcel of land in order to undertake a hypothetical highest and best use alternative development".³⁰⁴ This could be interpreted as an estimate of the land's opportunity cost. However, AIAL made the statement before the release of the Draft Report, in which the Commission suggested that land should be valued at opportunity cost. AIAL subsequently submitted that it was a value derived "based on a presumption that the airport did not exist, not on the presumption that it exists and has ceased operating".³⁰⁵ Given this, and considering advice from Telfer Young, the Commission regards the statement as having been directed at the cost involved in acquiring land and establishing an airport, not the alternative highest and best use value that might eventuate should the airport cease to operate.

8.86 To derive an estimate of the opportunity cost of AIAL's operational airfield land, the Commission first needs to determine the next best alternative use of the land. As with the second runway land, the operational airfield land is zoned Airport in recognition of the likely continued use and development of Auckland International Airport (even without an airport designation). For the alternative use to be anything other than rural, the land would need to be rezoned.

8.87 Telfer Young have advised the Commission that they expect that (were the airport to close) the existing and potential planning of all of AIAL land would come under intense scrutiny by at least the Territorial Local Authority and Auckland Regional Council in addition to AIAL. The implications on Auckland's infrastructure of rezoning the land from Airport to an alternative use would become an issue of regional significance. The effect of urban development on the Manukauharbour would become a key environmental issue. Some parties would want to retain the land as a "green belt" outside the Metropolitan Auckland Urban limits, others would seek to develop the land in a manner that complements the existing commercial and industrial activity already in place.

8.88 AIAL has submitted that, because of the extent of land involved, the Manukau City Council would initiate zoning changes, rather than AIAL having to request changes. They acknowledged that the process would attract significant opposition, lead to hearings in the Environment Court, and take two years or more to be resolved.³⁰⁶ However, AIAL submitted that an zoning change would eventually occur and that an alternative urban use was likely given the nature of surrounding land uses, the proximity of the land to the City, the pressure for land, and the physical ease of developing the land for that purpose.³⁰⁷

8.89 had Auckland International Airport not been built at Mangere, the land would probably have been zoned and utilised years ago for urban uses. Land surrounding the airport has progressively been developed for urban, commercial and industrial use (as indicated by the series of photographs provided by AIAL). While small parts of the operational airfield land may not be suitable, or allowed to be used, for residential or commercial uses (possibly that land bordering the Mangere-Puhinui Rural and Heritage zones), the Commission considers that the majority of the land is likely to have a best alternative urban use. This being the case, and given the uncertainty as to what amount (if any) land might be restricted in its use, the Commission adopts a best alternative urban use for all of AIAL's operational airfield land. The infrastructure needed to support urban development already exists at the airport.

8.90 having determined that the best alternative use for all of AIAL's operational airfield land is urban (with a mix of residential, commercial and industrial activities), the second step is to determine the value of the land in that alternative use.

8.91 AIAL submitted that, for the operational airfield land, a figure of $273,000 per ha ($140,000 plus holding costs of $133,000) represented opportunity cost. AIAL argued this would be the land's value in its next best use as a residential subdivision. The figure excludes the $32,000 of levelling costs on the basis that any developers would benefit from the easy contour of the land (already having been levelled for use as an airport). The $273,000 figure was supported by sales evidence for similar land in East Tamaki, Henderson and Long Bay.³⁰⁸ Including levelling costs, AIAL subsequently suggested a range of $279,000 to $307,000 per ha.³⁰⁹

8.92 Air New Zealand argued during consultation with AIAL that, for the operational airfield land, a value (before the addition of holding and levelling costs) of $70,000 per ha based on comparable sales of undeveloped airport designated land was appropriate, and consistent with what would be produced by a rural land comparison (the alternative use being rural).³¹⁰ If AIAL's methodology of valuing the land at market value existing use were adopted, the airlines suggested that the addition of holding and levelling costs would increase the value to $107,000 per ha.³¹¹

8.93 In its submission on the Draft Report, BARNZ submitted an alternative urban use value of $90,000 per hectare and an alternative small rural block value of $32,000 per ha, and on that basis argued that the $140,000 per ha adopted by AIAL was at the upper end of the range. BARNZ seemed to argue for a value of $90,000 per ha.³¹²

8.94 The Commission, in principle, would like to be able to identify the potential alternative use of each parcel of hectare of the operational airfield land individually, and derive a single estimate of the opportunity cost of the land. However, the use of a realistic range is a practical alternative, and also takes account of the uncertainty over alternative use. having taken advice from Telfer Young, and considered submissions, the Commission considers that the value adopted by AIAL should be reduced from $305,000 per ha to $200,000 per ha. The Commission notes that the estimate of opportunity cost does not include holding or levelling costs associated with the development of the airfield.

