Feasibility Analysis
The object of this chapter is to outline some preliminary views on the feasibility of a commercial airport at Whenuapai. So far, two airport proposals have been forwarded - that of WCC/Infratil and that of Whenuapai Airport Ltd. This chapter concentrates on the feasibility of commercial air service operations and not wider issues such as ancillary activity and property development.
To assess the feasibility of the airport option it is first necessary to outline the proposals. Feasibility can be broken down into three interlinked elements - technical, regulatory and commercial feasibility. Technical feasibility largely deals with infrastructure and basic physical operational requirements for civilian commercial airport operations. Regulatory feasibility relates to the consents required from the Civil Aviation Authority (CAA) and under the RMA and any relevant local government regulations to operate Whenuapai as a commercial airport. Commercial feasibility looks at issues such as the financial sustainability of an airport operation including issues such as the initial capital investment required.
As before, our analysis is based on our synthesis exercise where we identified the key issues outlined in the submissions from the NZDF consultation process as well as further information provided by key providers, including a business case provided by WCC/Infratil.
Again, given the short timeframe to complete the project, the scope and nature of the issues and the incomplete information available, a formal assessment of feasibility (based on returns to the investor, and the sustainability of these returns) of the options is not possible. Most of our analysis will come down to making informed judgements, while acknowledging that there are limits to this approach. Perhaps the most specific answer we can provide is whether a commercial airport operation of the types envisaged is feasible in principle.
Legal analysis has determined that the establishment of an airport at Whenuapai is feasible from a broad legal perspective. Our analysis of regulatory feasibility is largely constrained to matters of process and likely issues that would need to be addressed, as we are not well positioned to comment on the finer details of regulatory requirements, nor would it be proper to pre-empt the RMA or CAA processes. We also consider that commercial operators (as opposed to officials) are better placed to assess the commercial viability of their proposed venture, though we are able to make some preliminary judgements and observations on the assumptions that WCC/Infratil have made in relation to the commercial success of their proposed airport operation.
The Proposals
The WCC / Infratil Proposal
The following assessment of feasibility will be largely based on the model proposed by WCC and its commercial partner, Infratil.
The WCC/Infratil proposal is based on an airport catering for budget airlines flying to/from Australia and the Pacific Islands as well within New Zealand. Traffic is estimated to reach around 24,000 aircraft movements per year and up 1.6 million passengers by 2009. Infratil have noted that they would like to obtain consents for over 60,000 aircraft movements a year. By means of comparison, Wellington International Airport Limited (WIAL) handled 3.9 million passengers and 112,490 aircraft movements for the year ended 31 March 2003.
Freight operations at Whenuapai would be limited as the runway would not have the capacity to deal with large freight planes.
The proposal is based on the phased expansion of the commercial operation. Initially joint use with the RNZAF is proposed until the military leave the base. There is also the option to retain an ongoing military presence at Whenuapai. WCC/Infratil appear to believe the initial limited operations would require little in the way of investment. During this time, consents would be sought to enable operations of the scale noted above. However, Infratil and WCC recognise that it may be necessary for consents to be obtained before even limited commercial operations could begin. […]
Infratil estimates that approximately 140 hectares would be required for the operation of the airport and a further 75 hectares for commercial aeronautical activity.16 There is limited discussion on the use of existing buildings, though they are within the area deemed as necessary for airport operations.
The proposal seems to envisage that once the RNZAF vacates, the Crown would retain ownership of the land with a lease arrangement to an airport company. Legal analysis rules this out. However, there are a number of other options for ownership and operational arrangements that are available to WCC and Infratil.17
The Whenuapai Airport Ltd Proposal
An alternative commercial airport proposal has been submitted by Whenuapai Airport Ltd (WAL). The proposal outlines a small-scale regional (domestic) airport operation which would, over time, be expanded to international jet services similar to those envisaged by WCC/Infratil. The airport would begin operations catering for aircraft up to a maximum weight of 5,700kg (30 passengers) from newly constructed terminal facilities on the opposite side of the runway to current buildings occupied by the RNZAF. Airlines that have been mentioned in this context include Great Barrier Airways. Operations would then expand once facilities are upgraded to allow international services. Expected annual aircraft movements and passenger numbers are unknown.
Perhaps the principal point of difference from the WCC/Infratil proposal is that the WAL proposal represents a wholly private commercial venture that does not require direct council involvement. Rather, WAL's proposal is based on the outright purchase of the airbase from the Crown. WAL is confident they could access up to $50 million to fund its proposal, and have indicated they have the backing of a major bank.
