Solution for high airport charges should start with doubling them

'It is always the Airport Authority which negotiates airport-related charges. But this mechanism may not be the best solution after the airport is privatised.' Wilson Fung Wing-yip, Deputy Secretary for Economic Development I WONDER IF Mr Fung does not actually have a worthwhile point here, although for reasons that are the polar opposite of the ones he espouses. Mr Fung's apparent argument is that a fully privatised Airport Authority would be a monopoly that looks after its own interests first and may thus have too much scope to raise its charges to airlines without giving due consideration to the overall interests of Hong Kong. Some restraints should therefore be imposed on it and discussion of these will be a focus of public consultations that are soon to start. My view is that the airport generates a lamentably low return on the tax money that you and I invested in it and the only way of getting a decent return on our money is not a mechanism to restrain its charges but one to encourage it to charge airlines more. Unless we do so, we are virtually guaranteed that Mr Fung will be frustrated in his hopes of privatising the airport at a valuation above its $37 billion book cost. We will not get anything near that figure. Timidity in setting charges, not greediness, characterises our airport management. Let me put this into the perspective of the bar chart. The red bars show you the annual return on equity for the British Airports Authority (BAA) - net profit as a percentage of shareholders' funds. It has averaged 7.5 per cent since 1999. The blue bars show you the equivalent for our own airport. Even after skipping the first three get-started years of operation, it is only a miserable 0.81 per cent. Admittedly our airport had a bad year in the 12 months to March, with earnings down 23 per cent to $386 million because of Sars. But take even the earnings high water mark of $502 million the previous year and you get a return on equity of only 1.37 per cent. Do you think investors will pay 73 times earnings for a Hong Kong dollar stock when the overall Hong Kong market trades at only 15 times historic earnings? The airlines that complain so much about charges at Chek Lap Kok would certainly not be satisfied with such low returns. Assuming a return on equity of 10 per cent for Cathay Pacific this year (it will be at least that), the average over the period of the chart would work out to 8.9 per cent and this is with two exceptionally bad years in 2001 and 2003. So let us assume that to get the valuation up to at least the $37 billion book cost, our airport would need at least BAA's 7.5 per cent return on equity. This would require annual net earnings of $2.8 billion. There is only way to get such earnings and it is to raise airport charges from their present level of about $2.5 billion a year. We would have to double them, which would certainly make the airlines scream and shout. It should not trouble our airport, however. Its studies show that it ranks 44th out of 50 major airports in charges. Doubling the charges would take us to about what German airports charge and lift our ranking to about 12th, still well below New York, Paris and Tokyo. But perhaps, you say, we can make it less than double through greater emphasis on shop and other revenue sources at Chek Lap Kok. No way, say I. The trend at other airports is to double till and that is the way we should go, too. The airlines pay the airline part and we keep the money from our investment in other facilities. Why should we have paid to put them up if the airlines are to get the benefit? But even a 7.5 per cent return on equity may be too low. It is all very well for a stable monopoly business like BAA but ours is not really a monopoly. We are encircled by airports on the mainland, all of which want our business and seem to have Beijing's tacit consent to try get it. To compensate for this element of risk we need a higher return on our investment. Try 10 to 12 per cent if we are to recoup our investment. And let us remember that this is investment only as narrowly defined. What about all the money we put into that loser, the Airport Express, or the Tsing Ma bridge and highway? They are superb transport links but not in financial terms and they exist only to serve the airport. Our real airport investment could be double the $37 billion official figure. No, Mr Fung, the danger is not that our airport will charge too much when it is privatised but that it will continue to charge too little.