Auckland International Airport Limited (AIA) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Auckland Airport Regulatory pricing position for PSE4 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Carrie Hurihanganui, Chief Executive Officer of Auckland Airport. Please go ahead, ma'am.

[Foreign Language]. Welcome, and good afternoon to everyone on the call. Thank you for joining me and Chief Financial Officer, Phil Neutze, today. I'm pleased to be able to share with you our Price Setting Event 4 or PSE4 outcomes. Setting charges is something that happens once every 5 years in accordance with the Airport Authorities Act, our pricing announcement today is the result of 24 months of extensive consultation with major airlines regarding aeronautical investment in Auckland Airport over PSE4 to support their business operations, as well as consultation over the airport's wider 10-year development road map. Synergy charges will fund part of the much-needed investment in the infrastructure that is underway. And for PSE4, this amounts to $2.5 billion of commissioned infrastructure focusing on important airfield, terminal, baggage and transport improvements to be completed and in use by airlines by the end of the 5-year period. I'm sure you're keen to get into the detail before we then move into Q&A. So let's jump to Slide 4 to kick things off. Now the strong recovery in aviation has reinforced the need for Auckland Airport to once again move up on its long-term road map for upgrading New Zealand's gateway Airport. The 10-year road map indicates $5.6 billion of priced aeronautical investment over the next 10 years. This is the base CapEx scenario. And while a higher CapEx scenario was also included in consultation, the $5.6 billion provides a deliverability risk-adjusted view as it is quite an ambitious program. Now the road map includes construction of a new integrated domestic terminal on the Eastern end of the international terminal that will replace the current 57-year-old terminal, as well as other key projects that include refreshing the current domestic terminal to deliver an improved customer experience over the next 5 years while the integrated terminal is built; a modern and new baggage system that will enable improved customer experience such as baggage store with the added bonus of using 50% less power than conventional baggage systems. We will have the largest airfield expansion in our history, some 250,000 square meters or the equivalent of 23 rugby fields, providing new remote stands for jet aircraft, new fuel infrastructure and significant storm water capacity enhancements. There's also investment in contingent runway operations to safeguard resilience. A new experience for arriving and departing international travelers with a new public drop-off and pickup area on the doorstep of the international terminal as part of the transport hub development. And expansion of the international check-in area to accommodate more passengers for when the new integrated terminal opens. So with today's announcement, we've now set our aero charges out to 30 June 2027, which will see an increase, which will fund this critical investment. If we move to Slide 5, Phil will walk through the detail of the pricing in a little while, but at a glance, some of the key inputs and related outputs include passenger numbers. So when you're comparing to the PSE3 forecast for this period of PSE4, we have seen net reduce by 4% to $98 million versus the $103 million that was in the PSE3 forecast and direct results of the pandemic. Now post-tax return target is 8.73% versus the 6.62% in PSE3, and it does reflect a significantly different environment that we are operating in with high inflation and high cost. To give context of that, in 2017, when setting PSE3, OCR was 1.7% and inflation was 1.6% versus the current economic backdrop. Now total aeronautical capital investment over the period is $5 billion, and that includes assets that will be commissioned in PSE5. So then when you look to say that price and commissioned aero CapEx in PSE4 then is $2.5 billion. Those assets will be commissioned and in use in PSE4, and this is up from the $1.4 billion that was forecast for the same period in PSE3. The price regulated asset base will be $3.3 billion by the end of PSE4 at 30 June 2027. Now based on those key inputs, the headline outputs our priced aero revenue of $2.6 billion, passenger