Given the similarities of the operational elements of the two proposals, and the fact that WCC/Infratil's proposal is far more advanced and detailed than WAL's, the following analysis is largely based on the WCC/Infratil proposal.
Technical Feasibility
The length of the primary runway at Whenuapai (03/021) is 2,031 metres. This is comparable to the runway at Wellington International Airport. Therefore, it would appear that Whenuapai would be able to cater for aircrafts up to and including the Boeing 737 (approximately 136 seats) and Airbus A320 (approximately 150 seats) aircraft that are currently used on trans-Tasman routes and appear to be favoured by low cost airlines.18
Wellington International Airport Ltd's (WIAL) engineers and executives, acting on behalf of Infratil, inspected the runway at Whenuapai and concluded that they were confident that there were no unmanageable reasons why Boeing 737-scale operations would not be viable at Whenuapai.
The ability to operate such aircraft from Whenuapai has not been disputed during the consultation process. Therefore, we are confident that such operations at Whenuapai are technically feasible in the broadest sense.
Regulatory Feasibility
CAA Consent Requirements
WCC/Infratil commissioned Airplan to produce a preliminary planning study to assess the current state of facilities at Whenuapai, the extent to which these comply with CAA regulations, and the nature and cost of meeting such requirements.19 Airplan noted that the aviation infrastructure at Whenuapai is generally in a poor condition and that civil operations would require stricter maintenance, monitoring and security than those that currently govern military operations. While Airplan concluded that a major and costly programme of works would be required to comply fully with CAA requirements, there are pragmatic alternatives where concessions could be sought from CAA to enable commercial operations to occur. For example, applying self-imposed operational restrictions is an option used at other New Zealand airports.
Airplan noted the need for a more detailed investigation on how an airport might be practically operated under CAA guidelines. This would require a tighter definition of the commercial and operational role of the airport. […] These estimates appear consistent with AIAL's estimate of $37 to $51 million to upgrade facilities to enable operations of the type outlined in the WCC/Infratil proposal.20
It should be noted that civil aviation requirements are less onerous for domestic airports and smaller aircraft. This would seem to imply that domestic prop services could begin and then international jet services introduced, once investment in infrastructure was completed. […] This is based on the assumption that the runway is not initially upgraded and CAA concessions are granted for a number of deficiencies. However, the state of the runway has been identified as a critical issue.
Conclusion - CAA Consents
At present we only have estimates based on incomplete information, much of which is provided by pro-airport stakeholders. However, there is no evidence to suggest that Whenuapai would not be able to obtain the necessary CAA consents, as long as the required investment in upgrading and adding the necessary facilities and infrastructure was forthcoming. Therefore, we are fairly confident in concluding that a commercial airport of the type envisaged by WCC/Infratil and WAL is feasible from a regulatory aviation perspective. However, the cost of the technical upgrades could significantly impact on the commercial feasibility of an airport as could any identified necessary mitigation activity resulting from the RMA consenting process.
RMA Consents
In order to establish airport operations at Whenuapai, a new designation (and/or a variation of the existing defence designation during any period of joint-use before NZDF's consolidation to Ohakea) would be necessary under the requirements of the RMA. Resource consents would be required for such environmental impacts as stormwater and wastewater by the ARC.
The RMA process is detailed and complex and would require a full assessment of environmental effects, including assessment against the RMA, the Auckland Regional Policy Statement, and other regional and district plans. It should be noted that an assessment is also required against the Waitakere and North Shore City district plans due to the noise contours and height restrictions for flight paths. Potentially, the noise contours may also expand into the Rodney District. Other airport operations in New Zealand that are close to residential areas have certain mitigation requirements attached to them. It seems reasonable to assume operational restrictions and mitigation activities to reduce the environmental impact of the operation would be required in the Whenuapai case.
WCC have estimated that the consenting process would take between one to three years, and that a five-year staged withdrawal of the RNZAF provides the opportunity for commercial operations to obtain the necessary consents through the RMA process.
Manukau City Council have suggested that the process could take between five to ten years. This is presumably based on Manukau's experience in granting consents for AIAL's proposed second runway, which took seven years. However, this extended time period may have reflected the perceived lack of urgency to begin construction on the second runway.
WCC/Infratil note that consents would be easier to obtain if existing-use rights, and therefore effects, can be transferred from a defence designation to a civil designation through an alteration to the existing designation under the RMA process. This is still to be determined. If existing military-use rights can be transferred to a civilian operation, it means existing impacts would be established as the baseline on which commercial operations would be tested under the RMA. If existing impacts cannot be used as a baseline, a "zero effects" baseline is likely to apply which may prove an insurmountable hurdle to achieving any consents to operate an airport and may significantly impact on commercial feasibility. WCC/Infratil have stated that existing use-rights will lapse after two years if use is not maintained.
