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• Asset Base

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• Airfield Inquiry

• Final Report Part IV

• Valuation of Airfield Land
• Valuation of Non-Land (Specialised) Airfield Assets
• Optimisation
• New Investment and Pre-Financing
• Appropriate Asset Base

29. Asset valuation is relevant for the purposes of both determining the price for, and assessing the performance of, airfield activities at the three airports. The value of the asset base is, therefore, an input into the consideration of whether control of airfield activities is necessary or desirable in the interests of acquirers, and whether control is recommended. The higher the asset valuation, the higher the revenue needed to generate the required return on assets, and the higher that prices need to be.

30. In order to examine airfield activities, the Commission determined what it considers to be the appropriate principles to be used in arriving at an airport's asset base. In economic terms, the relevant costs on which to determine an asset base are generally opportunity costs. The opportunity cost of employing an asset in one use is what the owners forego in not receiving the returns that could be earned from the asset in its next best alternative use. However, applying the opportunity cost principle may not always be appropriate, because of dynamic efficiency considerations. In deciding its approach to determining the asset base, the Commission examined:

• An appropriate methodology for valuing land and non-land airfield assets.
• Optimisation of surplus assets.
• Timing issues regarding new investment.

31. A full discussion of issues regarding the asset base is contained in Chapter 5.

Valuation of Airfield Land

32. In most cases, land does not depreciate and is not subject to technological obsolescence. Furthermore, unlike some other airport assets, it has an alternative use and, consequently, has an opportunity cost greater than zero.

33. Valuing airfield land at opportunity cost provides appropriate signals either to continue operating the land in its existing use (as an airfield), or put the land to alternative use and relocate the airport. It also provides the appropriate incentives for new investment. Opportunity cost should be determined based on the highest alternative use value of airfield land, with that being the higher of the value with or without the sealed surfaces (the latter being after the costs of removing the sealed surfaces).

34. Land value should not include the cost of getting the land to a stage where it could be used as an airport. Any land holding, levelling, seawall construction and reclamation costs should be valued as specialised sunk assets at historic cost. In order to avoid double counting, these values should not include any portion that is already included in the opportunity costs of the land.

35. The relevant alternative use for land may differ from airport to airport, and may depend on the underlying zoning (or future rezoning) of the land. Potential alternative uses are residential, commercial, industrial and rural. The airports have made various assumptions regarding the alternative uses of their land.

36. In determining appropriate land values for inclusion in the asset base, the Commission made adjustments to the airports' values to optimise land as relevant, and to include land at its opportunity cost. In the case of AIAL, this results in downward adjustments to land values and, in the case of WIAL and CIAL, in upward adjustments to land value.

Valuation of Non-Land (Specialised) Airfield Assets

37. Non-land airfield assets are, on the whole, specialised assets as, for the most part, they have no alternative use. The most significant non-land assets are the sealed surfaces or civil works that have been developed on the land. Economically, these assets are sunk as the investment in them cannot be recovered by resale.

38. In the case of sunk assets, opportunity costs are zero. Such assets are being used in their best use, and there is no alternative use. However, valuing the assets at zero may affect the willingness of investors to invest in such assets. Airports need to be able to recover the costs of, and earn a return on, specialised airfield assets in order to preserve continuity of supply. Alternative approaches to deal with this issue are valuations at replacement or historic costs.

39. The Commission's view is that specialised airfield assets should be included in the asset base at historic cost, and depreciated as appropriate. Historic cost provides investors with a return on the amounts invested, and preserves incentives to invest in the future. Investors are compensated for inflation through the use of a nominal WACC.

40. In determining appropriate values of specialised assets for inclusion in the asset base, the Commission has adjusted the airports' values of specialised assets to exclude revaluations from historic cost to Optimised Depreciated Replacement Cost (ODRC). It should be noted that no airport optimised any of the Depreciated Replacement Cost (DRC) for these specialised assets.

Optimisation

41. A condition for efficient pricing is that the costs that should be recovered through pricing are those that reflect the least cost of production. Airports should be able to recover through prices the efficient costs of assets needed to provide airfield services. The Commission's view is that only those assets that are currently `used and useful' should be included in the asset base on which a rate of return is calculated. All other assets should be optimised out.

42. Land and non-land assets that are surplus should not be included in the asset base - they should be optimised out. The Commission has optimised out a number of parcels of what it considers to be surplus land at the airports. Detailed discussion on this is found in the airport-specific chapters.

New Investment and Pre-Financing

43. Growth in aircraft movements will require investment in additional runway capacity at airports from time to time. It may not be desirable for airport companies to delay investment until demand exceeds capacity. Equally, it is not desirable from an efficiency perspective for airport companies to over-invest in facilities. Investment planning, therefore, should aim to ensure that there is an appropriate level of investment to support production, with no excess, or under, capacity.

44. Any new investment should be based on reasonably anticipated future demands. Excess capacity may be dynamically and allocatively inefficient.

45. The Commission considers that it is a matter of judgment as to when land should be acquired for future runway developments, given the inevitable uncertainties as to when relevant parcels will become available on the market, and to when development may actually occur. A judgement is required in each particular case. The Commission believes that it is important that incentives to invest in expansions to capacity in a timely fashion are preserved.

46. However, there is a danger that land could be acquired too far in advance of need if the airport were assured of being able to recoup the cost of holding it from users. Hence, the Commission considers that holding costs - based on the historic cost of the land, net of income generated and of revaluations - should be capitalised (and depreciated), and incorporated in the asset base as a specialised asset at historic cost for charging purposes only from the point at which construction commences. This means that although the airport has some discretion as to when land is purchased and net holding costs start to accumulate, it must bear the risk that the land may never be developed as planned prior to the development actually being initiated. From the point at which construction commences, the land would be valued in the asset base at opportunity cost.

47. The Commission excluded the land AIAL holds for its second runway from AIAL's asset base for determining allocatively efficient price and computing returns. It also considers a proportion of the second runway land to be dynamically inefficient, as this proportion of land is unlikely to be used by the airport for airfield activities even over the medium term, perhaps not even in the long-run. The rest of the second runway land is expected to be used at some time within the medium term, and is, therefore, not seen as leading to dynamic inefficiencies.

Appropriate Asset Base

48. The tables below show, for each airport, the current asset base for the pricing of airfield activities considered appropriate by the Commission, compared to the figures adopted by that airport.

AIAL Airfield Asset Base as at 30/06/2001

WIAL Airfield Asset Base as at 31/03/2001

CIAL Airfield Asset Base as at 30/06/2001