Markets with Madison[VIDEO EPISODE ON YOUTUBE & SPOTIFY] The country’s largest gateway is replacing its 60-year-old domestic jet terminal. Is it an infrastructure play or a real economic boost?
The information provided in this program is of a general nature. It is not intended to be personalized financial advice. We encourage you to seek appropriate advice from a qualified professional to suit your individual circumstances. This is the country's largest gateway, Auckland International Airport. Where I'm standing is what will be it's new domestic a jet terminal. How much of an economic boost could this infrastructure investment provide?
You need the right infrastructure to enable growth. Well, you know what they say, build.
That and they will come.
Yes, there was a movie out that, I'm pretty sure.
So why do you think airlines are kicking up such a fuss? Because they are?
Yeah.
I mean, if you look back over time and my career has been an aviation, airline and airport side, it's a long standing tension point.
I feel very oddly dressed to be in the airport chicken area behind the scenes of one of the country's biggest infrastructure projects. Madison reading Auckland Airport's six point six billion dollar upgrade. Wow, they got that deep into the ground. Our tour guides are the airport's chief executives carry her to Hananui, her project managers, and the Hawkins construction team.
So this is that the stitch.
Yeah, so they if you go right back, you can see the plant of the old building. So and in fact that's the eastern end of the international channel that Isaac was saying, we've now built out. Wow, and this is kind of a connector or the stitch to this building then that he was just describing.
So international, the stitch which stitches it to domestic, which is this is domestic jet but Westandard.
Correct.
I'm sure Madison's interested in detail excavation, so yep, thrill me.
It's going to be hard. So this is reinforcing bar so when they fill up, credit has something.
To bind to.
So this is going to be underground the new domestic facility. No one's going to know of this, No, I'm glad we get to see it before you stand on it. So people will be picking up their bags pretty much.
On top of this. Correct.
And I think that's what people miss it, like saying why is the airport of.
The structure so expensive?
And it's you're not building a tin shed or a warehouse that you.
Just pick up your bag. You've actually got to whether.
It be for ensuring to Isaac Zuler comment that the building will withstand sharks New Zealand, and it's kind of oh yeah, perfect those elements. So it's often this under the ground stuff because the size, scale and obviously public use of the building and people just don't.
See it absolutely, and this is where a lot of the six point six bill has.
To go correct.
It's under the ground before you even see a terminal.
It's crazy.
This project has caused somewhat of a runway rumble between the airport and airlines who think the spend is excessive given it will be paid for by passengers through higher landing and takeoff charges in future years, and the tension.
With airports and airlines.
We need a really strong air New Zealand and we need more foreign carriers coming because that's from if you're looking forward, and if you sits not on a war, it's an end And I know that sounds flipantall glim, but it is that piece of it. All those things need to come together for ultimately New Zealand to deliver to its ambitions completely.
We want a strong carrier that can withstand competition, and it ultimately makes the more meta and makes.
The airport correct correct, and I then quite often people want it's interesting, you fine, and you must find this in your reporting.
People want to or it's a or be what it's like left? All right?
Right?
Or wrong? Yeah? Up and down? Yeah, it's like it's A and B. We need to go hand and people are kind.
Of what we're walking on what will be a two hundred and forty meter long peer extending out to twelve new domestic jet gates. It will connect to a brand new four story terminal with this view of the tarmac from the top.
And the other thing about the gates is a number of them are what.
We call swing gates. Are the ability to do either.
The narrow body jets or combined to do a wide body wow.
So it gives you flexibility.
So there's care And the twelve new gates, are they all additional or are you also ridding of some gates?
So what's the net edition.
So in fact, that twenty six percent additional capacity is you've got the two extra gates all being a three to twenty one capable ultimately and the last plan in future you won't have the domestic terminal in its current form, So this is replacing that sixty year old asset and part of that is because in twenty thirty you may have heard us talk about the main runway needs lab replacements, which means we need the contingent runway. You can kind of see from here that the taxiway just how close it is to the domestic terminal, and so to enable those runway works, the contingent runway means you can't have jets parked along that side of the domestic terminal, of course, because they needed to shut to Taxiga in plan. So in fact, your we'll decans into the new DJT regional, will continue to operate out there for a little while, and we're in the throws. Now, well, what's the future regional look like? Consulting with airlines, et cetera.
When are we getting a second runway? Ah, well, that's not saving any money on the side of that, that's.
One of the master planning. I'm saying. What we do know is at the point in time.
