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Guest allblack

Airport Economics Question

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Good evening.Recently Auckland Int'l Airport (NZAA)has increased the value of it's assets, and airlines are worried (with much justification)that costs such as landing charges etc will increase...My question is why? Can someone please explain to me using words of one syllable or less why an airport increasing the value of it's assets leads to an increase in charges to it's customers (airlines/leaseholders)?I presume that the increase in charges in not something that happens naturally, Auckland (or any) Airport must decide that this gives them an excuse to do so....CheersTimNZWN

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Assets don't last for ever and eventually will need to be replaced. Any business (if it intends staying in business in the long-term) needs to build up funds to replace its assets as and when needed. In accountancy terms this is called making provision for depreciation or amortization.If, as seems to be the case at Auckland airport, assets are undervalued then the operator may not be making adequate provision to replace them. After all, when the time comes for their replacement the cost will be based on the current costs, not historical ones.

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.............so why does the increase in the value of assets immediately seem to include increased costs for users of the assets?

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Because costs to users will need to be increased to provide sufficent funds to replace the assets. Where else is the money to come from?Many companies have got into financial difficulties by undervaluing their assets and making inadequate provision for their replacement ands overstating their profits. The result was that when the time came to replace the assets the companies didn't have sufficient funds to do so.

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