Raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker, Carrie Hurihanganui, Chief Executive Officer of Auckland Airport. Please go ahead, ma'am.
Ngā mihi nui kia koutou katoa. 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 roadmap.
The new charges will fund part of the much-needed investment in the infrastructure that is underway, for PSE4, this amounts to NZD 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, let's jump to slide four to kick things off. The strong recovery in aviation has reinforced the need for Auckland Airport to once again move up on its long-term roadmap for upgrading New Zealand's gateway airport. The 10-year roadmap indicates NZD 5.6 billion of priced aeronautical investment over the next 10 years.
This is the base CapEx scenario. While a higher CapEx scenario was also included in consultation, the NZD 5.6 billion provides a deliverability risk-adjusted view, as it is quite an ambitious program. The roadmap 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 sq m , or the equivalent of 23 rugby fields, providing new remote stands for jet aircraft, new fuel infrastructure, and significant stormwater 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. Expansion of the international check-in area to accommodate more passengers for when the new integrated terminal opens. With today's announcement, we've now set our aeronautical charges out to 30 June , 2027, which will see an increase, which will fund this critical investment.
If we move to slide five, Phil will walk through the detail of the pricing in a little while. At a glance, some of the key inputs and related outputs include passenger numbers. When you're comparing to the PSE3 forecast for this period of PSE4, we have seen that reduced by 4% to NZD 98 million, versus NZD 103 million that was in the PSE3 forecast, a direct result of the pandemic. Post-tax return target is 8.73% versus 6.62% in PSE3, that does reflect the significantly different environment that we are operating in with high inflation and high cost. To give context to that, in 2017, when setting PSE3, OCR was 1.7% and inflation was 1.6% versus the current economic backdrop.
Total aeronautical capital investment over the period is NZD 5 billion, and that includes assets that will be commissioned in PSE5. When you look to say the price and commissioned aero CapEx in PSE4 then is NZD 2.5 billion. Those assets will be commissioned and in use in PSE4, and this is up from the NZD 1.4 billion that was forecast for the same period in PSE3. The price-regulated asset base will be NZD 3.3 billion by the end of PSE4 at 30 June , 2027. Based on those key inputs, the headline outputs are priced aero revenue of NZD 2.6 billion, passenger services charges of NZD 1.5 billion, and airfield charges of NZD 1 billion, made up of both landing and parking charges.
On a revenue per passenger basis, the average over PSE4 is NZD 10.79 for combined domestic and regional flights and NZD 37.26 for international flights. If you jump to slide six, you know, 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 and underway pre-pandemic, but needed to be paused until the recovery profile was clear. If we move to slide seven, the 10-year roadmap lays out the transformation journey of the aviation system at Auckland. 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, a future regional solution, upgraded roads and transport system, the transport hub, arrival hall upgrade, the new cargo precinct, and the northern stands and stormwater upgrades. The international arrivals expansion, which is stage two, and the northern runway remain on hold, and you'll see that identified on the slide and are not in the roadmap at this time. 10 years is a long time, however, it is worth calling out that projects in the roadmap are subject to change and may be replaced, deferred, or canceled. Moving to slide eight, 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 undercover five-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 departing passengers per hour than the current terminal, due to increased space for security screening. Moving to slide nine, the domestic terminal will be refreshed to extend its life. We know that there is 5 years, 2028, 2029 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 where required. Moving to slide 10, the new transport hub.
This really will be the heart of public transport at the precinct, including the undercover 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 has a 3-story office building at one end and includes 14,000 sq m rooftop solar array that will generate approximately 1.2 MW that will power the office building and much of the electric charging in the facility. The car park is being built to a U.S. Gold Parksmart standard and the office building to a 5 Green Star certification to align with our sustainability aspirations. Moving to slide 11. I mentioned earlier about the size of this expansion at 250,000 sq m .
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 sq m space for its apron and airfield operations, meaning the current space where the aircraft park up temporarily will be impacted. The project will add extra taxiways and seven remote stands for aircraft that lay over for several hours before departing again, five of which would have in-ground jet fuel reticulation and other services. The project also includes the addition of significant additional stormwater 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 and place. The 10-year roadmap 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, Phil, before we then open up to questions.
