U.S. airlines pocket windfall profits on fares to Europe, study says

January 16th, 201211:10 pm @

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U.S. airlines could pocket a big windfall by raising fares to Europe beyond what is needed to pay for their carbon emissions, a new study warns.

The study, found in the latest edition of the research publication the Journal of Air Transport Management, says that the airlines could profit by up to $2.6 billion over the next decade by raising prices more than necessary to pay the costs of the European Union’s emissions trading scheme.

Robert Malina, the paper’s lead author from the Massachusetts Institute of Technology, says the possible “windfall gains� would be the “result of airfares rising more than actual expenses.�

Delta, United-Continental, American and US Airways already have added surcharges to fares on flights to Europe.

The charges, mostly $6 on a round-trip ticket, came within days of the EU imposing its trading scheme on flights in and out of EU countries starting Jan. 1.

The airlines won’t say why they imposed the new fare charges or that the increases are designed to offset the costs of complying with the EU rule that’s designed to limit greenhouse gas emissions out of environmental concerns.

Although the airlines are silent on the reason for the increase, Rick Seaney, chief executive of FareCompare.com, which tracks ticket prices for consumers, says it “is pretty clearly related� to the carbon offset.

U.S. airlines aren’t the only ones raising fares. Air France, British Airways, Air Canada, the German airline Lufthansa and Dutch carrier KLM also have put on $6 surcharges, according to FareCompare.com.

One thing the airlines will say is there’s no way they can profit from the rule, which requires them to buy allowances if they exceed emissions caps.

“It defies logic and the experience of the airline industry to suggest that a tax that imposes costs on the airlines would in practice serve as a revenue-raiser for the industry,� says Steve Lott, a spokesman for Airlines for America, the trade group representing major U.S. airlines.

The airlines group estimated that complying with the emissions regulation would force U.S. airlines to transfer $3.1 billion to the European Union from 2012 to 2020.

OAG, a British firm that analyzes the aviation industry, estimates that complying with the program could cost airlines about 3 per cent per passenger, or $15 on a $500 ticket.

But Andrew Sibley, an OAG spokesman, disputed the conclusion drawn in the study by MIT’s Malina in conjunction with researchers at Muenster University in Germany.

Sibley says it’s “highly unlikely� airlines will profit from the rule because European regulators “will be watching very closely� to prevent airlines from gouging customers.

European power plants were able to profit earlier in the carbon-trading scheme by essentially selling carbon allowances they had received for free.

But power plants received 100 per cent of the allowances they needed for emitting carbon, while airlines get only 85 per cent for free. They must buy the rest at auction.

Nancy Young, Airlines for America’s expert on the carbon program, says power plants are monopolies that can charge what they want, while airlines are competitive and can undercut each other in price.

Article source: http://www.calgaryherald.com/travel/airlines+pocket+windfall+profits+fares+Europe+study+says/6002925/story.html