8.95 The $200,000 estimate does not take into account the costs of removing sealed surfaces that sit on the operational airfield land. Depending on what the best alternative use was, the sealed surfaces might have to be removed (in order for the land to be put into that use). The costs of removing the sealed surfaces could be significant. AIAL has submitted that much of the sealed surfaces could be utilised as roading or carparks in an alternative use, but should they be removed the cost/benefit would be neutral (as the removed sealed surfaces can be recycled as crushed base-course used in roads).³¹³ However, as noted earlier, the Commission takes the higher of the value with or without the sealed surfaces.

Adjustments for Holding and Levelling Costs

8.96 In the revised assessment of AIAL's asset base contained in this Report, the Commission has considered whether it needs to include estimates of the DHC of the holding and levelling costs associated with the development of operational airfield land. As noted above, amounts associated with such assets should only be included where they are not already included in the opportunity cost of the land, in order to avoid double counting. Amounts should not be included where the holding and levelling costs have no separate value to AIAL.

8.97 Vesting documentation indicates that no separate amounts were attached to these costs as part of AIAL's vesting value. The Commission considers that this may have been because the costs had already been almost fully (if not entirely) depreciated at vesting. Any value that did remain may have been implicitly included within the vesting value of the land. The fact that the land had been levelled may have added to the value of the land at vesting. As no value was specifically attributed to holding and levelling costs at vesting, investors would not have expected to recover, and earn a return on, such costs.

8.98 The levelling costs associated with the development of AIAL's operational airfield add to the opportunity cost value of the land. Many potential alternative uses would require levelled land. As such, the Commission considers that levelling costs (the value attached to the fact that the land is level) are captured in its estimates of the opportunity cost of the land. No additional value needs to be allowed for levelling costs.

8.99 In terms of holding costs, the Commission considers that the costs originally incurred when the Airport was developed were almost fully (if not entirely) depreciated at vesting, with low or no value to AIAL remaining. As such, no additional value needs to be allowed in the asset base for holding costs associated with AIAL's operational airfield land.

Seabed

8.100 As noted above, AIAL's 30 June 1999 asset valuation (and its financial accounts) attributes a value of approximately $30 million to 430.18ha of seabed. This is a mix of titled (AIAL owned) and untitled seabed. In its value of airfield land included in its asset base for pricing purposes, AIAL removed all the seabed except for 140ha of titled unreclaimed seabed at the western end of the runway, which it included at a value of $70,000 per ha.³¹⁴ In the Draft Report, the Commission excluded the remaining 140ha of seabed from its assessment of AIAL's appropriate asset base.

8.101 The western sea approaches at Mangere are flown over by aircraft using the airport when landing or taking off. Despite excluding significant amounts of seabed from its asset base in setting prices, AIAL has argued that the relevant areas of seabed, the great bulk of which it owns, should be included in the asset base for the following reasons:³¹⁵

• Given the opportunity, it would have been reasonable for AIAL to acquire seabed in order both to protect aircraft access, the ability to place navigation lights in the water and for the added flexibility that such land holdings offer for future reclamations, if required.
• If the seabed had not been available to AIAL, it may have had to acquire additional land of an equivalent value to protect the operational areas of the airport.

8.102 The airlines have argued that the western approaches seabed should be excluded from AIAL's asset base as it is not strictly required for operational purposes.³¹⁶ They regard the approaches at Auckland International Airport as being no different in principle to those over the sea at Wellington International Airport. The only difference is that AIAL happens to own part of the seabed (WIAL does not).

8.103 The Commission considers that ownership of the seabed is not needed for operational purposes. Existing statutory planning provisions provide adequate protection for aircraft to fly over the area, without the need for AIAL to own the seabed. Moreover, even accepting the airport's ownership of the seabed, it is questionable as to what value is appropriate. The Commission notes that the airport's holdings of seabed were included as one of the vesting assets, but that, after vesting, the seabed was allocated no value in its asset register. This apparently continued until the seabed was entered at a positive value in the 1999 asset valuation.

8.104 AIAL submitted it "is prepared to concede that arguments exist for suggesting that a value should not be ascribed to the seabed in the asset base for charging purposes".³¹⁷ The Commission considers there are strong grounds for excluding all of the seabed from AIAL's asset base.