WCC/Infratil are of the opinion that if commercial operations can be commenced alongside existing military operations, this will improve the possibility of carrying over existing-use rights. Infratil has stated its willingness to spend $2 - 3 million to seek the necessary consents.
Consents under Waitakere City's district plan are not considered by WCC to be hurdles to the WCC/Infratil proposal. JOG noted that it was not their role to predetermine the outcome of the statutory processes necessary to establish a commercial airport at Whenuapai. However, notwithstanding the limited information available, its view was that the WCC/Infratil proposal has a reasonable prospect of success through the RMA process.
The fact that civil airport operations are not currently in the district plans and the obvious environmental impact of such operations will mean the WCC/Infratil proposal and its consent process will require full public notification, a submission process and recourse to the Environment Court. There is also the potential that the proposal could then be appealed to higher courts as is often the case in other such contentious proposals.
It is likely that the process would involve joint notification, assessment and hearings by the responsible bodies, being ARC, WCC, North Shore City Council and potentially Rodney District Council. Each responsible body would then make their own respective decisions. It is expected that WCC would utilise independent commissioners due to a potential conflict of interest and the desirability of ensuring objectivity and transparency in the process.
It is unclear if any additional procedures may be applied to the process. For example, we understand that a Mayoral Forum was established by Manukau City to consider issues around AIAL's second runway in the lead-up to the consents process.
Conclusion - RMA Consents
There is no reason for us to question the opinion stated in the Regional Growth Forum's JOG report, nor WCC's opinion concerning the likelihood of obtaining consents. However, it is clear that there is significant opposition to a commercial airport at Whenuapai and, therefore, it is likely to be challenged through the RMA process and compensation and mediation activity sought. This has been confirmed by the WAAG (Whenuapai Airbase Action Group) who largely represent local residents around the airbase.
Commercial Feasibility
WCC/Infratil have provided us with a business case for commercial operations at Whenuapai, developed by WIAL. The evaluation includes an assessment of the potential market for demand, views of potential airline operators, and estimated airport revenues, operating expenditure and capital expenditure requirements. The business case is based on the development of a viable schedule for air services, estimations of load factors and calculation of revenue per passenger. WIAL noted that this was a standard method for forecasting airport traffic.
As noted above, commercial operators are in a better position to assess the commercial viability of a commercial airport operation at Whenuapai. However, it is worth noting the factors that are likely to affect the commercial feasibility of the airport and to make some initial judgements from our analysis of the business case.
We also note that the outcome of any activities necessary to enable the airport to be technically feasible, such as obtaining consents, may impact on commercial feasibility.
Potential Market Demand
WIAL concluded that there is a credible potential market for point-to-point airline operations from Whenuapai.
WIAL indicates that passenger demand is likely to be generated through:
- Population growth in the Auckland's North West sector.
- Improved convenience/access to air services and reduced overall trip time for those in the North West sector. WIAL noted a study by Tourism New Zealand which showed that every additional two hours of travel time dampens consumers' propensity to travel by up to 38%. They also note that EasyJet's CEO has stated that convenience of airport access is a primary criterion for selection of EasyJet's destinations.
- Increased competition in the air transport services market - leading to cheaper flights and higher levels of air travel. WIAL note that international fares fell by 16% from 2002 to 2003 which resulted in a 30% increase in trans-Tasman traffic from WIAL. Between 2001 and 2003 domestic fares fell by 8.5%, resulting in a 17% increase in traffic from WIAL. WIAL state that the experience of low cost services in Australia and New Zealand demonstrate that there is no natural growth rate for demand for air services - rather, it is price and seat availability that determine passenger numbers. Air New Zealand confirmed that the principal element driving demand is price.
- General economic growth in the North West and wider Auckland region. This is likely to result in increased numbers of business requiring domestic and trans-Tasman travel. Interestingly, WIAL's experience shows that there is no correlation between GDP growth and domestic passenger numbers.
- A potential inbound tourism market of Australians looking at short breaks to Auckland (e.g. weekend hop-overs).
[…] estimating annual passenger numbers will reach 1.6 million. […]
WIAL believe that airlines would specifically be attracted to Whenuapai due to its low cost and quick turn around of services that characterise point-to-point airports. Concentration on reducing turn around times would give Whenuapai a comparative advantage over AIAL in the budget air service market as such operational characteristics would enable airlines to realise the potential passenger growth resulting from the factors outlined above.