Thanks. Excuse me. Thanks, Carrie. I'll be speaking to a few numbers, so apologies, and there's a little bit of repetition around the infrastructure development program, but I think that's actually helpful for it to sink in so you can understand exactly where things sit. Starting with price-setting event, 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 roadmap that we disclose in the pricing disclosure, the 10-year roadmap, and we have those details here.
What I've been up to for the last couple of years, the first thing that we did was back in June 21, we consulted with the airlines and got strong agreement, almost unanimous, to delay the first reset. We froze prices at FY 2022 levels for the first year of PSE4, and that's FY 2023. With the understanding that that shortfall versus target return in FY 2023 would be forecast to be made up over the remainder of the PSE4. 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. First one is traffic assumptions. This is pretty straightforward.
Don't really need to comment too much on this, other than just to confirm that our traffic forecasts are our constrained forecast. This is after we apply an estimated price elasticity of demand, dampening impact from the price path. That's factored into it. 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 FY 2025 and international in FY 2026. On to slide 16. Just wanna make sure people understand that these are nominal dollar forecasts. These include our forecasts, 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 will feed into pricing.
As Carrie mentioned, over PSE4, NZD 2.5 billion of assets to be commissioned and in use. NZD 1.5 billion of that relates to the overall terminal integration program. That includes the likes of remote stands, new baggage system, check-in expansion, arrivals expansion, well, some tweaks to the arrivals, I should say, as well as the western truck dock. 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. This gives you a simplified render of what the new domestic processor will look like, integrated with the eastern end of the international terminal.
On the bottom bullet on the left, we talk about NZD 2.2 billion. That's the forecast cost of the pier, plus the headhouse and some airfield works. The remainder of the NZD 3.9 billion that we announced a couple of months ago is 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's ops center. Eastern baggage 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, 'cause that won't be operational until late calendar 2028 or 2029.
What it does include is additional stands and stormwater 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, and there's some detail here. Also the transport hub. Aeronautical component of that is pick-up and drop-off. There's also gonna be a 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, is where the offices will be, aeronautical offices. They're not priced. They're recovered through just standard rental arrangements, but the ops center will be. Over to slide 19. These are some of the less significant elements of CapEx and PSE4.
Important all the same, but I'll take that as read. Over to slide 20. This is the money shot, really, for analysts. It's this, in terms of the infrastructure or the regulated asset base that drives PSE4 prices, and there's quite a lot in this. Again, just reinforcing, you can see the 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. 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. On the right-hand side is other aeronautical CapEx that will take place over PSE4 and PSE5.
Airfield renewals and other renewals, those are the renewals for the likes of our business technology systems, roading renewals, airfield ground lighting that was acquired from Airways, bathrooms, those sorts of things. You'll see that both of those renewals categories add up to, on average, NZD 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. Maintenance CapEx pretty much matches depreciation. Back to bottom left of this slide, breakdown of terminal integration program. NZD 3.5 billion is the value that gets commissioned and priced for aeronautical use. That's a little bit less than the NZD 3.9 billion that we talked about previously. The NZD 3.9 billion also includes other uses that aren't allocated to aeronautical charges.
I think that's about it I wanted to cover on this page. Moving on to the next slide, 21. 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. Almost all of those, well, in fact, all of those that were lower, were either in low labor cost countries like Mexico, India, and China, or they were much larger airports that had 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.
We do see real operating costs per passenger trending back pretty close to where they finished, pre-COVID, FY 2019. Back to NZD 6.60, deflating using forecast CPI inflation versus NZD 6.40 per pax in FY 2019. These forecasts, of course, are Auckland Airport's risk. They feed into the building blocks, determine the prices. It's not often that actuals perfectly match your forecast, so after those unders or overs, that will be Auckland Airport's risk. 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.