8.105 Even if the seabed were included in AIAL's asset base, it should, as with land, be included at opportunity cost. Evidence at the Conference from AIAL suggested that the only potential acquirers of the seabed were local Maori, who own the rest of the Manukauharbour. AIAL considered it unlikely they would be willing to pay for the seabed (suggesting, given that they would be the only potential acquirer, an opportunity cost of zero).³¹⁸

8.106 The 140ha of unreclaimed western approaches seabed are excluded from the Commission's assessment of AIAL's appropriate airfield asset base. The values attributed to the seabed by AIAL are shown as optimised out in the Commission's analysis, which has the same effect as including them at an opportunity cost of zero.

Seawall

8.107 In AIAL's land valuation obtained at 30 June 1999, an ODRC value of $9.787m was attributed to the seawall. In its value of airfield land included in its asset base for pricing purposes in August 2000, AIAL excluded this amount after the airlines pointed out the amount had already been included in civil works values (therefore, it was included in the asset base twice). This adjustment is reflected in the figures presented in Table 13 as the starting point for the Commission's assessment of land value at 30 June 2001 (the seawall does not appear).

8.108 While AIAL made the correction for pricing purposes, the double counting of the seawall is included in its 1999 and 2000 financial accounts and information disclosures. The Commission uses these figures as its starting point for its computation of 1999 and 2000 land values. In the Draft Report, the Commission made adjustments to these values to similarly exclude the seawall from its assessment of AIAL's airfield land value. These adjustments are also made in this Report.

8.109 After the removal of the double counting, AIAL has treated its seawall as a separate asset (included in civil works), with a separate value assigned in the asset register, rather than the value being subsumed within the value of the airfield land. The Commission notes that WIAL has taken the same approach to the valuation of its seawall. Regardless of whether the seawall is included in civil works or subsumed into the land value, the issue is whether the seawall has a value over-and-above that of the land it protects.

8.110 Using the Commission's valuation principles discussed in Chapter 5, this issue can be resolved by considering the opportunity cost of the seawall and land. Where the seawall is needed to support the runway, but would not be needed for an alternative use of that land, its opportunity cost is zero (as it has no alternative use). Where the seawall is needed to protect reclaimed land more generally, the opportunity cost of that land would be the same as other equivalent land in the vicinity (as the land does not have a use, alternative or otherwise, without the seawall). Again the opportunity cost of the seawall would be zero. The only value, in opportunity cost terms, is in the value of the land it protects.

8.111 In short, seawalls are specialised assets whose costs are sunk. Their opportunity costs are therefore zero. However, in common with other specialised assets, the Commission considers that, in order to protect the value of the original investment, the seawall should be valued separately from the land at DHC.

8.112 The value attributed to the seawall by AIAL is summarised in Table 15.

Table 15: Treatment of AIAL Seawall

8.113 In the revised assessment of AIAL's asset base contained in this Report, the Commission has considered whether it needs to include estimates of the DHC of the seawall construction costs. As noted above, amounts associated with such assets should only be included where they are not already included in the opportunity cost of the land, in order to avoid double counting. Amounts should not be included where the seawall construction costs have no separate value to AIAL.

8.114 Vesting documentation indicates that no separate amounts were attached to these costs as part of AIAL's vesting value. The Commission considers that this may have been because the costs had already been almost fully (if not entirely) depreciated at vesting. Any value that did remain, may have been implicitly included within the vesting value of the land. As no value was specifically attributed to seawall construction costs at vesting, investors would not have expected to recover, and earn a return on, such costs. However, it may have merely been an oversight on the part of those determining AIAL's vesting value.

8.115 The airfield at Auckland International Airport is bounded in part by sea, and lies partly on reclaimed land. The seawall has been built, both as part of the reclamation process, and to protect the land against erosion by the sea. In addition, Mr Seagar (an expert for AIAL) cited engineering advice that the land already present at the airport site did not need seawall protection for non-airport use - it is relatively stable and not subject to wave erosion - but did need a seawall to add stability to the runway under the weight of landing aircraft.³¹⁹ The building of the seawall was less expensive than the alternative of reclaiming an additional strip of land to act as a supporting "buffer". Thus, the seawall is needed for airport use of the land, but not for alternative uses.

8.116 The seawall does not add to the opportunity cost value of the land, as alternative uses of AIAL's airfield land do not require a seawall. As such, the Commission considers that seawall construction costs are not captured in its estimates of the opportunity cost of the land. Additional value needs to be allowed for seawall construction costs. The seawall has separate and distinct value to AIAL while the land continues to be used as an airfield. The seawall also needs ongoing maintenance by AIAL.