services charges of $1.5 billion and airfield charges of $1 billion made up of both landing and parking charges. On a revenue per passenger basis, the average of our PSE4 is $10.79 for combined domestic and regional flights, and $37.26 for international flights. If you jump to Slide 6. recovery continues to look strong. The forecast demand growth reinforces the need for this significant infrastructure investment. And much of it is in line with what was announced in underway pre-pandemic but needed to be paused until the recovery profile was clear. If we move to Slide 7, the 10-year road map lays out the transformation journey of the aviation system at Auckland in key projects, as referred to earlier, is the integrated terminal that was announced in March to replace the domestic terminal. Related to that, we have domestic airfield expansion to support that new terminal, refresh of the current domestic terminal of future regional solutions, upgraded roads and transport system, the transport hub, arrival upgrade, the new cargo precinct and the Northern stands and storm water upgrades. The international arrivals expansion, which is Stage 2 in the Northern runway remain on hold, and you'll see that identified on the slide and are not in the road map at this time. 10 years is a long time, however, so it is worth calling out that projects in the road map are subject to change and may be replaced, deferred or canceled. Moving to Slide 8, the integrated terminal will deliver a step change in the domestic experience, and something that's incredibly important, certainly based on the feedback we've had from our customers, from state-of-the-art check-in to new modern baggage systems and under cover 5-minute walk for international to domestic jet transfers, more efficient processing areas and more. This results in a 20% increase in gates and a 26% uplift in seat capacity as all gates will be A321 capable. And it will be able to handle 44% more departed passengers per hour than the current terminal due to increased space for security screening. Moving to Slide 9, the domestic terminal will be refreshed to extend its life. We know that there is 5 years. 2028, '29 is when the integrated terminal is due to be commissioned. And so we will be upgrading key customer-facing areas such as bathrooms, dwell areas and help desks, as well as key updates on systems were required. Moving to Slide 10, the new transport hub. This really will be the heart of public transport at the precinct including the under cover pickup and drop-off on the doorstep of the terminal. It will cater for valet, car parking, electric vehicle charging stations and future proofing for mass rapid transit. It is a 3-storey office building at 1 end and includes 14,000 square meters rooftop solar array that will generate approximately 1.2 megawatts that will power the office building and much of the electric charging in the facility. The carpark is being built through a U.S. Gold Parksmart standard and the office building to a 5-star Green certification to align with our sustainability aspirations. Moving to Slide 11. I mentioned earlier about the size of this expansion at 250,000 square meters. We do need to create a new area for aircraft parking with a large part of the airfield about to become a construction site for the development of the newly integrated terminal. This requires more than 80,000 square meter space for its apron and airfield operations, meaning the current space with the aircraft park up temporarily will be impacted. The project will add extra taxiways and 7 remote stands for aircraft that layover for several hours before departing again, 5 of which would have in-ground jet fuel reticulation and other services. The project also includes the addition of significant additional storm water capacity, which is critical as New Zealand reflects on the recent intense weather events experienced. In time, it would also connect to a planned cargo precinct and further still into the future at some stage, the second runway. Moving to Slide 12. Auckland Airport's focus is on building a better future. Our purpose is to connect people in place, and the 10-year road map sets out the investment to create more resilience and deliver the customer experience that our travelers expect. Now I'll hand over to Phil so that we can get into the detail on the pricing fill before we then open up to questions.