Effectively, it was a quarter of the international passenger charge. We've now set that equal to the international passenger charge, again, it will only apply to arriving. It's effectively half international passenger charge. That better matches the infrastructure and the costs that apply to those passengers. For landing charges, very similar structures to PSE3, we've tweaked around the 6-ton area. That avoided an anomaly where aircraft slightly less than 6 ton were actually getting a higher charge than the aircraft slightly more than 6 ton, which wasn't entirely fair. We fixed that up. On parking, aircraft parking, we will, in 12 months' time, we'll reduce the free layover period from 48 hours down to 12 hours. That's necessary.
We're experiencing some airfield congestion at the moment, and part of that has been contributed by freighters that are utilizing that 48 hours free. We need to change that, particularly as we go into this construction period, and we have less stands available at certain times. Runway land charge, it's still in the pricing structure, but it won't apply, it won't be triggered, and even if it was, it'd be set at NZD 0 per passenger, effectively, it doesn't apply in PSE4. The key new changes are a CapEx wash-up and a demand wash-up. CapEx wash-up is one 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, NZD 2.5 billion, that were forecast over PSE4.
The present value of any underdelivery, that would be the depreciation that we recover on assets that aren't actually delivered and the return on capital, or the profit on that would get washed up and would reduce aeronautical charges in PSE5 if we under-deliver. If we over-deliver, there's no wash-up in favor of Auckland Airport. Demand wash-up, though, does work two way. It has a 15% trigger. If aeronautical revenues are either above or below the pricing forecast by 15%, it will trigger, 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.
That knocked back our total passenger numbers and revenue by about a third, about 33%, it would offset about half of that underrecovery. On to target return, slide 23. 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's view, that we've taken a very principled, a defensible approach to this. I'm sure there'll be some questions, but let's head some of them off by just giving a bit more of an explanation. What we've done is simply take the Commerce Commission's global comparative company sample set and refreshed all of its analysis as at 30th of June, 2022, 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 absolutely discredits the rationale for that. There was a theory that aeronautical, on average, had a lower systematic risk or non-diversifiable risk than does the entire company. Our analysis shows that relation doesn't hold. In fact, it's weakly the other way. If there was an adjustment, it should be upwards, not downwards. We haven't applied an upwards adjustment. There's also been commentary that we should adjust out COVID somehow. If you take that theory through, every time an economic shock comes up, you adjust out the shock and lower the assessed asset beta.
Over 100 years, all you've done is reduce asset beta versus what it really is. Those shocks are real things that take place. 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. COVID is in it at this time. In the future, it will roll out. We will update this analysis before every price reset. That'll 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'd need to adjust it back into future data, because it's a real risk that does exist.
A nd 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 it into the numbers when it wasn't there, because it didn't happen to be a shock in that period. That's that rationale. We've also adopted the Commerce 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 than that, and if we took a different approach, then we'd be guessing at what might be a right approach, as opposed to just taking the same old approach that's applied for nearly 15 years.
Some commentators have pointed 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. They had a traffic risk sharing mechanism that equated to a 8.5 basis points uplift. They had a uplift of GBP 300 million to their RAB, which equates to 2.2 basis points, if you applied that through to Auckland Airport. They had a NZD 25 million per annum residual asymmetric risk boost to their allowable revenue. That equates, if you applied that approach to Auckland Airport, 20.8 basis points.
Also they reduced their traffic forecast versus their best estimates by 0.87%, which equates, if you apply that to us, 2.9 basis points. If we applied the same approach that London Heathrow has, we would've lifted our asset beta by 37.5 basis points. In fact, what we did was we diluted the COVID impact over 10 years. The last 5 years have been 18 basis points higher than the previous 5 years, but we diluted it over 10 years. We took a nine basis points uplift. Our nine basis points uplift asset beta compares with 37.5 basis points if we applied to London Heathrow, so around about a quarter of the uplift that London Heathrow's benefited from.
Of course, I'm happy to take questions offline or even on this call on that. Moving to slide 24, price setting decision. 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. You can see we've got three charts here: domestic jet on the left, regional on the middle, and international on the right. For each of those in FY 2024, we benchmark well, in fact, pretty much below everybody else, but they will increase over FY 2024. It's hard for us to do a like-for-like comparison versus other airports, 'cause it's only Auckland, Christchurch, and Wellington that have to produce 10-year forecasts.