8.117 In the revised assessment of AIAL's asset base contained in this Report, the Commission includes an estimate of the DHC of the seawall construction costs for 1988 to 1998 (even though it was given no separate value at vesting). Also, the seawall amounts included in the years from 1999 in revalued non-land assets (as part of civil works) are reduced to DHC when non-land assets are adjusted. As all the $9.787m amount included in 1999 is revaluation, the entire amount is deducted. However, to offset this, the Commission includes an estimate of the DHC of the seawall from 1999 onwards (based on its assessment of DHC for 1988 to 1998).

8.118 The estimates of the DHC of the seawall construction costs are determined by taking AIAL's 30 June 1999 gross replacement cost estimate, working out the effective costs at vesting (1 April 1988), then adjusting these to take account of depreciation from the time that the seawall was constructed (assumed to be in the 1960s) to vesting, continuing to depreciate going forward. Table 16 below summarises the results produced.

Table 16: Estimates of Seawall Construction Costs ($000s)

8.119 The $3.4m estimate of the DHC of the seawall at vesting appears reasonable when compared to the $4m value attached to WIAL's seawall at vesting. The Commission would expect - given the physical characteristics of the land at the two Airports - that the seawall at Wellington was more expensive to construct than the one at Auckland.

Reclaimed Seabed

8.120 A major part of AIAL's operational airfield land is reclaimed seabed (159.72ha of the 351.72ha), most of which (130.73ha) was reclaimed prior to vesting. Between 1995 and 1999, approximately 29 hectares was reclaimed by AIAL from the western lagoon area, at an outlay of $589,000 per hectare. In determining its asset base, AIAL has treated all reclaimed seabed as land and valued it at $305,000 per hectare. As noted above, this land would, under the Commission's approach, have an opportunity cost valuation of $200,000 per hectare, as for other runway land.

8.121 The issue is whether any allowance should be made for the costs of reclamation over and above the opportunity cost of the land.

8.122 The Commission has considered whether it needs to include estimates of the DHC of the reclamation costs associated with the development of operational airfield land. As noted above, amounts associated with such assets should only be included where they are not already included in the opportunity cost of the land, in order to avoid double counting. Amounts should not be included where the reclamation costs have no separate value to AIAL.

8.123 Vesting documentation indicates that no separate amounts were attached to these costs as part of AIAL's vesting value. The Commission considers that the reclaimed seabed was probably just simply valued as land, with costs of reclamation disregarded. As no value was specifically attributed to reclamation costs at vesting, investors would not have expected to recover, and earn a return on, such costs.

8.124 Without the reclamations, a large part of AIAL's airfield land would not exist in its present form. As unreclaimed seabed, it would have an opportunity cost of zero. However, as reclaimed land, it has a number of potential alternative uses. The reclamation costs associated with the development of AIAL's operational airfield (both pre- and post-vesting) add to the opportunity cost value of the land. As such, the Commission considers that reclamation costs are captured in its estimates of the opportunity cost of the land. No additional value needs to be allowed for reclamation costs.

Land Approaches

8.125 AIAL owns some parcels of approach land, which is flown over by aircraft using the airport when landing or taking off. Specifically, this land is Wiroa Island (40.36ha) and the eastern approaches (170.8081ha). AIAL has included this land at a value of $70,000 per ha for pricing purposes. In the Draft Report, the Commission made no adjustments to these values, or the areas included by AIAL.

8.126 The approach land at AIAL covers the Pukaki Creek area to the east of the runway. This area of land, at about 170 hectares, is larger than required for an approach "fan", and has been valued by AIAL at the rural zoned land rate of $70,000 per hectare, or $11.95 million in total. This land is zoned "rural heritage", which is intended to maintain rural land uses and to protect soils, effectively meaning it can only be used for agricultural purposes. This prevents encroachment by urban land uses that would be incompatible with airport uses. Unlike most other airport land, however, it is considered to have no future urban potential. AIAL submitted that its ownership of the land was needed to ensure it is not used in ways that may prejudice the airport's curfew-free status. However, the Commission considers this concern is already addressed by zoning restrictions and the airport designation (in that the zoning offers the same protection as if AIAL owned the land).³²⁰

8.127 In addition, the airport owns Wiroa Island to the south of the runway, which is the site of buildings leased to Airways Corporation for air traffic control. Wiroa Island is also a bird sanctuary. AIAL noted that it has the highest rate of bird strikes of any New Zealand airport, and so the Island was valuable in drawing birds away from the runway.³²¹ However, he said that the rescue fire training ground will probably be relocated there in the longer term (it was not clear, however, whether this threatened the sanctuary or was a complementary use of the land). The Island comprises about 40 hectares, and was valued initially at $115,000 per hectare, subsequently reduced to $70,000 per hectare during the last consultation with AIAL's substantial customers.

