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Analysis: EU carbon law likely to raise air fares to Europe
December 22, 2011 / 12:40 AM / 6 years ago

Analysis: EU carbon law likely to raise air fares to Europe

(Reuters) - Flying to Europe is about to get more expensive.

The continent’s highest court upheld a European Union law on Wednesday that will charge airlines for carbon emissions on flights to and from Europe, beginning January 1.

Carriers are certain to want to pass that cost on to consumers and some industry watchers forecast airfares between the United States and Europe could rise $50 to $90.

Mike Miller, vice president of the American Aviation Institute, a commercial aviation think tank, said trans-Atlantic ticket prices could rise $70 to $90, based on current oil prices, as a result of the EU carbon law.

“The bottom line is that this is a tax on passengers. It will dampen demand as prices rise and will slow airline investment into the single biggest method of lowering emissions - buying more efficient aircraft,” Miller said. “The higher prices and resulting drop in demand may push upwards of 10 million travelers not to travel, according to IATA.”

Many U.S. airlines declined to comment on how the EU law would affect pricing plans, but a representative for Virgin Atlantic Airways said: “It will invariably be necessary for us to pass at least some of the cost of the scheme on.”

Airlines for America, the U.S. airline industry group that challenged the EU law, said it was reviewing its legal options, but its members would “comply under protest” for now.

The group has estimated that the emission law could cost the U.S. airline industry $3.1 billion from 2012 through 2020.

“The airlines quite honestly just have to pass it on,” said Jeff Kauffman, an analyst with Sterne Agee & Leach. “Anybody going to Europe is going to have to pay a higher fare.”

AIRLINE SHARES DOWN

The European Court of Justice ruling helped push down shares of U.S. airlines on Wednesday, with the Arca Airline index down 1.3 percent. The sector was also hit by new rules from the U.S. Federal Aviation Administration that required more rest for pilots, which is expected to cost U.S. airlines $297 million over 10 years.

Ray Neidl, senior aerospace analyst with Maxim Group, said the European move could set a bad precedent as an individual region was moving to impose its own rules on airline commerce.

“It’s troublesome that one part of the world is acting unilaterally in putting these rules into effect. Historically the world has cooperated globally on rules and regulations,” Neidl said.

A plane approaches Rome's Fiumicino International Airport in a file photo. REUTERS/Max Rossi

United Continental Holdings Inc, the world’s biggest carrier, called on the United States and other governments to continue working toward a solution “based on principles of cooperation rather than unilateral action.”

While carriers are likely considering their options with regard to the EU law, bypassing it would be difficult, analysts said.

The Wall Street Journal reported that package delivery company United Parcel Service Inc might consider re-routing flights around Europe, such as by going through Mumbai, to cut the cost of the EU plan, quoting UPS Airlines President Mitch Nichols. When asked by Reuters for a comment, UPS said it “has made no decision about the direction it may pursue.”

FedEx Corp declined to comment beyond a statement from the International Air Transport Association that expressed disappointment over the court decision.

Kevin Sterling, an analyst with BB&T Capital Markets who follows package delivery companies, said re-routing would not be as viable an option if fuel prices keep rising. U.S. crude prices moved up on Wednesday to about $99 a barrel.

“If fuel drops, then maybe the fly-around would actually make more sense,” Sterling said.

HIGHER FEES

Tom Parsons, CEO of discount travel website Bestfares.com, noted that the amount consumers pay to fly has risen markedly in recent years because of much higher fees.

Back in 2007, the fuel surcharge on a round-trip ticket from New York to London was $130, compared with $382 now, he said.

Airlines for America spokesman Steve Lott said the group was troubled that the EU law requires none of the monies collected to be used for environmental purposes.

“Considering the state of many European countries, we have strong reason to believe a lot of governments will use this money to help pay off their debts and financial problems,” he said.

“By contrast, we think the money could have been used by airlines to invest in new aircraft, invest in new engines - things that will actually reduce their carbon footprint.”

This year, U.S. carriers, including Delta Air Lines Inc and American Airlines parent AMR Corp, placed orders for hundreds of new aircraft that will offer improved fuel-savings and emissions performance.

Additional reporting by Lynn Adler, Jilian Mincer and Mitch Lipka in New York; editing by Andre Grenon

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