Our Aussie airports don't. We know they've got a lot on, so we've done a bit of web scraping, and we've found that Melbourne, for instance, intends to spend NZD 9 billion over the next 10 years. Brisbane has got plans for NZD 5 billion. We don't know the split between aeronautical and non-aeronautical, and Perth, about NZD 3 billion. If you look at those international charts, they, internationals, other Australasian international charges will be increasing along with ours. On to slide 26, forecast returns.
As I talked about before, our returns were massively below what they needed to achieve our target return in FY 2023 because of the price freeze that we applied. Our returns need to be over the target return on average for FY 2024-2027, as you can see, to achieve that target return. On to slide 27. Actually, I've already covered off how these wash-ups work, so I won't spend any more time on that. Let's flip all the way to slide 29. Big picture on capital management, we continue to target an A- credit rating. In our view, that's the optimal credit, 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 get higher returns. That's not the case, that's because we've got such a significant increase in our borrowing program over the next 10 years. 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, if push came to shove, and we needed to take steps to avoid that happening, e.g., 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.
Another reason for that is we're on a forward price earnings multiple of about 45x . Gross that up for tax, and that equates to a pre-tax return on equity for, say, FY 2024, of about 3%. That's about half our borrowing costs. It's certainly and that's before any increase in borrowing costs through a credit rating downgrade. It's just good sense for us, if we were faced with the risk of a credit rating downgrade, to avoid that through an equity raise. As we've 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. Moving to slide 31, the regulatory timeline. Actually we've heard since we drafted this slide that the Commission will publish its draft WACC input methodology determination in June, so on 14th of June, actually, next week. That's draft only, so they'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. Oh, sorry, I've also missed a couple of things.
Our new charges will take effect from 1st of July, in less than a month's time. We'll publish our detailed pricing disclosure, which will be yet more informative versus today, during August, it's due 2nd week of August, but hopefully we can get that out earlier. We'll let you know when. The Commerce Commission, we expect it to review our price-setting decision by sometime H1 calendar 2024, so sometime after Christmas next year. 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. That's the end of my presentation. I think we're happy, Carrie, to go on.
Yeah.
Q&A.
Absolutely. I think you've given a great overview, Phil. I have no doubt there are some questions on the line. Why don't we jump into that?
Sure. We will now begin the question and answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Owen Birrell from RBC. Please go ahead, Owen.
Yeah. Hi, guys. Can you hear me?
Yes.
We can.
Excellent. Excellent. Okay. Look, I guess the first question for me is regarding the CapEx spend. It's a little bit higher than we'd previously expected. Just a couple of questions on that. Firstly, how much of that is just, I guess, additional buffer that's been built into your expenditure profile versus new projects that have been added? Can you give us a feel for the, I guess, the CapEx profile over the next, you know, the PSE4 period, noting that, you know, you're gonna be spending a lot more money than you're actually going to be commissioning?
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 buffer, are you referring specifically to PSE4, or are you talking over the 10-year roadmap?
Both, actually.
Both. Okay. Yeah, well, certainly as far as the capital program itself, I said that it's largely similar to what was announced in would have been February 2020, if I've got the timeline right, and then that was paused. Clearly the economic environment, the things have been updated as far as there's been significant escalation in construction. I think it was a 12 months to kind of the end of last year was 17%. There's certainly, they've been updated to reflect those. I'm not aware from a contingency perspective as far as significant changes. We have had the cost escalation.
Yes.
Just want to do a quick check with you on that.
Yeah. Yeah. We don't build a buffer. All of the projects are the midpoint expected outcome of those capital expenditure programs. There's no sort of make-believe projects or buffers in there. As I mentioned, we've got circa NZD 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 NZD 600 million per annum of commission CapEx over the 10 years. This base plan is NZD 5.6 billion, so just a smidgen under that. Yes, it is front-loaded. We also talked about just under NZD 4 billion related to the terminal integration to be delivered by the end of 2029, so about 6 years.