Thanks, Carrie. So I'll be speaking to a few numbers. So apologies, but there's a little bit of repetition around the infrastructure development program. I think that's actually helpful to sink in so you can understand exactly where our thing is set. Starting with price setting events. As Carrie mentioned, every 5 years, we're required to consult before we set aeronautical prices, that's under the Airport Authorities Act. We also have separate consultation obligations around significant capital projects. And related to that, the overall capital road map that we disclosed and the pricing disclosure, the 10-year road map and we have those details here. So what have we been up to for the last couple of years? The first thing that we did was back in June '21, we consulted with airlines and got strong agreements, almost unanimous, to delay the first reset. So we froze prices at FY '22 levels for the first year of PSE4, that's FY '23. On the understanding that, that shortfall versus target return and the FY '23 would be forecast to be made up over the remainder of Price Setting Event 4. So over the page to Slide 15, we'll start to have a look at some of the building blocks that feed into the price paths. The first 1 is traffic assumptions. This is pretty straightforward. I don't really need to comment too much on this other than just to confirm that our traffic forecast are constrained forecast. This is after we apply estimated price elasticity of demand dampening impact from the price path, so that's factored into it. And we're slightly more conservative than a lot of market commentators. So we're forecasting for pricing that domestic passengers return to pre-COVID levels in the FY '25 and international in FY '26. So then on to Slide 16. I just want to make sure people understand that these are nominal dollar forecast. So these include our forecast, CapEx escalation costs, as well as holding costs. Some of you remember that last time around for PSE3, we focused on real dollars. But we've kept it simple this time, and just focusing on the dollars that we'll see them to pricing. So as Carrie mentioned, over PSE4, $2.5 billion of assets be commissioned and used. So $1.5 billion of that relates to the overall terminal integration program. And so that includes the likes of remote stands, new baggage system, check and expansion, arrivals expansion. Well, some tweaks to arrivals, I should say, as well as the Western truck dock. And then the balance, and we'll come back to this as well later in the presentation, upgrades to the domestic terminal building, airfield renewals works and the aeronautical components of the transport hub. Over to the next slide, 17. So this gives you a simplified render of what's the new domestic processor will look like, integrated both the eastern end of the international terminal. And on the bottom bullet on the left, we talk about $2.2 billion. That's the forecast cost of the peer plus the head house and some airfield works. So the remainder of the $3.9 billion that we announced a couple of months ago as other components. We'll come back to that. That remainder also includes the enabling works set out here on this page. So relocating our Airport Ops Center. Eastern Bag Hall, we demolished the old one and we're building a new one. And relocating a lot of activities that took place on the airfield. Over the page to Slide 18, again, on the terminal integration program, what does that include in PSE4? Well, it doesn't include the new pier and headhouse because that won't be operational until late calendar '28 or '29. But what it does include is additional stands and storm water infrastructure, a new baggage system, the expanded check-in, some arrivals upgrades. As I mentioned, the Western truck dock and also some roading and forecourts expenditure. We also -- in PSE4 have the upgrade of the domestic terminal that Carrie spoke of in some detail here. Also the transport hub. So aeronautical component of that is pickup and drop-off. There's also going to be dedicated aeronautical operations center, and there'll be aeronautical offices, in fact, on the picture on the right-hand side of this slide, closest to us as where the offices will be, aeronautical offices. They're not priced, they're recovered through just standard rental arrangements, but the Ops center [indiscernible]. So over to Slide 19. These are some of the less significant elements of CapEx on PSE4, important all the same, but I'll take that as read. So then over to Slide 20. So this is the money shot, really for [indiscernible]. So as this in terms of the infrastructure or the regulated asset base that drives PSE4 prices, and there's quite a lot in this. So again, just reinforcing , you can see on the left-hand side, in fact, both charts show commissioned infrastructure in PSE4 in the navy blue and commissioned in PSE5 in the light blue. So for the terminal integration program, I've already touched what's getting commissioned, just to repeat that, though. Remote stands, baggage system, check-in expansion and West terminal enabling, that's the arrivals tweaks as well as the truck dock. And on the right-hand side is other aeronautical CapEx that will take place over PSE4 and PSE5. So airfield renewals and other renewals, those are the renewals or the likes of our business technology systems, roading renewals, aircraft -- sorry, airfield ground lighting that was acquired from airways. Bathrooms, those sorts of things. And you'll see that both of those renewals categories add up to, on average, $100 million per annum over the 10-year period. That's pretty much exactly what the regulated aeronautical depreciation adds up to over that period. So made CapEx pretty much matches depreciation. Back to the bottom left of this slide, breakdown of terminal integration program. $3.5 billion is the value that gets commissioned and priced for aeronautical use. That's a little bit less than the $3.9 billion that we talked about previously. The $3.9 billion also includes other users that aren't allocated to aeronautical charges. And I think that's about it, I wanted to cover on this page. Yes. So moving on to the next Slide 21. So this is operating costs. Just to provide