Airways Corporation of New Zealand Limited Pricing for the 2019-2022 Period
4.C. Cost of capital
AIRWAYS PROPOSED Airways proposed a capital charge rate of 6.9%. This is the same cost of capital that Airways has used for the 2016-2019 pricing period. However, it reflected a different mix of underlying parameters. The proposed risk-free rate, debt premium and debt issuance cost parameters were lower, while leverage was higher. The proposed leverage reflected Airways target leverage for the 2019-2022 pricing period. SUMMARY OF SUBMISSIONS Several submitters commented on the increase in the leverage parameter. For example, BARNZ supported all inputs used by Airways for its proposed capital charge rate, other than the asset beta and/or leverage inputs. BARNZ’s view was that the asset beta and leverage were not consistent and should be based on either: X X unweighted averages of the asset beta and leverage of overseas Air Navigation Service Providers (ANSPs), or X X the parameter values determined by the Commerce Commission for New Zealand airports Some submitters suggested other reasons that a lower cost of capital be adopted including Airways’ low-risk position as a State-Owned Enterprise; the volume risk- sharing mechanism changes in 2017, and the diversified nature of Airways’ services and revenue compared to airports. The change from the pricing proposal reflects a fall in the risk free rate. It is consistent with Airways’ previous practice to update the risk free rate to reflect the most recent data available. Airways carefully considered the submissions made in relation to asset beta and leverage and sought expert advice on the best estimates for the cost of capital parameters. Airways’ asset beta is estimated from the asset betas of comparable entities. The most directly comparable entities are AirServices Australia, NERL (NATS) and IAA. Given that the business of Airways depends on the business of airports the asset beta of the airports in New Zealand must also provide guidance on an appropriate asset beta for Airways. The estimated asset beta for New Zealand airports is 0.6 and the comparator air navigation services asset betas lie in a range of 0.505-0.65. Therefore, Airways considers that 0.6 is a reasonable estimate of Airways’ asset beta. AIRWAYS’ RESPONSE Airways’ capital charge rate for the 2019-2022 pricing period is 6.59%.
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