8.128 AIAL has argued that the relevant areas of approach land should be included in the asset base because their ownership provides assurance of control over future developments that might impinge upon, or hinder, airfield use, rather than relying on planning constraints.³²² The leasing revenues from such land are deducted from the revenue requirement for pricing purposes.

8.129 The airlines, in contrast, have argued that the eastern approaches and Wiroa Island areas should be optimised out as they are not required for operational reasons.³²³ The amount of land that AIAL owns is significantly larger than that required to protect aircraft movement capability (i.e., the fan required at the eastern end of the runway). The majority of the fan required is seabed in Pukaki Creek, with only a small part of the eastern approaches land falling within the fan.

8.130 In its assessment of AIAL's asset base in this Report, the Commission has optimised out the eastern approaches land and Wiroa Island from AIAL's asset base. The rationale for this is akin to that for the seabed - all are approach land. The costs of the parts of Wiroa Island (on which Airways have buildings) should be recovered from Airways. The Commission considers that ownership of the eastern approaches land and Wiroa Island is not needed for operational purposes, given the protections afforded by the airport designation and zonings covering the land.

Second Runway Land

8.131 In its value of airfield land included in its asset base for pricing purposes, AIAL included approximately 263ha of land held for development of the second runway which was classified as future airfield activities land. In the Draft Report, the Commission excluded the value associated with this land (approximately $37m) from its assessment of AIAL's appropriate asset base.

8.132 AIAL plans to build a second runway to the north of the existing runway. There is no definite date for construction, but it will start before 2010 and - based on demand forecasts - AIAL, at present, considers it is likely to start around 2006 or 2007.³²⁴ The current and previous versions (at the time of the Conference) of the Manukau District Plan contain a recognition of the potential need for the second runway. The land held for the development of the second runway is zoned "airport" and is covered by the airport designation, which means it has limited alternative uses, thereby protecting the opportunity to build the second runway at some unspecified point in the future if required. The airport designation has been on the land since the early 1960s.

8.133 The proposed new Manukau City District Plan, which was in the final stages of negotiation at the time of the Conference, provides (for the first time) for AIAL to construct and operate the second runway. As a consequence, it also contains detailed noise control rules, including significant restrictions on noise-sensitive land uses within the relevant noise contours. These provisions were the subject of a Consent Order by the Environment Court in late 2001, which allows the building of a 1,200 metre runway immediately, and its extension to 2,150 metres subject only to a round of public consultation. However, there is presently considerable uncertainty as to when each stage of the new runway will be needed. The new runway would be subject to more restrictive interim noise control, which will prevent full usage, until a trigger mechanism in the Consent Order is activated by demand. AIAL may also have to compensate residents for noise.

8.134 Apart from the land that would be directly occupied by the second runway, additional land would be needed at each end of the runway for the fans for aircraft safety purposes. Under the proposed Manukau District Plan, the alternative uses for the fan areas would be limited; buildings would not be allowed, nor would activities involving assemblies of people. As planned, much of the fan at the western end would be seabed.

8.135 The District Plan has a life of ten years. Should the construction of the second runway not begin within the life of that Plan, AIAL would be able to apply for a rolling over of the designation for a further ten-year period. However, this would involve the Manukau City Council revisiting the issue.

8.136 The Commission notes that, because of adverse environmental effects of airports, particularly noise, they are subject to considerable planning controls under the Resource Management Act. These controls limit the uses to which land designated for airport use can be put, even before it is acquired by an airport. The owners are under no obligation to sell their land to the airport, and many years may pass before the airport is able, through market transactions, to acquire all of the parcels of land needed for a planned development.³²⁵ Once the land is owned by an airport, the controls place significant obligations on the owner in the course of seeking resource consent to develop the land for airport use. Hence, significant planning horizons appear to be involved in accumulating land and bringing it to the point where it can be developed for airport use.

8.137 From an economic perspective, the appropriate criterion to apply to land acquisition would be one of cost minimisation over time. In principle, this would involve choosing the time pattern of land purchases that would minimise the net present expected value of cost over time, where cost is measured as the purchase plus holding outlays, less revaluations and revenue generated from other uses in the meantime. These costs would reflect the various statutory restrictions and obligations (which add to the airport's costs) discussed above.