some context to this, we recently purchased the Jacobs Global Airport Performance Indicators Report for 2022. And that showed that Auckland Airport on OpEx per passenger was the ninth most efficient on that measure out of the 50 global airports that they look at. And almost all of those, well, in fact, all of those that were lower or either in high -- low labor cost countries like Mexico, India and China, or they were much larger airports that have greater economies of scale. We do forecast OpEx to grow, as you can see in the chart on the left-hand side, driven primarily by passenger growth and inflation. But we do see real operating cost per passenger trending back pretty close to where they finished pre COVID FY'19. So back to $6.60 deflating using forecast CPI inflation versus $6.40 per PAX in FY '19. And these forecasts, of course, Auckland Airports risk -- they feed into the building blocks and determine prices. It's not often that actuals perfectly make your forecast. So after under or over that will be Auckland Airport's risk. Then over to tariff structure on Slide 22 to give you an overview of what's changed versus PSE3. That's what I'll focus on pretty much. Transit passenger charge used to be set at roughly half the international passenger charge but only charged on arriving, transiting passengers, not departing. So effectively, it was 1/4 of the international passenger charge. We have now set that equal to the international passenger charge, but again, it will only apply to arriving. So it's effectively half international passenger charge. And that better matches the infrastructure and the cost that apply to those passengers. For landing charges, very similar structures for PSE3, but we've tweaked around the 6 tonne area that avoided an anomaly where aircraft slightly less than 6 tonnes, we're actually getting a higher charge than the aircraft slightly more than 6 tonne, which wasn't entirely fair. So we'll fix that up. On parking, aircraft parking, we will -- in 12 months' time, we'll reduce the free layer of a period from 48 hours down to 12 hours. And that's necessary. We're experiencing some airfield congestion at the moment. and part of that has been contributed by freighters that's utilizing that 48 hours free. So we need to change that, particularly as we go into this construction period, and we have less stands available at certain times. Airline charge, it's still on the pricing structure, but it won't apply. It won't be triggered and even was a $0 per passenger. So effectively, it doesn't apply in PSE4. So the key new changes are a CapEx washup and a demand washup. The CapEx washup as 1 way only in favor of airlines and that covers them in case we're unable to ramp up and deliver the full value of commission assets, $2.5 billion that were forecast over PSE4. The present value of any under-delivery and that would be the depreciation that we recover on assets that aren't actually delivered and the return on capital, the profit on that. That would get washed up and would reduce aeronautical charges in PSE5, if we under deliver. If we over deliver, then there's no washup in favor of Auckland Airport. Demand washup though does work 2-way. So it has a 15% trigger. If aeronautical revenues are above or below the pricing forecast by 15%, it will trigger, but only to the extent that our IRR over the period either is below or exceeds our target by 75 basis points. If this did apply previously PSE3, that would have served to recover about half our losses from COVID-19. They knocked back our total passenger numbers and revenue by about 1/3, about 33%. So it would offset about half of that under-recovery. So then on to target return, Slide 23. So I've already seen a bit of commentary on this, and this is an area that I feel very passionate about. I can absolutely assure you that it's Auckland Airport view that we've taken a very principled defensible approach to this. And I'm sure there'll be some questions, but let's hit some of them off by just giving a bit more of an explanation. So what we've done is simply take the Commerce Commission's global comparator company sample set and refreshed all of its analysis as at 30th of June 2022. So before the -- immediately before the start of PSE4 that's to calculate things like asset beta and leverage. This time around, though, we haven't reduced that average by 5 basis points for the aeronautical components because we've done a lot of empirical analysis that absolute discredits the rationale for that. There was a theory that aeronautical on average had low systematic risk or nondiversified risk than does the entire company. Our analysis shows that, that relation doesn't hold. In fact, it's weekly the other way. So if there should -- if there was an adjustment which should be upwards, not downwards. We haven't applied an upwards adjustment. There's also been commentary that we should adjust our COVID somehow. If you take that theory through, every time an economic shock comes up, you adjust out the shock and lower the asset beta over 100 years. All you've done is reduced asset beta versus what it really is. Those shocks are real things that take place. And all we're proposing is we take a 10-year slice like the Commission has insisted we do for the last 13 years or so. So COVID at this time, in the future, it will roll out. We will update this analysis before every price reset. And that will ensure that over the long term, we actually use the correct asset beta. If we were to seek to adjust it out of this data, obviously, we need to adjust it back into future data because it's a real risk that does exist. And that would mean you'd have to have perfect information on the probability of this risk and of GFC and every other risk that happens -- happening in the future in order to adjust and into the numbers when it wasn't there because it didn't happen to be a shock in that period. So that's the rationale. We've also adopted the Commission's most recent post-tax market risk premium estimates. And that gives us the answer. We don't think there's a more principled approach that we could have taken on that. And if we took a different approach, then we'd be guessing what might be a