Demand dictates, we know where it'll be located, which is what the master plan does. It creates that view of so we don't build something a long term masset to only realize what it is so we know where it's going, but ultimately demand will dictate that back to earlier conversation. As demand dictates and we see that.
We'll firm up design past long gage with airlines as part of that.
But it's a good problem to have. If we get gross to the point that the second runway is demanded, that's good.
That's good for New Zealand. Well, you know what they say, build that and they will come. Yes, there was a movie on that.
I'm pretty sure the existing international end won't change, but transfers into domestic will be a better experience with passengers passing through this new terminal.
So this is where airline lounges.
Yes, so this for it's sitting above the processing area which will go to ano. Yes, this is like other lounges and the EXISTINGCT terminal internationally.
So good view of the time act, great customer experience when it's when it's finished.
So this is like the Champagne, cheese and crack aslam more likely working if it's the domestic lounge.
Right. Well, yes, you've got options obviously because you've now got to integrated.
You've got the view of efficiencies that are created potentially for airlines as they're thinking about kind of those best back office functions of how they.
Run their lounges. So that's a benefit to of an integrated terminal.
You get some of those things that aren't necessarily seen from the customers but do create efficient efficiency opportunities.
And it's big. The level below is the main area soon to be home to aviation security. With forty percent more space, it would be great.
This gives you an idea because in the current domestic terminal we can improve technology.
With aviation securities. You don't have to take laptops up.
The footprint is the footprint that there is nowhere for additional Q space, So it was really important that we created the flexibility for processing because you also don't know in five or ten years what the processing requirements will be, so it's ensuring where you've got optionality around that. And there's things change.
The screening is something you just can't avoid and an airport, so you.
Just need to create the space for it correct and technology will improve over time and do those elements, but you have to have the footprint that allows you to do it.
The queues have been crazy recently too, so.
Well, and some of that is short term pain.
For medium term gain is the upgrading of the machines, which means you don't have to take the laptops out. But yeah, it's also there is that footprint can stand that we know we do everything possible, but that we are on the countdown to twenty twenty nine, and I suspect our passengers will be so that they can come across and actually have a much more seamlessness.
This angle gives you more of a sense of just how much more open space there.
Will be clear security, and then you'll be into the duell area, which could be coffee shops.
To eat, and that's this you'd be hanging out here before going to your gate. I'm looking like an air hosting now.
And around yes, and then out to the and then ultimately out Toie.
Car you're on gate whatever it is. Look at the space yep, it's huge. Yeah.
After seeing the site, Carry and I sat down to discuss the investment underway and how the airport's profit is partly capped by regulators. Carrie, thank you so much for having us out here. I really appreciate it.
Pleasure.
I think the big question is why we've seen what you're doing out here at the airport, but why why do you feel like this company needs to invest like it is.
We'll probably two key drivers, and the first would just come down if you've been through the domestic terminal recently.
The inn is full at peak times, and so.
The ability for the future growth and capacity and competition and all those elements. It's a sixty year old or near sixty year old terminal and it is time for capacity, resilience renew The flip side of tho is when you then look at the economic and you know, we've recently had an economic impact studied in an Oakland airport and you've got thirty five billion dollars of economic activity that comes out of Oakland Airport. And so the combination of those things really underpins the why and why it's important.
I don't want to ask you about economic impact, because how much of this investment, the increase of the infrastructure and it's scale here at the airport, how much of that is to do with boosting the economy both locally and Auckland but also in the country given this as the biggest gateway into New Zealand, Or how much of this is actually just purely an infrastructure play for the business itself.
And I would say it's all of those things.
And the reason I mean, you know, it's not lost on anyone the conversations of an estimated two hundred billion dollars of infrastructure deficit facing New Zealand.
And so that's a broader topic.
You need the right infrastructure to enable growth and enable that. But more so in that play to say, if you look at from a longhol capacity, over ninety percent of flight that come into New Zealand arrive in at Oakland Airport. If you broaden that to short hool airlines, that's more than seventy five percent of all international flights come here. Eighty percent of cargo arrives in the belly hold of a passenger aircraft and ninety percent of that arrives into Oakland Airport.
And so you know, Oklin.
Airport is kind of this value engine, if that's what you want to talk about. It's got an ends, an ink roll that's incredibly important, you know, and the current government talks about doubling exports and ten years Okan Airport, like many businesses, has a role to help enable that. So we have to be fit for purpose to actually deliver to that ambition, both as an airport but also for endsetting.
So how much more fit will this infrastructure investment make Aukan Airport in terms of trade that it can bring in in terms of passenger capacity in and out of the country too.