That's about NZD 670 million per annum, so a bit over that NZD 600 million average run rate, and probably closer to NZD 700 million when you add in non-terminal integration projects.
That's the commissioning profile, if I understand, but what about the actual spend profile, the cash going out the door?
We haven't provided a forecast yet of non-commission CapEx for PSE5, so that'll come in our price setting disclosure in August.
Sorry, I guess what I'm trying to get to is the roughly NZD 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?
Yes.
Is that the last couple of years, or is it spread across the remaining 4 years?
Yeah. As we talked about, there's NZD 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.
Okay, thank you.
Yeah, our next question comes from the line of Amit Kanwatia from Jefferies. Please ask your question, Amit.
Good afternoon. Thanks for taking my question. If I can ask on the target returns, and 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 the 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?
Firstly, if the commission sticks with a pretty important regulatory principle of consistency, then it would get exactly the same answer that we have. Apart from 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 the WACC IM, we've provided all the empirical data that absolutely debunks that theory. 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'd need to think about how we feel about that when we consider its review of our pricing decision and respond early next year.
I guess what happened in PSE3 is a useful pointer. We weren't able to come to a precise agreement with the Commerce Commission. Again, we felt that we're taking the principal approach to our WACC calculation. We were targeting then something different to the midpoint WACC calculation. On this occasion, we're using the midpoint, so exactly what would expect the Commerce Commission to calculate it, if it just kept a consistent approach to the last two price-setting periods. 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.
If the Commerce Commission was to change its approach radically, but it appeared to be a very compelling approach, which I struggled to see how that would happen, but if it did, we would consider that and make adjustments accordingly.
Sure. I mean, if I can just, kind of interrelated as far as this new demand wash mechanism 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. Has there been any thinking? Because it theoretically should also impact your asset beta in the future, which I guess should be less than 80 basis points, if that makes sense.
Yeah. Yeah. We've looked at that and had expert advice on that. If you look at the commission sample set, most. Well, look at the European companies, they have far more aggressive asymmetric risk wash-up mechanisms than we're targeting. 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 would only be the losses above 15% that were recovered through asymmetric risk. Whereas London Heathrow, their residual loss would only be 2.5%. Their mechanism would make them good for everything but 2.5%, versus ours, which would be everything but 15%.
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, we understand that most of the European airports are negotiating with their regulators for an explicit recovery of losses during the prior pricing period. In fact, On that basis, we should be including an uplift to that 0.8 asset beta, because our asymmetric wash-up mechanisms are far softer and less effective than the comparable company data set.
Sure. Just final question for me. On the CapEx, obviously, you'll be spending NZD 5 billion until fiscal 2027, which is front-loaded. As you've said, the 10-year base CapEx is NZD 5.7 billion, so that only leaves NZD 700 million for PSE5. 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, NZD 5.7 billion for 10 years, but NZD 5 billion in first until 2027, so that doesn't leave you much for the next 5 years. What are we missing or what's the higher CapEx scenario over here?
We refer to that on slide 20, on the right-hand side. It's the third bullet point. It's largely additional terminal expansion and roading capacity that could be triggered, depending on the traffic outturn. We would consult with our airlines before that would be baked into PSE5's aeronautical plans.
How much would that be if those are triggered beyond the base CapEx scenario?
We're not commenting on that at this stage.
Right. Okay. That's all from me. Thank you.
Thank you. Our next question comes from the line of Marcus Curley from UBS. Please ask your question, Marcus.
Good afternoon, Phil. Look, I just wanted obviously a little bit of follow-up on that, you know, that last question, around the wash up. I suppose, if you're keeping a pure process and you're obviously, you know, basing your asset beta off, you know, the history, don't you think you're sort of double dipping by asking for a wash up in addition to that? You know, I suppose specifically, do you think you put yourself at any risk, extra risk, by asking for that, you know, you know, ahead of the Commerce Commission review?