right approach as opposed to just the same approach applied for nearly 15 years. Some commentators appointed to Heathrow and said they only got a 3 basis points asset beta uplift for COVID. That was net of a range of other mechanisms that the U.K. CAA implemented for Heathrow, that maybe commentators haven't noticed. So they had a traffic risk sharing mechanism that equated to 8.5 basis points uplift. They had an uplift of GBP 300 million to the RAB, which equates to 2.2 basis points if you apply that through to Auckland Airport. They had a $25 million per annum residual asymmetric risk boost to their allowable revenue. That equates if you apply that approach to Auckland Airport 20.8 basis points. And also, they reduced the traffic forecast versus the best estimates by 0.87%, which equates if you apply that to us 2.9 basis points. So if we applied the same approach that London Heathrow has, we would have lifted our asset beta by 37.5 basis points. In fact, what we did was we diluted the COVID impact over 10 years. So the last 5 years have been 18 basis points higher than the previous 5 years, but we diluted it over 10 years. So we took a 9 basis points uplift. So our 9 basis points uplift asset beta compares with 37.5 if we applied to London Heathrow. So around about 1/4 of the uplift that London Heathrow benefit from. And of course, I'm happy to take questions offline or even on this call on that. So then moving to Slide 24, price setting decision. So as you can see on the next page, our aeronautical charges over PSE4 will increase, but will remain benchmarking well versus comparable airports. I've already touched on the other elements to set out in this slide. So let's move over to Slide 25. And you can see we've got 3 charts here. Domestic jet on the left, regional on the middle and international on the right. And for each of those, in FY '24, we benchmarked well. In fact, pretty much below everybody else, but they will increase over FY '24. It's hard for us to do a like-for-like comparison versus other airports because it's only Auckland, Christchurch and Wellington that have to produce 10-year forecast. Our Aussie airports don't. But we know they've got a lot on. So we've done a bit of web scraping and we found that Melbourne, for instance, intends to spend $9 billion over the next 10 years. The Brisbane has got plans for $5 billion. We don't know the split between aeronautical and non-aeronautical. And Perth about $3 billion. So if you look at those international charts, they -- international, other Australasian international charges will be increasing along with ours. So then on to Slide 26, forecast returns. As I talked about before, our returns were massively below what they needed to achieve our target return on FY '23 because of the price freeze that we applied. And so our returns need to be over the target return on average for FY '24 to '27, as you can see, to achieve that target return. On to Slide 27, actually, I've already covered how these washups work, so I won't spend any more time on that. So let's flip all the way to Slide 29. So big picture on capital management. We continue to target an A- credit rating. In our view, that's the optimal capital structure and will maximize shareholder returns over the next 10 years. Some shareholders wonder how that can be and say, surely, if you just let your credit rating drop, you'll leverage your returns and we get higher returns. That's not the case, and that's because we've got such a significant increase in our borrowing program over the next 2 years. So we estimate that if we let the credit rating drop, that would increase our borrowing margin by about 30 basis points, and that would apply over all of that increase in borrowings. That really hurts from an earnings per share perspective and a push came to shove, and we needed to take steps to avoid that happening EG through an equity raise, the earnings per share dilution would be only a tiny fraction of that. It would be far better for shareholders to avoid a credit rating downgrade through an equity raise. And another reason for that is we're on a forward price earnings multiple of about 45x. Gross it up for tax, and that equates to a pretax return on equity for say FY '24 of about 3%, that's about half our borrowing costs. So it's certainly -- and that's before any increase in borrowing costs through a credit rating downgrade. So it's just good sense for us if we were faced with the risk of a credit rating downgrade to avoid through an equity raise. As we have acknowledged here, as a significant infrastructure program, and whether or not we may require an equity raise is largely determined on the pace that we can deliver that. We've modeled various scenarios, and we see that there's a range of somewhere between no need for an equity raise at all to a maximum of about $1 billion and ranging from never to somewhere towards the second half of PSE4. So then moving to Slide 31, the regulatory time line. So actually, we've heard since we drafted this slide, the Commission will -- publishes draft WACC Input Methodology determination in June. So on 14th of June, actually next week. That's draft only that I'll call for submissions and cross-submissions. There'll be a detailed process between now and then. And the Commission will release its final determination in December this year. The Commerce Commission will also review our price -- sorry, I also missed a couple of things. So our new charges will take effect from 1st of July. So in less than a month's time. And we'll publish our detailed pricing disclosure, which will be yet more informative versus today during August, due 3rd week of August. But, hopefully, we can get that out earlier. We'll let you know when. And the Commerce Commission, we expect to review our price setting decision by sometime H1 calendar '24, so sometime after Christmas next year. And of course, the Commission will take into account any change in view on the WACC Input Methodology that will be determined in December this year when it reviews our pricing decision. And we will, of course, consider that accordingly. So that's the end of my presentation. So I think we're happy, Carrie, to go into...