Hub-and-Spoke versus Point- to-Point Models
The business case notes that Whenuapai could only ever be a point-to-point operation as its runway lacks the capacity to cater for long haul aircrafts. It also notes that there are many international examples of point-to-point airports operating within the same city as the traditional hub-and-spoke airports. WIAL point out that the passenger number it is forecasting for Whenuapai are not sizeable enough to impact on the continued success of AIAL.
Financial Feasibility
Based on the above factors and assumptions, WIAL provided an assessment of financial feasibility. The WIAL business case assumes commercial operations begin in 2007 after necessary upgrades, but states that the financial feasibility is not dependent on this timing. The financial feasibility case covers the first 10 years of operation and has been confined to core air services with some allowance for revenue from terminal retail and car parking. There is no allowance for non-aeronautical revenues such as commercial property development.
Capital expenditure forecasts in the business plan are based on the Airplan report, with some contingency. […]
Revenue is based on airport income per passenger within the range currently achieved by New Zealand's existing airports. […] WIAL believe that this will adequately support the capital expenditure required.
Commercial Risk to Infratil
In line with standard business and investment practice, Infratil's investment strategy, as outlined to us, will follow a process that minimises any financial risk. As we understand, the only initial investment that Infratil will commit to is the $2 – 3 million needed to apply for the required consents. The outcome of these hearings, which could take a number of years (WCC estimates this to take between one to three years), would determine if any further investment will occur. Should consents be obtained that would allow commercially viable operations, it is likely that significant investment in upgrading the infrastructure would be required before substantial operations could begin. […]
Infratil have noted that there are a number of factors that could impact on commercial feasibility and that within these there are a number of possible outcomes. […] A "bad" airline outcome could be a daily service to Australia and limited regional services. A "good" outcome could be daily links to a number of Australian cities and reasonable regional services - movements at about half the level of Wellington. […]
Discussion and Conclusion of Commercial Feasibility
The business case takes no account of the need to purchase the Airbase. Infratil has stated that it would be willing to underwrite the Council should the Airbase need to be purchased though they have also given the impression that they believe the cost would be fairly low given the lack of alternative uses for the site and potential remediation costs should Whenuapai not become an airport.
Assumptions around operating expenditure are not elaborated on, though the report notes that these have been assessed on a detailed line by line basis.
There is no discussion in the business plan of how potential border charges would be accommodated and how a potential increase in cost for security services could affect commercial feasibility. It is therefore unclear as to whether border control costs have been factored into the business case. As discussed in the previous chapter, subject to Cabinet decisions on the current review of border control funding, any new airport (potentially including Whenuapai) will have to meet the full costs of border agencies. Based on Infratil’s forecasts, Treasury estimates that by the third year of operations at Whenuapai, the cost associated with border control would be in the order of $6.5 million per annum (under full-cost recovery). If Whenuapai is to be subsidised on a similar basis to existing airports, approximately $3.1 million per annum will have to be met.
While the absolute value of some of these additional costs may or may not be significant depending on the extent to which the border charges could be passed on to passengers in ticket prices. But in any case, there will be some negative effect on commercial viability, either as a direct cost to the airport or via an impact on ticket price flowing through to reduced demand. Given that the main attraction of low-cost carriers to most passengers is the low price of such services, they are likely to be sensitive to price changes.
Perhaps the most critical issue raised by the feasibility analysis is the assumption of underlying demand. The business case seems to have little discussion of demand factors that may be specific to the trans-Tasman aviation market, such as the market's ability to sustain more airlines or the extent to which there is additional unmet demand for air travel. As discussed earlier, anecdotal evidence from Air New Zealand suggests that while the introduction of their low cost Express Class fares for domestic and trans-Tasman routes resulted in an approximate 40% increase in passenger traffic, demand is probably close to saturation point and existing competition on the trans-Tasman route has pushed price close to as low as it can go.
No real link is made between the drivers of demand and the estimated passenger numbers. However, we accept that forecasting demand for a yet to be established airport is exceedingly difficult and subject to many variables that would be difficult to account for. At face value, given the growth of population in the North West and the convenience of Whenuapai to this population base, the recognition that demand is largely determined by price, and the fact that attracting one airline to Whenuapai is likely to require other airlines to compete on the same route, there appears to be a potential to exploit existing and untapped demand. Moreover, given the willingness of Infratil to invest in at least testing the commercial feasibility of an airport at Whenuapai, initially through the RMA process and then through a period of joint use, we do not feel we are in a position to reject the assumptions of the business case.
