The sale of central government's Wellington Airport shares has parallels with Auckland Council's proposal.
Airport sales have a troublesome history in New Zealand – the sale of Wellington Airport shares in the late 1990s essentially brought down the Government.
At the time central government was looking to sell its 66 percent stake in Wellington International Airport as it considered the airport non-strategic.
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Wellington Council saw the benefit of selling its 34% stake at the same time, with many of its reasons echoed over two decades later by Auckland Council, including the fact they didn't have much influence in the business. Also that the objectives of the airport, including expansion and greater visitation, would be in the interests of any private owner.
The council did not sell, but Jenny Shipley’s National-led coalition government went ahead with its sale to NZX-listed Infratil, which still holds that 66 percent share.
The sale infuriated NZ First’s Winston Peters, who was then the Treasurer and Deputy Prime Minister. His opposition to the sale worsened tensions with Shipley, and she eventually sacked him from both roles. So he led NZ First out of government.
Despite a few stabs at selling the investment, Wellington Council still holds its 34 percent.
Auckland Council’s plan to sell likely won’t make anything close to those sort of waves, but it is still a contentious issue.
Even though it let its shareholding in Auckland International Airport (inherited from the former Manukau and Auckland councils) dilute from 22 percent to 18.09 percent by not purchasing any new shares issued in a $1.2b capital raise during the pandemic, Auckland City Council still has the largest single holding in the company.
It's a smaller percentage than Wellington's council holds in its airport, but Auckland Airport is of much greater significance.
The Auckland Airport share
Using Wednesday’s closing price of $8.88 a share, the council’s stake is worth $2.37 billion.
Its well-publicised reason for selling the stake is to pay down debt, saving the council $87m in interest payments each year, eclipsing the expected $39m in dividends for the current financial year.
That goes a long way towards plugging its $300m operating deficit, which will also be met by cutting services and hiking rates.
Classed as a strategic asset, the shares can’t be sold without public consultation – which is currently underway.
The Wellington sale featured vociferous consultation sessions, described as having people hanging from the rafters. If that's anything to go by, public opposition could be sharp.
Of 49 written submissions to the sale proposal, 72 percent favoured keeping ownership.
Reasons given included concern around foreign ownership, loss of public control, that it was an income-generating asset, or simply that the council would waste the proceeds.
Auckland Council pre-emptively answered those concerns in its 2023/24 budget.
Losing control
A major opponent to selling Auckland Airport over the years is former Manukau mayor Sir Barry Curtis.
In a Newsroom opinion piece earlier this month, Curtis said only local public ownership, in part or whole, could safely secure the long-term interests of Auckland, and that selling the shares would be a “very short term ‘band aid’ to council finances without addressing the root causes”.
Addressing the loss of public control in the proposal document, the council expressed confidence that the absence of its minority ownership interest wouldn’t lessen any incentive for the airport to act in the wider public interest, under appropriate regulatory oversight.
It also said its current shareholding gave it no real ability to control or influence the strategic direction of the company – it stopped nominating a representative to the airport’s board in 2015.
It said any concerns over foreign ownership could be dealt with by the Overseas Investment Office, which has a say on the character and purpose of any potential investor more than a quarter owned by foreign interests.
Milford Asset Management Trans-Tasman Equity Fund portfolio manager Sam Tretheway doesn’t have a strong view either way, but said the airport was of strategic importance for the economic growth of the country and it needed to be properly managed.
“If it’s poorly managed, tourists might not want to come and that’s bad for the economy. If it comes to be renowned as a terrible airport, and people avoid it, that’s bad.”
Tretheway said it would need to have continuing capex, infrastructure investment to make sure it’s a good airport and said the council stake did provide influence, but any sale would trigger the requirement for Overseas Investment Office approval.
Sydney
Tretheway pointed to the 2022 sale of Sydney Airport for an idea of how the process could take place – and that these sorts of infrastructure assets can attract full valuations.
Sydney Airport was purchased for AU$23.6b in early 2022 by a consortium of infrastructure investors, with the airport subsequently delisted from the Australian Securities Exchange.
Overseas investment rules required the airport to be at least 51 percent Australian-owned. This threshold was met with the inclusion of institutional Australian investors such as AustralianSuper.
New Zealand’s Overseas Investment Act was amended in the face of a 2008 attempt by the Canadian Pension Board to purchase a 40 percent stake in the airport.
Originally, government had proposed legislating restricting foreign ownership of Auckland Airport to 49.9 percent, a 20 percent limit on individual foreign investors and some restrictions on board membership.
This was changed to simply allow ministers to consider the benefits of keeping “strategically important businesses” in local hands when deciding whether to veto overseas investments.
The definition of strategically important businesses includes airports; the Canadian purchase of Auckland Airport was subsequently blocked by the relevant ministers.
Auckland Airport didn’t supply Newsroom with a ratio of its overseas and domestic ownership, but crudely using Wikipedia’s unreferenced ratio of 60/40 domestic and international ownership (treated as an estimate in this case), a foreign purchase of the council shares could well take foreign ownership of the airport above acceptable levels.
Another reason given by Sir Barry Curtis for not selling the shareholding is the value that has been created.
Since the super city was formed in 2010, the combined value of Manukau and Auckland’s shares have more than tripled, representing a gain of $1.2b .
Tretheway said increases in passenger numbers had historically delivered effective growth for the airport, but a lot of revenue had been driven by retail – Chinese tourists spending on duty-free, for example.
“That’s missing and whether it will return is still not proven," he said. "So while it’s historically been attractive, long-term return is uncertain and the need for funding is going to go up.”
The upgrade
Subsequent to the council laying out its plans to sell its shares, Auckland Airport released a $3.9b redevelopment project.
The project will replace its 57-year-old domestic terminal for $2.2b, with the remaining $1.7b going towards other costs in the integration of the domestic and international terminals.
The upgrade will be funded through higher pricing for airlines, which will flow through to ticket sales.
In a note, Forysth Barr head of research Andy Bowley said there was scope for additional equity capital being needed, potentially in the form of a dividend reinvestment plan once dividends resume at the end of the year.
Auckland Council’s existing policy for its airport shares is to not participate in dividend reinvestment plans, though it can make exceptions.
Not participating would see its shareholding in the airport, and therefore its sway on operations, further diluted.