Yes. Phil, I think you've given a great overview, So, but I have no doubt there are some questions on the line. So why don't we jump into that.

[Operator Instructions] The first question comes from the line of Owen Birrell from RBC.

Excellent. Excellent. Okay. Look, just the -- I guess the first question for me is regarding the CapEx spend. It's a little bit higher than we previously expected. Just a couple of questions on that. Firstly, how much of that is just, I guess, additional buffer that's being built into your expenditure profile versus new projects that have been added? And can you give us a feel for the I guess, the CapEx profile over the next -- the PSE4 period, noting that you're going to be spending a lot more money than you're actually going to be commissioning.

And Owen, can I just clarify before we answer that when you're asking your first part of the question about the capital and how much -- are you referring specifically to PSE4 or are you talking over the 10-year road map?

Both, actually.

Both. Okay. Well, certainly, as far as the capital program itself, that they are -- it's largely similar to what was announced in February 2020, if I got the timeline right. And then that was part, but clearly, the economic environment. So the things have been updated as far as there's been significant escalation in construction. I think it was 12 months to kind of the end of last year was 17%. So there's certainly they've been updated to reflect those -- but so I'm not aware from a contingency perspective as far as significant changes that we have had the cost escalation, but, Phil, want to have a quick check with you on this.

Yes, yes. So we don't build a buffer. All of the projects are the midpoint expected out of those capital expenditure programs. There's no sort of make-believe projects or papers in there. As I mentioned, we've got circa $100 million per annum of maintenance CapEx in the numbers and the rest is growth CapEx. We talked about -- at the interim results, we said investors should expect roughly $600 million per annum of commissioned CapEx over the 10 years. So this base plan is $5.6 billion. So just a smidge and under that. But yes, it is front loaded. We also talked about just under $4 billion related to the terminal integration to be delivered by the end of 2029, so about 6 years. So that's about $670 million per annum, so but over that $600 million average run rate and probably close to $700 million when you add nonterminal integration projects.

So that's the commissioning profile, if I understand. But what about the actual spend profile, the cash going out the door?

So again, we've talked about -- yes. We haven't provided a forecast yet of noncommissioned CapEx for PSE5. So that will come in our pricing disclosure in August.

I guess what I'm trying to get to is the -- roughly, it was a $2 billion odd of terminal spend that sits in work-in-progress at the end of the period. When is that going to be spent during PSE4? A couple of years or is it spread across the remaining 4 years?

Yes. So as we talked about this $5 billion of aeronautical CapEx over PSE5. So that's the total cash flow spend. So roughly double what's been commissioned, and most of that will get commissioned in the first 2 years of PSE5.

Our next question comes from the line of Amit Kanwatia from Jefferies.

If I can ask on the target returns in, Phil, obviously, you're making good case as far as the asset beta, that you're using of 80 basis points. I just want to understand given Commerce Commission is still under their review. And let's say, if they arrive at their final decision, which is lower than this 80 basis points, and let's call it 60, 70 basis points, what would happen to your target returns then?