So if you look that thirty five billion of economic activity that I talked about, that's as that today. If you roll forward to twenty thirty two, which is kind of the ten year planning horizon we worked to, that jumped up to fifty five billion in terms of that, and that's made of domestic tourism, of international tourism, of freight. And I think people also forget they think of Oakland Airport as a place that you and I and travelers go to on our holidays or visiting family and friends. But actually the trade and freight activity is incredibly large as well. Auckland Airport is the third largest high value port compared to the Port of Totong and the Port of Oakland. So again part of that broader infrastructure and economic kind of engine side of things.
Carry It's no secret that there has been quite a runway rum, but we call it quite some controversy around both the scale of this investment and who's going to pay for it. Can you explain to me how much it's costing and how you're financing it, and then we'll get to the airline part after that.
Yeah, certainly.
So we came out earlier and the tenure capital plan was six point six billion over the ten years and actually from and it will matter in a minute when we get to the airline side of things, but five point seven billion of that is what we call priced or regulated activities. Oakland Airport has regulated activities and things that are described as natural monopolies runway, airfield, air bridges, baggage systems, and then you have non regulated such as the retail property, roading and some other elements of that. So you've got a mix of those two things. When it comes into the who pays you've got it depends on those So the regulated elements are paid for by airlines. It's a user pays system, so if you're using the runway, then the charge is run through to that. When you look at the non regulated side, that is recovered through it's funded by Oakland Airport shareholders and off the diversified balance sheet, and then it's recovered over the long term through things like commercial leases to those retail tenets for example, so.
The majority is regulated, which is price set by the Commerce Commission because this is a natural monopoly. As you said, we don't have a population un fortunately big enough to house.
More than one or on airports.
So how much more are airfe is going to have to increase to help pay for that regulated portion, which is the majority of this investment that airlines are coughing out for.
I think it's probably context. It's really important.
So when you look at domestic jet charges, for example, they make up four to six percent of an airline ticket, so quite small in the scheme of things. If you look over the current pricing period which goes through to twenty twenty seven, we're increasing those domestic landing charges by a dollar seventy six a year. So from kind of size and scale gives you an idea, it's quite small in the scheme of things. It's also when we look historically, partly because the domestic terminal is almost sixty years old, it's been at forty to fifty percent less than other major airports in New Zealand. So by the time we get to the end of this pricing period at twenty twenty seven, Okan airport will be either on par or below those other major airports. And when you even look across to Australia, so you've got a mixed there that airlines will pay for they use and then the non regulated piece, as I said, will be recovered by the users of those so commercial leases, tenant leases, et cetera.
So why do you think airlines are kicking up such a fuss because they are.
Yeah, I mean if you look back over time and my career has been an aviation airline and the airport side, it's a long standing tension point and every five years, you know the regime came into place about two thousand and eight in terms of the Commerce Commission, every five years or so you see the cycle of intense scrutiny and conversation between airports and airlines and then obviously the role of the Commerce Commission to review that.
So it's been a long standing hot point.
We'll call it that. And listen, I get it. Nobody wants charges to go up. It doesn't matter what your business is. You want to manage that. But at the same time, if we go back to that economic engine, you have to have the ability to grow New Zealand, to create competition, to create connections with New Zealand to the world and each other. You have to have fit for purpose facilities to do that, and so there's a balancing act a little bit that comes with that.
How much of this investment do you think is growth for the future versus plane catch up because these are old, old, aged terminals that we're dealing with.
Yeah, I mean the domestic debt Teroma is nineteen sixty six at commission, and so you have your adding capacity. So it'll be twenty six percent more capacity in the new domestic debt terminal than what there is today, forty four percent more processing space which nobody loves a queue, so that additional space will be welcomed by our travelers. It will be integrated into the international terminal, so it's a five minute indoor walk instead of the outdoor walk that it has been for many decades.
So there's value across that.
That's both that combination of capacity growth for the future as well as than that renewal and resilience things like expansions. It's the terminal, it's airfields, it's a transport network. You know. One of the things mid next year will deliver will be significant stormwater resilience into the airfield that will be delivering, which is key. We've seen unprecedented intensity at weather events in the last couple of years, and so it's also future proofing for that, which is incredibly important as well, things.
Like processing times and just making sure the customer experience is relatively okay. Isn't that what an airport is just meant to provide? Why should airlines have to pay for making sure that that part is up to scratch, which is your operation?