8.138 The thrust of AIAL's submission was that the application of such an economic criterion would encourage purchase of land where "the imminent future need for the land has not been fully appreciated by the market". This would avoid AIAL having to pay a premium for land, and make allowance for the fact that large parcels of land are not always available, which would necessitate a longer acquisition process. AIAL stated that, in the early 1960s, the airport had anticipated the second runway would be needed in the 1990s; a forecast that significantly over-estimated the growth in demand.³²⁶ AIAL also emphasised that the need to meet planning requirements, and to get land designated for airport use, makes it desirable to acquire land early rather than later.³²⁷ In short, AIAL argued that "prudence" suggests early purchase. Nonetheless, the mere holding of land also does not address the important question of whether it is appropriate that acquirers pay for it through the airport's current charges.

8.139 Overall (as noted in Chapter 5), the Commission considers it a matter of judgment as to when land should be acquired for future runway development. Designation for airport use can prevent land that may be required in the future from being used for incompatible purposes. On the other hand, the accumulation of land required through individual market purchases can take some years. Further, there is uncertainty as to precisely when land may actually be required for such developments.

8.140 The second runway land held by AIAL is included in its asset base for the purposes of determining landing charges, valued by AIAL at $140,000 per hectare. Holding costs have not been included.

8.141 AIAL submitted that the value of the second runway land would increase as it approached imminent development, and would be closer at that time to the $274,000 per ha value (including holding costs, but prior to levelling costs) of the current airfield land.³²⁸ However, he did not make clear how the precise value would be calculated at that time, and upon what it would depend, despite being questioned on the matter.

8.142 The airlines have agreed to the general prudence of AIAL acquiring the second runway land but they have not agreed that the land should be included in the asset base for charging purposes at this time. They do not consider they have been adequately consulted under the Airport Authorities Amendment Act regarding these acquisitions. The Act requires the airports to consult with substantial customers on any capital expenditure plans in relation to airfield activities that are likely, within the following five years, to exceed 20% of the value of the company's assets in respect of identified airport activities.

8.143 Dr Kahn (an expert for AIAL) argued the users of an airport are "causally responsible for the congestion that they impose on one another and these congestion costs form part of today costs".³²⁹ He contended further that the costs of the land held by AIAL for the second runway are part of today's costs in economic terms, because they reflect the costs of relieving today's congestion. These costs are a surrogate for congestion costs, and are therefore economically justifiable in the absence of congestion pricing.

8.144 However, it can be argued that raising costs, and therefore landing charges, by including the development land in the asset base, is a blunt instrument for dealing with congestion. Although the long-run costs of providing airfield services are of primary interest, congestion is experienced in the short-run where demand exceeds capacity. The appropriate remedy economically, in the short-run, is to ration capacity by raising charges during the congested part of the day, charging higher prices when congestion exists. This would discourage airlines from timetabling flights when the runway is most congested. In the long-run, the appropriate remedy would be to take heed of the congestion price signal to plan for an expansion of capacity at the appropriate time. This timing would be better informed by the short-run approach and its impact on alleviating congestion.

8.145 The Commission notes that peak hour pricing is not supported by airports because of the alleged inflexibility of airline schedules, even though such pricing is used overseas. Landing times for long-haul international flights at Auckland International Airport tend to be inflexible, as New Zealand is somewhat "the end of the line", and schedules are driven by availability of arrival and departure slots at larger, busier airports such as Heathrow (London) and LAX (Los Angeles).

8.146 Peak-pricing, if contemplated, should not be introduced merely to raise the total revenue generated by an airport. Generally, increases at peak times should be matched by decreased prices at other times of the day.

8.147 Little evidence emerged at the Conference that there was significant congestion at Auckland International Airport. AIAL considered that a 15 minute delay at the peak hour was the standard to validate the building of a second runway.³³⁰ BARNZ said delays of only one to four minutes currently occur in the peak hour at Auckland International Airport.³³¹ These figures were not disputed by AIAL. This suggests that current congestion levels at AIAL are probably not sufficient to warrant a congestion component to be added to prices, whether in the form of peak-hour pricing or by proxy in the form of development land costs as advocated by Dr Kahn.

8.148 This still does not solve the problem as to when the value of second runway land at Auckland should be incorporated in charges. There is an annual cost associated with the actual or implicit interest charge on the funds invested in the land. However, the land generates income each year from farming, and is also periodically revalued. These income and revaluations should be netted off from the costs. The options are for the annual net holding cost to enter the charging base each year, or to be allowed to accumulate until such time as it is permitted to enter the charging base. Either way, users pay the net holding cost; it is just a matter of when (and whether the costs is incurred by current or future users).

8.149 However, a consequence of carrying forward and accumulating net holding costs is that, if the land were not developed as intended, the airport would not be able to recoup those costs. Hence, the determination as to when the net holding costs enter the charging base has the effect of allocating the risk of non-development - albeit, probably very small - between the parties.