Yes. Firstly, after the Commission sticks was a pretty important regulatory principle of consistency, then it would get exactly the same answer that we have. Apart from we've taken 5 -- we've added 5 basis points in that we're not downwardly adjusting the overall company average asset beta for the aeronautical component and nor would we expect the Commission to -- as part of our submissions on WACC IM, we've provided all the empirical data that absolutely debunks that theory. So it's hard to see how the Commission would come on a principled approach to a significantly different answer. And if it came to an unprincipled decision, then we need to think about how we feel about that when we consider its reveal of our pricing decision and respond early next year. But I guess, what happened in PSE3 is a useful pointer. We weren't able to come to a precise agreement with the Commission. Again, we felt that we're taking the principal approach to our rate calculation. We were targeting then something different to the midpoint calculation. On this occasion, we are using the midpoint. So exactly what would expect the Commission to calculate it if it just kept a consistent approach to the last 2 price setting periods. But last time, there was a difference, and we chose to reduce our target return and to implement that through a discount to standard charges over the final 3 years of PSE3. So if the Commission was to change this approach radically but appeared to be a very compelling approach, which I struggle to see how that would happen. But if it did, we would consider that and make adjustments accordingly.

Sure. And I mean if I can just kind of interrelate it, as far as this new demand was [indiscernible] that you're introducing in this PSE5, which is good in the sense that it protects your returns from future disruptions similar to COVID-19. But has there been any thinking because -- theoretically it should also impact your asset beta in the future, which, I guess, should be less than 80 basis points, if that makes sense.

Yes, yes, so we've looked at that and had expert advise on that. If you look at the Commission sample set, most -- well, look at the European companies, they have far more aggressive asymmetric risk, washup mechanisms and retailing. Take London Heathrow, for instance, if you take an example, if we suffered a 60% loss in our demand over PSE4 -- let me just grab the analysis through our asymmetric risk mechanism, we would still lose 15% of that. So it will only be the losses above 15% that were recovered through asymmetric risk, whereas London Heathrow, the residual loss would only be 2.5%. So their mechanism would make them good for everything about 2.5% versus ours, which would be everything, 15%. And you see that across other European airports as well. In fact, we're not pricing to recover any of our losses over PSE3 at all, but we understand that most of the European airports are negotiating with the regulators for an explicit recovery of losses during the prior pricing period. So in fact, we should be -- on that basis, we should be including an uplift to that 0.8 asset beta because our asset metric washup mechanisms are far softer and less effective than the comparable company data set.

Sure. And just a final question for me. On the CapEx, obviously, you'll be spending $5 billion until fiscal '27 and -- which is front-loaded as you've said the 10-year base CapEx is $5.7 billion. So that only leaves $700 million for PSE5. And I mean you've talked to, this is a base CapEx. Can you talk to what are we missing as far as a higher CapEx scenario? Because I mean, $5.7 billion for 10 years with $5 billion in first until '27. So that doesn't leave you much for the next 5 years. So what are we missing or what's the higher CapEx scenario earlier.

Yes. So we refer to that on Slide 20 on the right-hand side, the specific bullet point. So it's largely additional terminal expansion and roading capacity that could be triggered depending on the traffic outcome, and we would consult airlines before that would be baked into PSE5 aeronautical plans.

And how much would that be if those are triggered beyond the base CapEx scenario?

We're not commenting on that at this stage.

Our next question comes from the line of Marcus Curley from UBS.

Phil, look, I just wanted, obviously, a little bit of a follow-up on that last question around the washup. I suppose you're keeping a pure process and you're obviously basing your asset beta off the history, don't you think you're sort of double dipping by asking for a washup in addition to that? And I suppose specifically, do you think you put yourself at any risk, extra risk by asking for that ahead of the Commerce Commission review?

Well, we have to make a pricing decision. So we just have to do it and then wait for the Commission to opine on it. But absolutely not. Obviously, pandemic risk has always been a risk, but it's never been in the data previously. So our target returns have been too low previously. They should have factored in pandemic risk. They never did. So that again just shows how difficult it is to take an approach that you try and adjust the data based on adjusting in or out shocks. And in our view, by far, the most appropriate approach is to leave everything lie as it sits and will wash through the data over a rolling 10-year slice.

But do you think there's a risk that they say, well, we'll give you a washup, let's say, arguably a full washup on passenger volumes but keep the asset beta unchanged. I suppose, wouldn't you rather take the risk and have the higher asset beta than the washup?

