U.S. airlines could boost their profits by more than $2.5 billion by 2020 thanks to their inclusion in the European Union’s Emissions Trading Scheme, a new study part-funded by the U.S. Federal Aviation Administration has concluded.
The researchers of the study, from the Massachusetts Institute of Technology and Germany’s University of Muenster, said this was because airlines were likely to pass on the full cost of EU carbon emission permits to passengers, even though they currently receive most of their permits free.
The finding contradicts warnings from U.S. airlines and their associations that the disputed EU scheme, which entered force on January 1, will hit profit margins already squeezed by rising fuel prices, fierce competition and national taxes, Reuters reports.
“If carriers pass on all additional costs, including the opportunity costs associated with free allowances, to consumers, profits for U.S. carriers will increase,” said the study, which was published by the Journal of Air Transport Management.
“On the other hand, if airlines are only able to pass on the costs of allowances purchased or are unable to pass on any costs, U.S. airline profits will decrease,” the researchers said.
Under the EU scheme, all airlines landing or taking off in the 27-nation bloc and three neighbouring countries must submit permits to cover the carbon emissions of these flights.
Currently, all airlines receive 85 percent of their emission allowances free of charge, opening up the possibility of windfall profits for airlines that pass on the cost of these allowances to passengers.
“Consistent with profit-maximising behaviour in competitive markets, most studies assume that airlines will pass on the full cost of CO2 allowances, including opportunity costs associated with ‘free’ allowances,” the researchers said.
Major emitters such as power companies, which have been included in the EU ETS since 2005, initially made huge windfall profits by raising electricity prices to reflect the cost of carbon permits, including those which they were allocated free.
If U.S. airlines do pass on the cost of free allowances to customers, the researchers estimate that they stand to net windfall profits of $2.6 billion between 2012 and 2020, provided the EU keeps allocating free allowances at the current level.
The study assumed an initial EU carbon price of 15 euros per tonne in 2010, rising by 4 percent annually up to 2020, compared with an actual carbon price currently of about 7 euros per tonne.
Germany’s biggest airline, Lufthansa (LHAG.DE), has said it will pass on an expected 130 million euros in compliance costs this year to consumers, while U.S. carrier Delta Air Lines (DAL.N) has added a $3 per passenger surcharge on all its trans-Atlantic flights.
Estimates for the cost of the EU scheme vary greatly, with the European Commission putting the figure at between 2 and 12 euros per passenger, while the American Aviation Institute, a commercial aviation think tank, said trans-Atlantic ticket prices could rise by $70 to $90.
U.S. airlines have led opposition to the EU law but recently failed in a legal challenge to the scheme in the EU courts.
China has also voiced firm opposition to the European legislation, and its major airlines have said they will not pay any carbon costs under the EU scheme.