Minister of Transport Michael Wood orders sweeping review of services for small airports, will consider direct funding

Transport Minister Michael Wood has ordered a wide-ranging review of smaller airports and Airways’ funding and operations which could lead to a dedicated fund to sustain services.

The ”first principles review” comes after transport officials identified serious problems in the country’s aviation system and raised concerns about safety as Airways considers cutting back services in the regions.

Ministry of Transport documents released under the Official Information Act reveal a ”rolling contestable fund” of between $10 million and $12m a year could be needed to help small airports remain viable.

In a letter to the minister officials say small airports must pay the full cost of Airways and other services or forego them, affecting reliability or safety. Fatigue and Airways staffing problems over summer were also causing concern.

Wood told the Herald it was difficult for smaller airports to sustain themselves from airport fees and charges or small ratepayer bases, so the Government was ”carefully looking” at the question of a contestable fund.

”This would need to have strict and clear criteria to support airports that are not commercially viable to undertake necessary capital investment and ensure the continued provision of air services.”

Wood said the ministry-led review would look at what was wanted from the air navigation system and how to provide it.

This will include looking at the regulatory settings, new technologies, funding of the system, and integration of air space and the review will start by the end of the year.

The New Zealand Air Line Pilots’ Association (NZALPA) welcomed the move.

The association represents air traffic controllers and says Airways’ decision to potentially remove air services from seven regional airports, including the tourism hub of Rotorua, was based on ”questionable” forecasting of regional air traffic levels during the national Covid-19 lockdown.

It appeared to have been planned well before the pandemic struck, said the association’s president Andrew Ridling.

“There was little regard for the obvious and devastating effects this would have on aviation safety, and connectivity to our regions and the communities involved, should the proposal go ahead. In our view, this was an egregious decision and looked to also take advantage of a crisis.”

He said the profit-driven Airways model was at odds with providing a safe, essential service.

”We don’t expect the Police or the Fire Service to make a profit,” he told the Herald.

Doing nothing will fail

In the letter to Wood, officials say Cabinet considered a bid for a regional connectivity fund last year for budget funding last year but this was unsuccessful.Such a fund could also directly subsidise air services if gaps are identified.

”Doing nothing to support regional air connectivity or responding only to crises (for example the Westport airport sea wall falling into the sea) fail as sustainable approaches,” officials told the Minister.

The letter shows the MOT is at odds with Treasury over the nature of the fund, saying it would not be a general subsidy but would provide ”an efficient process for funding of airports and airlines when a high threshold is met.”

NZ Airports represents 31 airports around the country and has said 12 airports with fewer than 200,000 passengers a year are considered ”at risk,” -12 airports.

The Auditor-General has also raised concerns about the “precarious viability:” of small airports, especially given their importance to the vitality and connectivity of the communities they serve.Five airports are joint ventures with the Crown, all of which are considered “at risk” and the letter notes that that model provides for inequalities where some airports are supported and others aren’t.

The monopoly position of Airwaysis explored, as is the need to prop up the SOE with funds from the Government aviation relief package unveiled as the pandemic hit and other Crown funding.

”As a result of its future revenue, Airways found itself in a negative cash flow situation and was likely to remain so for the foreseeable future.”

Airways proposed pulling air traffic control services at Hawkes Bay, Gisborne, New Plymouth, Rotorua and Invercargill airports and withdrawing flight information services at Kapiti Airport and Milford Sound’s Piopiotahi Aerodrome.So far none have lost their service and Airways must wait for the results of aeronautical studies – which include safety – before taking any action.

The plans have been fought by NZALPA which has cited safety worries.

Airways in the firing line

The letter says airlines have raised concerns that Airways is not always able to provide air traffic control for the hours or locations and is investing in future rather than current infrastructure – sweating assets.

There are also occasions where scheduled air traffic control is not able to be provided as planned, causing flights to be re-routed or cancelled.

The letter, written in February, says with the uncertainty around the provision of air control services at regional airports, a number of controllers have resigned and Airways is having trouble recruiting replacements.

This had affected Kapiti Airport over summer and shutdowns for a number of hours at Queenstown Airport.

”The CAA and the ministry have also received concerns around air service control operators and issues with fatigue and capability, and the potential safety concerns.”

CAA investigates these concerns and keeps them under review.

”Given funding pressures and the need to invest in future technology, it is recognised that Airways is in a tricky position where it needs to achieve a fine balance between being able to make necessary new investment and putting sufficient investment into current infrastructure and capacity.”

This needed to be further balanced against over-investing in resilience and driving costs into fee payers.

Airways has slumped to a $13.8 million loss for the six months ending December 31, 2020.This compared with an after-tax profit of $16.2m for the same period in 2019 in an aviation sector that had been growing quickly before Covid-19.

Funding the system

The letter outlines the few checks and balances on Airways’ price setting.

Airways consults and sets prices on the revenue required to operate its services and is not subject to the Commerce Act, not required to go to Cabinet and is not required to work with its monitoring agency on efficiency and effectiveness of its pricing model.

The Civil Aviation Act is being overhauled and submissions on it show concerns about the way Airways sets its charges.

”As with all monopoly consultation processes, airlines have no formal power to influence pricing methodology or the resulting prices and no ability to decline to pay, other than reducing or withdrawing services,”the letter to Wood says.

There have been concerns raised by the ability of Airways to set prices to fund significant capital investment needed for changing technology, even where they may not be users of it.

Smaller airlines and airports say that money Airways makes from its commercial activities as a result of its monopoly should be re-invested in supporting the air navigation system rather than being paid to the Government.

After years of paying dividends, these have been suspended due to the collapse in revenue from international operations. Instead, the Government has provided financial
support of $70m to Airways and a further $95 million facility to draw on.

Wood today said that it was important to extend support so Airways could continue to provide a safe national air navigation network.

Despite what it calls an uncertain outlook, Airways says in its Statement of Corporate Intent released last week that it hopes to be in a position to pay a dividend in
the 2024 financial year.

”Directors will seek to return a dividend of between 50 per cent and 100 per cent of free cash flow from the Group (normalised for maintenance levels of capital investment),
subject to maintaining gearing ratios below 50 per cent,” Airways says.

How the state fund could work

The officials say initially its focus would be on access to essential services and regional emergency management and resilience given the ”significant” challenges facing smaller regional airports.

The major costs facing airports are runway resurfacing and reconfiguration, maintaining terminals and other buildings and navigation procedures. Other costs include the provision, renewal or refurbishment of approach lighting, lit windsocks, runway lights and navigation beacons or support for satellite navigation.

”The fund would also be available to directly subsidise air services if gaps are identified in their provision.That is where sustainable air services could not be provided commercially and where services are necessary to deliver access and resilience objective.”

The officials say if the fund was set up the joint venture between the Crown and five airports would be reviewed to provide a more transparent, equitable and suitable approach.

”In addition, most overseas jurisdictions recognise that there will always be a need for some Government support for regional aviation services providing essential services.”

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