So, the washup is only a tiny component of systematic risk. In fact, arguably, asymmetric risk is separate from that. So I mean it's difficult conceptually, but to again emphasize the point, the Commission uses a global sample set to calculate asset beta. And from our analysis, the majority of those have far stronger washups than we do. So we should take that and we should say, "Oh, our washup isn't strong enough that we're proposing here." So we should upwardly adjust our asset beta to be on a level pegging with those global airport samples here.

Okay. Secondly, -- it sounds like you're happy to run this process right through its end. So if the Commerce Commission come out on the 14th and say, yes, that the asset beta is 0.6 and have changed the methodology, which obviously would be a lot different to where you're coming out today. You're just have -- the process would be to run through to the -- effectively to next year and get the final determination before you're likely to take any sort of reaction to that outcome.

Yes. Of course, we'd be part of the process that would submit and cross-submit on that proposal. And as it stands today, we couldn't see how that could -- there could be any principled basis for that. So if there wasn't, we'd be submitting hard on that. That would be our first step. And then we'll see whether or not the Commission took into account our submissions and our expert adviser submissions and then consider its overall decision or opinion on our price setting decision in H1 next year.

And then you flagged a potential capital raising in the second half of this period. You've obviously also talked about the front-loading of the CapEx of $5 billion. How concrete do you think that capital raise is clearly given that you're flagging it, one would assume that it's a reasonable likelihood, Obviously, that it sort of departs from what was said in response to not equity funding the domestic terminal?

Yes. I mean we have been talking in discussions with investors on the interim results webcast as well, acknowledging that there's a possibility of a need for an equity raise. Back in December, we were light years from finalizing 10-year capital plan and also what our target return would be and all the other elements. So we had no basis back then to assess whether or not it would challenge our credit metrics when we're asked that question. So we certainly were not considering an equity raise at that point in time. And by the way, we're not contemplating one right now either. And as I said, depending largely on our delivery rate for that infrastructure plan, any need from equity could range from nothing at all, neither, to -- up to $1 billion. So that's quite a wide margin of error.

Okay. And then maybe just a quick final one. When you've done your demand forecast, have you made much allowance for the impact of the higher charges on demand, particularly on domestic?

Yes. As I said, we have constrained the forecast based on elasticity estimates.

Could you provide any sort of color on what that impact was?

So I can give you some pointers. So basically, our elasticity applies to total airfares. Auckland Airport's average charges represent a bit less than 3% of an average airfare. And the -- our estimated elasticity is 0.8. So take a -- look at this, for example, I think we're forecasting roughly a doubling of domestic prices. So that would mean that if is all things being equal, would go up by about 3% and then multiply that by 0.8 elasticity would bring that down to circa 2% reduction in demand.

Our next question comes from the line of Roy Harrison from Bank of America.

Just want to get an understanding of the CapEx plan being subject to changes in traffic demand. So are there any recovery milestones we should look to that could potentially trigger an acceleration of CapEx or delay of CapEx.

Not over PSE4. That is the majority of any upside to capital expenditure would be PSE5. And again, we will update all those forecasts before we set prices for PSE5.

Next, we have a follow-up question from the line of Amit Kanwatia from Jefferies.

I just have a small follow-up question on the funding. And obviously, you've said it can be between $0 to $1 billion, and you've explained why equity makes more sense end. I was just interested in getting your view on maybe sale of your stake in Queenstown. If you can make some comments around that stake sale as an option as well to fund this CapEx.

Yes, it would hardly make a ripple on the pond really. We haven't valued that. But we bought that stake 10 or 11 years ago, and I think that cost us about $30 million. So it's going to be worth a few multiples of that, but it would still only be a fraction of 1 year of CapEx.

Thank you. I'm showing no further questions. I'd now like to turn the conference back to our speakers for closing remarks.

Well, thank you, everyone. Certainly, appreciate the chance to share with you today the price setting, and there's a lot that goes into it clearly. And I think Phil has done a fantastic job of articulating that. And he and Stewart will be more than happy to have follow-up calls as appropriate as things come to mind. But we are looking forward to moving ahead not only with the development, but concluding this 24 months of consultation and moving forward. So thank you all very much for your time this afternoon, and we will connect again soon. Thank you.

Thank you.

Thank you. That concludes today's conference call.