8.150 It is important that incentives are preserved to prudently invest in new capacity in a timely way. At the same time, it is important to avoid charges being used to cover imprudent or excessive investment in land, or land acquired prematurely, or to expect today's users to bear the risks associated with future developments. At the Conference, Simon Terry and Associates suggested that an economic criterion for when development land should enter the charging base would be from the point where there is a contract between the airport owner and its substantial customers that recognises the need for a second runway.³³² However, there may be "gaming" problems with this option, e.g., airlines might delay entering into any such contract if there were any doubts about whether development might proceed as planned. What might be perceived as "gaming", however, may be legitimate commercial behaviour by the airlines. There would be risks associated with, in effect, buying future capacity in a market with uncertain future demand. In the face of such uncertainty, directors may have trouble convincing shareholders that they should commit to a significant expense in the future.

8.151 The Commission notes that this coordination problem to meet demand though new investment is not uncommon, particularly in the absence of vertical integration. For example, in the electricity sector, Transpower's investment in the national grid is dependent on decisions and activities of the generators and retailers (through their customers). Transpower stated that its policy is to capitalise holding costs on investments until they become "used and useful".³³³ Indeed, the Commission notes that it is common accounting practice for interest costs of this kind to be capitalised.

8.152 The Commission considers that, given the judgmental nature of the decision to commence acquiring land, which falls largely to AIAL, and from which point net holding costs start to accrue, it is appropriate that AIAL bear the risk of non-development. That risk should provide some incentive on AIAL not to acquire land imprudently. However, as noted above, AIAL would recover its costs, so long as the land is developed. This approach would require net holding costs (on the historic cost of land) to be accumulated, rather than charged out on an annual basis. The Commission also considers that the appropriate point for the capitalised net holding costs (on the historic cost of land) to enter the charging base is once construction has commenced. From that point, the risk of non-development largely ceases to exist. This is similar to the risk that AIAL would bear in a competitive market. However, it is recognised this might create an incentive for AIAL to bring forward a development, or start early and take longer to complete, in order to commence charging sooner. The capitalised net holding cost (on the historic cost of land) to that point should be treated as a specialised asset, to be written off over the medium-term. From that point, the land would be valued at opportunity cost in the asset base.

8.153 In summary, as AIAL is yet to start construction of its second runway, it is not appropriate to include the second runway land in AIAL's asset base. In the analysis contained in this Report, the Commission continues to exclude the $36.757m value associated with this land (as determined by AIAL at $140,000 per ha) from its assessment of AIAL's appropriate airfield asset base.

Conclusion

8.154 In addition to the general principles determined in Chapter 5, the Commission has determined the following in respect of the valuation of AIAL's airfield land:

• The appropriate estimate of opportunity cost of AIAL's operational airfield land is $200,000 per ha.
• Holding, levelling and reclamation costs associated with the development of AIAL's operational airfield land should be included at DHC (to the extent they are not covered by opportunity cost and continue to have separate value to AIAL).
• Any seabed assets claimed should be optimised out of the asset base, or equivalently, incorporated at zero opportunity cost.
• Any value attributed to AIAL's seawall should be included as part of specialised assets at DHC.
• The eastern approaches land and Wiroa Island should be optimised out of the asset base.
• The land held for the second runway should be excluded from the asset base until such time as the construction of the second runway starts. At that time, the capitalised net holding costs (on the historic cost of land) should be treated as a specialised asset, to be written off over the medium-term; and the land would be valued at opportunity cost in the asset base.

Appropriate Asset Base

8.155 Based on the Commission's views of asset base outlined in Chapter 5 and their application to AIAL above, the Commission estimates the value of AIAL's airfield assets as at 30 June 2001 to be $190 million. The detailed calculation of the asset base is included in Appendix 13. Table 17 summarises the adjustments to AIAL's valuation to arrive at the Commission's assessed value.

Table 17: AIAL Airfield Asset Base as at 30 June 2001

8.156 The Commission's decision to optimise selected assets (as explained above) reduces the asset base by $61.2m.³³⁵ The inclusion of non-land assets at DHC (rather than ODRC) reduces the asset base by a further $22.2m. The major change between the figures estimated in the Draft Report and the figures shown above relates to the adjustments made to include operational airfield land at an opportunity cost of $200,000 per ha. This reduces AIAL's asset base by to $36.9m (relative to AIAL's value, which was the figure used in the Draft Report). The additional figures for seawall construction costs add $1.5m back in to the asset base.

²⁹⁵Depreciation figures when the assets are valued at DHC will be lower than when the assets are included at ODRC, so depreciation figures are reduced (amounts are added back to the asset base).