However, even if demand can be captured or created by Whenuapai, the business case does not seem to account for any potential competition response from AIAL. AIAL have noted in discussions with us that they are already looking at expanding their range of services. This would presumably make it cheaper for budget airlines to operate out of AIAL than more traditional airlines and would directly seek to attract the airlines and passengers that Whenuapai would target.
Critical Feasibility Issues
Our analysis of feasibility has identified a number of uncertainties that may be critical to the feasibility of the WCC/Infratil proposal, but for which the uncertainties are such that we are unable to provide an informed view.
Demand and Competition
Will there be enough demand to sustain a commercial airport operation? Is the trans-Tasman market big enough to sustain another, additional low cost service given that there is already competition between Qantas and Air New Zealand, and Freedom Air and Pacific Blue?21
How will AIAL respond and how would this impact on the commercial feasibility of Whenuapai?
We do not have enough confidence in the information we have to adequately answer these questions either way. That said it may not be possible to provide such information.
Timing - Consents and Cornerstone Airline
While the WIAL business case notes that timing is not a key issue for financial feasibility, Infratil have noted that they see timing as a critical issue in terms of obtaining consents and a cornerstone airline.
Infratil have given us the impression that they see a window of opportunity at present where the conditions are favourable to establish commercial operations at Whenuapai. This window has been estimated at around 7 years to have full operations established. Currently, there is the opportunity to exploit existing-use rights for air operations. This will be lost once the RNZAF leaves. Similarly Pacific Blue is currently considering flying out of Auckland. Pacific Blue represents the airline model which WCC/Infratil will be targeting and would make the ideal cornerstone airline.
However, Infratil have also noted that they are aware that it may be many years before satisfactory returns are achieved from airports.
Joint Use
The WCC/Infratil proposal envisages a period of joint use before the RNZAF consolidates to Ohakea. Joint use in the interim before the RNZAF leave would provide a period (at least 5 years) during which Infratil could determine whether operations are commercially viable.
The joint use proposals are predicated on a gradual reduction of RNZAF activity at Whenuapai, despite consistent statements from NZDF that the consolidation to Ohakea is almost certain to occur as a "big bang" (i.e. that consolidation will occur all at once rather than as a staged withdrawal). The WIAL business case notes that a detailed proposition for joint use will need to be developed once an in-principle agreement for development at an airport at Whenuapai is reached. Whether joint-use is practicable is likely to need to be determined before WCC and Infratil would be willing to conclude an agreement with the Crown. The Crown would also need to determine on what terms joint use would occur as there is a risk that the Crown could be perceived as either subsidising the airport through facilitating a trial period for WCC/Infratil or attempting to skew the consenting process.
Price of the Land
Feasibility may also be dependent on the price of the land. Although WCC/Infratil's initial assumptions appear to be that the land would remain in Crown ownership, they have indicated that they would be prepared to pay for the land. However, Infratil have consistently stated that they consider that the land would have little value. Infratil have noted that the land at WIAL only makes up around 20% ($50 million) of the airport's assets. The Government needs to consider whether it will be seeking a price that reflects the potential value of the land in so much as this may have a significant impact on the viability.
Ancillary Activities and Land Use
While the WIAL business case explicitly rules out property development and non-core airport ancillary activities, it is not clear how important these may be to WCC and Infratil. We have received mixed messages concerning commercial and industrial development around any future airport. More recently WCC and Infratil have stressed that they are not interested in property development in the short term. However WCC has indicated a desire to see the land developed for industrial use in the longer term. The ARC has stated its concern over the prospect of commercial activity being developed outside the MUL which would be contrary to regional growth strategies. However they accept that when the MUL was established it was done so without the knowledge that Whenuapai may become available for development and that the current and projected MUL boundaries will be periodically reviewed.
Conclusion - Feasibility
Both the WCC/Infratil and WAL scenario appear viable at the technical level. The ability to obtain various consents appears feasible though given the existing opposition any decisions are likely to be challenged. Commercial viability is more difficult to assess as it is dependent on a number of factors, which neither WCC/Infratil nor we can comfortably predict at this stage. There are significant uncertainties to the long run viability of a second airport at Whenuapai, the extent of these are only likely to become apparent as the proposal progresses, Infratil's proposed investment strategy reflects these realities.
We do not consider that the level of these risks, or the potential impacts that could result, are so significant as to indicate that central government should oppose the establishment of an airport.
18There may be the possibility of operating aircraft as large as Boeing 767s (approximately 200 seats), however this is likely to require operational restrictions such as take-off and landing weight restrictions.
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