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Sat 14 Jan 2012 02:13 PM

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EU airline tax may mean it's time to squeeze Airbus

European planemaker may pay the price for new carbon tax if GCC airlines decide to fight back

EU airline tax may mean it's time to squeeze Airbus
Airbus logo

There aren’t many issues these days that have the ability to unite the US and China. But the world’s two economic superpowers are currently standing shoulder-to-shoulder over one single topic, and they are backed by most of the other countries on the planet, including India, Australia, Canada, and the Gulf states.

We are, of course, talking about the European Union (EU)’s airline emissions scheme, which came into force at the beginning of this year.

Branded as the EU’s boldest commitment to protect the environment, the new law forces foreign airlines to enter Europe’s cap-and-trade scheme. In a nutshell, that means that carriers have three options; reduce their emissions, buy more credits from other airlines or sectors, or fund emission reductions outside the EU. In addition, the aviation sector as a whole has to reduce emissions by three percent by 2012 and five percent by 2020 — and this affects all flights that pass through EU airspace, whether they touch down in the continent or not.

That’s all well and good. Needless to say, the ruling won’t affect European legacy carriers, which have already been adhering to the rules for years. And despite all their bluster, the US and China aren’t going to be too badly hit either. While one industry body in the US claims that the law will cost the American aviation industry $3bn by 2020, another argues that US carriers could see windfall gains of as much as $2.6bn.

It seems no-one really knows what the true effects will be.

However, there is one location that is undoubtedly going to suffer. Legacy carriers in the US and Europe have clearly defined routes and there are limited plans for expansion, especially at tough economic times like these.

The same is not true for the fast-growing Gulf carriers, which appear to be being punished simply by virtue of the fact that they are late onto the scene. Emirates, Qatar Airways and Etihad are all still putting additional routes into Europe. In many respects, the next decade is going to be the one that will define the Gulf carriers.

So you’d expect them to come out fighting. Emirates president Tim Clark is on record as saying that the scheme will cost the airline an additional $50m this year alone, while sources at Etihad say that the Abu Dhabi carrier will have to stump up an extra $720m over the next eight years. Etihad CEO James Hogan has already said that the aviation industry should not be used as ‘the whipping boy’ for environmental issues.

So far it looks like most airlines and governments are going to take the hit and pass the cost onto passengers. With margins as tight as they have ever been, they don’t really have much choice.

But the Gulf carriers do have one — albeit extremely powerful — weapon. They have 505 aircraft on order with Airbus — a company that represents the cream of European manufacturing talent — out of a total of 882 orders from Middle Eastern airlines. The importance of the region to the planemaking giant cannot be overstated. According to Airbus’ own 20-year forecast, orders from the UAE will be worth a whopping $177bn over that period. That will makes it the third-biggest buyer of aircraft in the world behind the US and China.

Chinese anger has already resulted in the cancellation of a $3.8bn Airbus A380 orders worth at the Paris Air Show last year. That deal went to Boeing instead. The CEOs of the Gulf airlines are now becoming renowned for their hardball approach to plane deals — so why not follow China’s lead? It might be tough on Airbus, which is hardly thrilled about the policy, but it would also show that the Gulf carriers won’t take anti-competitive measures lying down.

(Ed Attwood is the deputy editor of Arabian Business. The opinions expressed are his own)

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Engineer 8 years ago

I do not agree with that. When it is a fight between the EU and others, why target a company based in EU ?
Other countries can introduce reciprocal levies which hurt EU countries OR do other measures to make the EU understand.
There are only 2 major aircraft manufacturing companies and in order to get the best product at a good price and high safety, there needs to be competition between them. Boycotting one ensures there is a monopoly which is not good for the industry in general

Geoffrey 8 years ago

What an absurd article. So a independent company, yes I know it has some support from the EU, is responsible for tax policy of the EU? How undemocratic and contradictory can you get. You call for the gulf carriers to stop this anti-competitive measure. But how is it anti competitive when the same rule applies to everyone?! Further, it's not as though the carriers are even affected as you say"pass the cost onto passengers" exactly what every other airline is doing. Yet by proposing a boycott of Airbus you are proposing to turn a duopoly into a monopoly. Nice and competitive there.
It's the same situation if all countries in the EU decided to boycot buying oil from the UAE because the UAE is completley tax free.
If this is such a big issue then why don't the gulf carriers to lobby their governments to impose a reciprocal tax but only all foreign airlines. I suspect that the carriers will realise just how petty self defeating such a policy would be.

John Harte 8 years ago

Ridiculous article written by someone with scant knowledge of how the aviation industry operates. Airlines choose aircraft based on numerous factors, and EU emissions taxes are really not one of them. China cancelled its order because of A380 delays.