Wellington.Scoop » Why the WCC should sell its airport shares

by Paul Ridley-Smith
The Wellington City Council has been consulting about selling its 34% shareholding in Wellington Airport, with a plan to invest the net sale proceeds in a new perpetual investment fund (PIF).

The income from the PIF would be paid to the Council each year for annual expenses (just as Airport dividends are now) and the capital would be preserved as a rainy day fund, perhaps to help with major earthquake damage.

Strong guardrails are proposed to stop the PIF being raided by this or subsequent Councils to repay debt, meet annual expense or funds other pet projects. Other councils have established similar future funds asset sales. New Plymouth District Council did so with the proceeds of sale of its Powerco shares and Auckland City is proposing exactly the same with proceeds of sale of its last tranche of Auckland Airport shares.

The Draft Long Term Plan says the shares might be worth ~$500m. That’s too high: at 31 March, Infratil valued its 66% share at $624m, implying $321m for the Council share. Ultimately, the highest bidder would decide.

Officers are recommending the sale and the PIF, and it’s supported by the Mayor, Councillor Brown and some others.

But other Councillors look likely to oppose.

A sale should be endorsed.

The Draft Long Term Plan persuasively argues that the Council would reduce its investment risk by owning a diversified investment portfolio, especially shares in businesses outside of Wellington and New Zealand. If there’s a major earthquake or natural disaster, the Council will need money and assured income from its assets. But that’s just when the Airport might be damaged and/or its business or income severely affected.

If the money is in ~200 global shares then the value of, and income from, these will be unaffected by a local disaster.

The NZ Super Fund, which has consistently produced strong returns, has assets of ~$70 billion, and 88% of these are abroad. Its 2023 Annual Report is titled “The Wisdom of Diversity”, and they don’t just mean the ethnicity of the staff.

Equally, the returns on this diversified portfolio should match, and more likely exceed, the returns on the Airport shares. The shares have done well for the Council, increasing ~7x in value, plus dividends, since it declined to sell them to Infratil for ~$49.6m in 1998. But less well than if the Airport shares had been exchanged for Infratil shares, which are up ~15x in value, plus dividends over the same period.

That’s all history. The question is how will they perform for the next 26 years? My view is OK, but not well.

The financial future for the Airport is modest. Notwithstanding years of hard work by Councillor Brown, when he was chair of the Airport for many years, and before that his late boss, Lloyd Morrison, all major strategic initiatives to grow the Airport business have failed.

There’s been no runway extension, no direct long haul flights using latest generation B787 planes, no successful new trans-Tasman airlines (just a series of failures – remember Freedom Air, Pacific Blue and Virgin Pacific?) and no new domestic airlines of any scale (again, just a series of failures – including Ansett NZ and Origin Pacific). And none of this is likely to change.

Earnings have always been a function of domestic and trans-Tasman services run by Air NZ and Qantas and its budget domestic subsidiary, Jetstar. The landing charges the Airport can charge are regulated by Part 4 of the Commerce Act and surely the lemon has been well and truly squeezed dry on the unregulated parking charges. The upside looks average at best.

But the downside is real.

Over the next 5 to 20 years Wellingtonians will likely fly less, not more. Technology is changing how business is done and the central Government’s expansion is over.

Face to face meetings are going the way of the morning newspaper. Leisure travel will always exist, but is there any good reason for thinking that a 4 times a year leisure traveller is going to go 5 times, especially if fuel prices and climate consciousness keeps rising? Dropping to 3 seems more likely to me.

And then there are the Black Swan events like the earthquake and pandemics. These have a negative bias.

Opponents of the sale cite strategic benefits. But these are almost non-existent.

Sure, the Airport is a strategic asset for the city, but not the Council’s shares in the Airport – an important, but poorly understood, distinction. The shares are only strategic if they give control or meaningful influence. They don’t.

Infratil (and its successor owner) have the right to appoint 4 directors and the chair. The Council can appoint 2 directors. All Board decisions can be made by simple majority – ie the Infratil directors. The Companies Act requires that very large transactions (more than about ~$900m in value) are approved by a 75% vote of shareholders. Anything less than that, Infratil fully controls.

If the Airport wants to spend $400m on a runway extension, the Council will have to tow the line. Same for building a hotel, a conference centre or buying a golf course or another airport. If the Airport wants to become a military base or welcome the private jets of the Global 1%, there’s nothing the Council, as shareholder, can do. And if the Airport needs to raise money from its shareholders to do so, then the Council will have to pay its 34% share or get diluted down.

Getting diluted is the ugly truth that Auckland City faced in 2020 when it couldn’t pay its share of COVID related capital raise of Auckland Airport. Dividends are controlled by Infratil. If it decides to reinvest operating profits in the business, rather than pay dividends, then so be it.

About the only thing the Council could, as shareholder, stop is the Airport closing and becoming a housing estate. But it’s almost impossible to conceive that happening as that’s a lower value use of the land.

The Council’s real strategic powers come from its planning and consenting authority status. It has these rights irrespective of its shareholding.

Opposition to the sale is sentimental and relies on the 1980s experience that some state assets were sold for undervalue. That’s true, they were. But we’re smarter than that now. The value of infrastructure assets is now well understood. A good process will lead to a fair price and the sale proceeds can immediately be reinvested in a wide range of assets, again at fair prices.

Paul Ridley-Smith worked for the Infratil group for many years until July 2023 and was closely involved in Infratil’s purchase of the Crown’s 66% share in 1998. He was a director of the Airport for 7 years until 2008.