²⁹⁶Other non-airfield activities land falls within the Mangere-Puhinui Rural zone. The zone is intended to protect the rural character of the Mangere-Puhinui area, avoid adverse affects on amenity and landscape values, and protect the resources of the area from the potentially adverse effects of development. Farming activity is the main land use in the area (given the high quality of soils), and such use of the area is encouraged. Housing development in association with farming is permitted, but controlled to ensure maintenance of open spaces. A limited range of non-farming activities, which cause only minor adverse effects on the environment, are controlled in the zone. The extent of such activities is limited.

²⁹⁷Telfer Young's advice to the Commission is included in Appendix 21.

²⁹⁸Air New Zealand, Draft Interim Consultation Response to AIAL¸ 22 December 1999, pages 67-70.

²⁹⁹Manukau Consultants Limited Report to BARNZ Valuers, 4 November 1999, page 5.

³⁰⁰Manukau City Council Media Release, New Push to Create "Gateway" Tourism Plan for Mangere and Puhinui, 1 May 2002, at http://www.manukau.govt.nz/latest/2002/may/gateway.htm.

³⁰¹Rushton Australia Pty Limited Report to BARNZ on AIAL Valuation, 2 February 2000, page 2.

³⁰²Air New Zealand, Draft Interim Consultation Response to AIAL¸ 22 December 1999, page 85.

³⁰³Conference Transcript, page 215.

³⁰⁴AIAL Submission on the Critical Issues Paper, 27 April 2001, Part A, page 82, paragraph 9.38.

³⁰⁵AIAL Submission on Estimates of Opportunity Cost, 21 May 2002, page 6, paragraph 24.

³⁰⁶Ibid, Attachment 2 - R L Demler Report page 7.

³⁰⁷Conference Transcript, page 214.

³⁰⁸AIAL Response to Section 70E Notice, 4 February 2002.

³⁰⁹AIAL Submission on Estimates of Opportunity Cost, 21 May 2002, page 12, paragraph 43.

³¹⁰Air New Zealand, Draft Interim Consultation Response to AIAL¸ 22 December 1999, pages 67-70.

³¹¹Ibid, page 83.

³¹²BARNZ Submission on the Draft Report, 10 August 2001, page 22.

³¹³AIAL Submission on Estimates of Opportunity Cost, 21 May 2002, page 10, paragraph 36.

³¹⁴Seabed in Pukaki Creek (although owned by AIAL) was excluded from the asset base for pricing. AIAL argues the Creek is used for drainage, and has allowed the building of access roads without going through lengthy planning processes, thereby giving the Creek value.

³¹⁵Report to AIAL Board 31 March 2000, sourced from advice from Ernst and Young 28 March 2000.

³¹⁶Air New Zealand, Draft Interim Consultation Response to AIAL¸ 22 December 1999, pages 84-85.

³¹⁷AIAL Submission on the Draft Report, 14 August 2001, Part A, page 20.

³¹⁸Conference Transcript, pages 227-228.

³¹⁹Ibid, page 225.

³²⁰Conference Transcript, pages 245-246.

³²¹Ibid, page 245.

³²²AIAL Submission on the Critical Issues Paper, 27 April 2001, Part A, page 79, paragraph 9.20.

³²³Air New Zealand, Draft Interim Consultation Response to AIAL¸ 22 December 1999, page 85.

³²⁴Ibid, page 126.

³²⁵Although AIAL does have the ability to compulsorily acquire land under the Public Works Act, it has submitted the process that has to be gone through is not necessarily any faster than when it buys land through market transactions.

³²⁶Conference Transcript, pages 33-34.

³²⁷AIAL Submission on the Draft Report, 14 August 2001, Part A, pages 66-67.

³²⁸Conference Transcript, page 245.

³²⁹AIAL Submission on the Draft Report, 14 August 2001, Attachment 3, page 10.

³³⁰Conference Transcript, page 34.

³³¹Ibid, page 640.

³³²Ibid, page 817.

³³³Ibid, page 875.

³³⁴Adjustment is nil in 2001, as AIAL excluded the adjustment itself in determining prices. Adjustments are made in other (earlier) years.

³³⁵The optimisation of selected assets is the change that occurs in moving from scenario 1 to 2 in the Commission's workings in Appendix 13. The reduction of land to opportunity cost occurs when then moving from scenario 2 to 4. The removal of revaluations of non-land assets to ODRC occurs when lastly moving from scenario 4 to 6. Scenarios 3 and 5 make the same adjustments, but without any optimisation. Scenario 6 reflects the Commission's adopted principles and views on AIAL's appropriate airfield asset base.