EU Carbon Law Likely To Raise Airfares To Europe

December 22, 2011

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Flying to Europe is about to get more expensive as the continent's highest court upheld a European Union law 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 USD$50 to USD$90.

Mike Miller, vice president of the American Aviation Institute, a commercial aviation think tank, said trans-Atlantic ticket prices could rise USD$70 to USD$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 travellers not to travel, according to IATA."

Many US 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 US 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 US airline industry USD$3.1 billion between 2012 and 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."

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

United Continental, 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 UPS 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 for a comment, UPS said it "has made no decision about the direction it may pursue."

FedEx 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. US crude prices moved up on Wednesday to about USD$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 operator Bestfares, 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 USD$130, compared with USD$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, US carriers, including Delta Air Lines and American Airlines parent AMR, placed orders for hundreds of new aircraft that will offer improved fuel-savings and emissions performance.

(Reuters)