Well, we have to make a pricing decision. We just have to do it and then wait for the commission to opine on it. Absolutely not. Obviously, pandemic risk has always been a risk, but it's never been in the data previously, our target returns have been too low previously. They should have factored in pandemic risk. Never did. That again, it just shows how difficult it is to take an approach that you try and adjust the data based on adjusting in and or out shocks. In our view, by far, the most appropriate approach is to leave everything lie as it sits, and we'll wash through the data over a rolling 10-year slice.
Do you think there's any risk that they say: Well, we'll give you a wash up, let's say arguably a full wash up on passenger volumes, but keep the asset beta unchanged? You know, wouldn't you rather take the risk and have the higher asset beta than the wash up, you know?
The wash up is only a tiny component of systematic risk. In fact, arguably, asymmetric risk is separate from that. It's difficult conceptually, but to, again, emphasize the point, the Commission uses a global sample set to calculate asset beta. From our analysis, the majority of those have far stronger wash ups than we do. We should take that, and we should say, "Oh, our wash up 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 sample set.
Okay. Secondly, you know, it sounds like you're happy to run, you know, this process right to its end. If the Commerce Commission come out on the 14th and say, yeah, that the asset beta is 0.6, and they've changed the methodology, which obviously would be a lot different to where you're coming out today, you're just happy the process would be to run that through, you know, effectively to next year and get the final determination before, you know, 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. As it stands today, we couldn't see how there could be any principled basis for that. If there wasn't, we'd be submitting hard on that. That would be our first step, and then we'd see whether or not the Commerce Commission took into account our submissions and our expert advisor submissions, and then consider its overall decision or opinion on our price-setting decision in H1 next year.
You know, you flagged a potential capital raising in the second half of, you know, this period. You've obviously also talked about the front loading of the CapEx of NZD 5 billion. You know, is, you know, how concrete do you think that capital raise is? Clearly, given that you're flagging it, one would assume that it's, you know, it's a, it's a reasonable likelihood. Obviously, that it sort of departs from what was said, you know, in response to not equity funding the, you know, the domestic terminal.
I mean, we've 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 a 10-year capital plan, and also what our target return would be and all the other elements. We had no basis back then to assess whether or not it would challenge our credit metrics when we were asked that question. 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. As I said, depending largely on our delivery rate for that infrastructure plan, any need from equity could range from nothing at all, never, to up to NZD 1 billion.
It's quite a wide margin of error.
Okay. 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, you know, particularly on the domestic?
As I said, we've constrained the forecast based on our elasticity estimates.
Could you provide any sort of color on what that impact was?
I can give you some pointers. Basically, our elasticity applies to total airfares. Auckland Airport's average charges represent a bit less than 3% of an average airfare. Our estimated elasticity is 0.8. Look at this, for example, I think we're forecasting roughly a doubling of domestic prices. That would mean that airfares, 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.
Okay. Thank you.
Thank you. Our next question comes from the line of Roy Harrison from Bank of America. Please ask your question, Roy.
Hey, guys. Great presentation. Just want to get an understanding of the CapEx plan being subject to changes in traffic demand. Are there any recovery milestones that we should look to that could potentially trigger an acceleration of CapEx or a delay of CapEx? Cheers.
Not over PSE4. It's the majority of any upside to capital expenditure would be a PSE5. Again, we will update all those forecasts before we set prices for PSE5.
Okay. Cheers.
All right. Thank you. We have a follow-up question from the line of Amit Kanwatia from Jefferies. Please go ahead, Amit.
Thanks. Thanks. I just have a small follow-up question on the funding. Obviously, you've said it can be between NZD 0 to NZD 2 billion, and you've explained why equity makes more sense than debt. 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.
Yeah, it would, it would hardly make a ripple on the pond, really. We haven't valued that. You know, we bought that stake 10 or 11 years ago, and I think it cost us about NZD 30 million. It's gonna be worth a few multiples of that, but it would still only be a fraction of 1 year of CapEx.
Yep. Okay.
All right. 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. I think Phil's 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. We are looking forward to moving ahead, not only with the development, but concluding this 24 months of consultation and moving forward. 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.