Yeah, I mean, I think it's those elements of Again, there's a whole bunch of obligations that need to be met with it be through the Civil Aviation Authority, and airports have to be certified just as airlines do, so you need to meet those requirements through border agencies and as you say, you want an efficient process. But also the airline systems also interface with that. So the check in systems and the software and the applications that airlines use need to interface with the airports. We don't necessarily dictate what platforms they use, so it's an ecosystem and I think that's a really important care.
You know, I see Offland Airport as the conductor of the orchestra, so to speak.
And I mean that on the basis that there's things that we control and should manage incredibly well.
There's things that we.
Need to influence and support such as water agency and confliniance requirements. And then customers for us is airlines stakeholders, the millions of travelers that come through our day, and that ecosystem only works if it's in concert and if it's working together, and so our roles to play that together. But fundamentally, when you look at air bridges, when you look at tarmac and aprons and stands where the aircraft park their plane, sorry airlines park their planes, that is a user pays basis that that is one of the underpinning enablers of airlines to undertake their businesses.
Quantas and their New Zealand have made the point in this controversy that if prices on air fees keep increasing, and they're already pretty high, if they keep increasing, then that will ultimately in the end impact negatively tourism in this company tree.
Do you agree with that? Are they wrong or are.
They right to suggest that if you keep bumping up prices that ultimately it's going to come round about and mean that too few people fly in and out of this country in this airport.
You know, I think you know.
The one thing that airlines and airports absolutely have and should operate a unison on, is that they are volume based businesses. So neither of those parties have an interest in negatively impacting demand, right, And then you get into the economic impact for New Zealand, that's that's a value add But at the same time, it's then I think I suspect where the airlines are coming from. It's this argument around elasticity and how that works. Again, if I draw a comparison to say, so, we are improving our increasing our domestic jet prices by dollars seventy six a year overnight. A couple of months ago, Air New Zealand increased its baggage fees by ten dollars per bag. So it all depends on how you bring those things together. That the ability to provide growth, and that twenty six percent press capacity is good for airlines, that creates growth for airlines, growth for the airport, growth friends at ink and so it's one of those elements that you need to have the facilities to enable that to happen.
When is this going to be finished? When are we going to walk through a new terminal and have hopefully a seamless experience.
At this airport.
Yeah, we'll we'll certainly over the next five years. So the integrated Terminal itself is going to be operational in twenty twenty nine, so that means we still have around five years to get from today to that point. But at the same time, we're also five years is a long time, So anyone that's been through the domestic criminal recent will have seen that we refreshed bathrooms, duell areas, the food court, et cetera. Because it's really important that our customers are having to look at good experience in the interim, and we're also opening things along the way. So the Transport Hub, for example, open fully just in the last few weeks, actually creating increased capacity for parking. It's on the doorstep of the International terminal, and that's future proofing because that's today the International termin or, but it will be the Integrated Terminal in five years time, so we will be rolling and opening things over the next five years. But the new terminal itself that you're describing, that's twenty twenty.
Nine, where is this going to put Auckland Airport on the international pedestal of airports. Are we going to be changy not lax?
Well, we're certainly not going to have a waterfall in the middle of our terminal, I can say that.
But actually we're a.
Fit for purpose, modern functional airport that is the appropriate proposition.
For New Zealand.
But we're very aware and you would have seen outside the transport hub, for example, quite a bit of landscaping, those four hactares that we've transplanted to Kawas and done things that were really aware as people come, visitors come to New Zealand that that feel of old tedle On how they look at that. But yes, I would like to think that that. No, we're not going to be doing kind of the changey experience in terms of some of those added benefits like the jewel, but we will create an experience that Kiwis and Oklanders can be proud of and something that meets that need of today.
And takes us into the future for decades to come.
And you're already seeing hotter competition from international airlines, especially going from here to the United States. Do you expect this investment to only.
Boost that well, I think you've got the combination right. So this is a domestic jet terminal replacement, so you will see that, and there is that flow through that we know historically in a pre COVID environment, about twenty percent of international inbound visitors would travel through on the domestic and regional network.
So we're really.
Conscious that the role we do is not only international domestic jet but also regional and how we feed and support the system that comes through, and I think that's something that's important as we go forward. But yes, we're seeing North America last year that had a thirty nine percent capacity increase from what it was in twenty nineteen.
Wow, compared to pre COVID.
That drove an increase in passenger numbers I think from memory sixteen percent up on passenger visitors at increased HIGER capacity by nine percent, but actually twenty six percent in export earning. So what that shows is when you enable growth and you enable those things, you do get almost the multiplier effect that ends Ittting benefits from some of that activity.
So now we'll really please I.
Look forward to experiencing it one day. So thanks for much your time, Kerry, appreciate it.
Thank you,
