Germany's Lufthansa told passengers on Monday to brace for higher ticket prices as it refuses to shoulder the costs of a carbon trading scheme at the centre of a brewing trade spat.
The world's second largest long-haul carrier after Dubai's Emirates said it faced 130 million euros ($169 million) in extra costs this year and became the first major operator to announce possible surcharges since the EU scheme took effect on January 1.
The increases will not go into effect straightaway.
Under plans to tackle climate change, airlines touching down or taking off in the 27-nation European Union and three neighbouring nations must account for their CO2 emissions as part of an expansion of the world's largest carbon market.
The United States, China, India and others have attacked the scheme on the grounds that it infringes their sovereignty and that the EU should not act alone. Some have warned of counter-measures, firing talk of the world's first carbon trade war.
The EU says its Emissions Trading Scheme, which already applies to other industries, is the fairest way to cope with aviation's contribution to global warming and cuts through years of inconclusive efforts to come up with a worldwide alternative.
Analysts say Lufthansa is among the airlines most affected by the scheme, along with other European network rivals British Airways owner IAG and Air France-KLM or United Continental and Singapore Airlines.
Germany's biggest airline said it would add the costs from the EU's Emissions Trading Scheme to its existing fuel surcharge, becoming the first carrier to provide details of how it plans to cope with the additional burden.
In the face of intensive competition, especially of companies from non-EU countries whose production is subject to emissions trading to only a small degree, Lufthansa will have to pass on the burden via ticket prices, as suggested by the EU, it said in a statement, adding this would not happen in the short term.
Lufthansa last raised its existing surcharges last month -- to between 102 euros and 122 euros per flight leg for intercontinental flights and to 31 euros for domestic and European flights. It said this was purely to cover higher fuel costs.
The industry has until now been reluctant to talk about higher prices, saying it would be too difficult to pass on the higher charges because of shaky demand and Europe's debt crisis.
Critics say airlines are using the emissions row as a smokescreen to hit the consumer.
If you look at the impact on the ETS, that only starts kicking in at the end of the year. It's very clear that they're (airlines) looking for excuses in more or less the same way as the power companies did when the ETS started, said Dutch Green member of the European Parliament Bas Eickhout.
They already calculated the higher carbon price and they made windfall profits.
2013 CRUNCH POINT
Airlines say they can ill afford the burden on top of soaring fuel prices, fierce competition and national taxes.
The airline industry expects the scheme to cost it about a billion euros this year, rising to 2.8 billion euros by 2020.
However, the crunch point will not come until March 2013 when airlines will be asked to surrender enough permits to cover this year's carbon emissions or else face stiff penalties.
In practice, industry experts say it will be difficult to gauge the overall impact of the scheme, which depends on the competitive conditions on each route.
Fares are dynamic. They are going up and down all the time according to market conditions. Carbon is just another cost, said Bill Hemmings, program manager of environmental lobby group Transport & Environment.
What they (airlines) are more worried about is how the costs will rise over time.
To get the scheme up and running, airlines will collectively receive in 2012 free permits amounting to 85 percent of their estimated needs.
But the industry says these have been under-estimated because travel has increased since they were calculated on the basis of 2004-2006 data and is set to grow further.
Lufthansa said it would need to buy 35 percent of the permits it needs for 2012 on the open carbon market.
Permits have roughly halved in value in the past year to 7.9 euros per ton of carbon amid fears of recession.
The scheme went ahead after Europe's highest court threw out a challenge last month. But the U.S. Congress is considering measures that would forbid U.S. carriers from taking part.
Analysts say many airlines may jump in to cover future needs before many of non-EU rivals, discouraged by their governments from taking part, enter the fray.
(Additional reporting by Barbara Lewis; Editing by David Holmes and Marguerita Choy)