EU Pollution Fees Could Lower U.S. Airlines’ Upside

Just when we thought fuel price volatility and a slow economy made it tough enough for airlines to make a profit, add one more fly to the ointment – a scheme to levy new pollution taxes on all airline flights that fly through European airspace. And U.S. airlines are mad enough about the plan to take their fight to the European Court of Justice.

The trouble stems from the European Union’s planned next step toward reducing carbon dioxide emissions over Europe. In January 2012, the EU will force non-European carriers to comply with its Emissions Trading Scheme. That means all aviation traffic flying through European airspace must cap its total CO2 emissions at 95% of 2004-06 levels – or face hefty fines.

And from U.S. airlines’ perspective, here’s where the new rule goes from bad to worse: The ETS provisions would regulate the entire flight from the U.S. to any EU country – even though the flight would be in EU airspace for only a fraction of that journey. Analysts at UBS think the scheme could cost the airline industry almost $429 million in its first year, rising to nearly $858 million by 2014.

Understandably, the new scheme has generated howls of protests from U.S. airlines like American (NYSE: AMR), United Continental (NYSE: UAL) and Delta (NYSE: DAL), all of which fly to European destinations – and through European airspace. U.S. airlines, which already balance on the slimmest of margins, could take a huge earnings hit if the rule takes effect.

The Air Transport Association of America, which represents the interests of U.S. airlines, brought action against the EU’s scheme on Tuesday in the European Court of Justice, arguing that it is “illegal” to apply the rules – and fines – to non-EU carriers.

“As proposed, the EU ETS provisions would regulate an entire flight from across the United States to the EU, even though the flight would be in EU airspace for only a tiny fraction of the journey,” ATA lawyer Derrick Wyatt told the 13-judge panel.

The International Air Transport Association, the U.S. government and the governments of Japan, Russia and China also are protesting the EU’s unilateral actions. IATA has sided with ATA, agreeing that the ETS provisions are illegal under international law. In June, China threatened to cancel a purchase of Airbus A380s because of its anger over the EU mandate.

European airlines like Virgin Atlantic, which fear the financial burden of the tax would hamper their ability to compete with airlines not subject to the fee, support the EU’s proposal. Airbus, fearing the loss of aircraft sales from the U.S. and China as a consequence, urged the EU to back off from applying the rules to non-EU carriers.

As of this writing, Susan J. Aluise did not hold an interest in any of the stocks named here.

Article printed from InvestorPlace Media,

©2023 InvestorPlace Media, LLC