ANALYSIS: Airbus fears China ETS row contagion

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China Southern Airlines' decision last month to purchase 10 Boeing 777-300ERs might have been taken as a routine agreement but for its contrast with Airbus's perceived isolation from China, a backlash to the Emissions Trading System (ETS), which it fears will envelop other European companies.

Airbus has already warned that the unilateral European position is threatening deliveries of its own long-haul aircraft to China but is clearly concerned that the situation will deteriorate, with the possibility of contagion.

Outgoing head Tom Enders is among three aerospace and six airline chiefs who "fully expect the list of suspensions, cancellations and punitive actions to grow" and spread to other strategic markets with "serious consequences" for European industry, says the airframer.

The executives have written jointly to the prime ministers of the Airbus nations - Germany, France, the UK and Spain - in a bid to halt an impending trade conflict.

EADS head Louis Gallois believes the company risks being ensnared in an intergovernmental dispute which could ultimately affect thousands of jobs.

"I have to say we're worried to see that this conflict on environmental tax is becoming a commercial war - with the risk for Airbus to be taken as a hostage," he says.

While the battle was confined to indignant statements from politicians, the damage was contained. But Gallois says the Chinese government has "put on hold" the approval for delivery of 45 long-haul A330s and A380s, contracts for which have been completed.

He says that the aircraft amount to a "significant share of our [widebody] backlog and deliveries" for 2013-14 and that the situation is "impacting the decision we've taken to increase production rates" of the A330 to 11 aircraft per month in 2014.

Last week Boeing Commercial Airplanes chief Jim Albaugh said the airframer was in "advanced talks" for 30 777s to Greater China, including those to China Southern, underlining the potential for Airbus's rival to capitalise.

"This [emissions] scheme is creating distortion," says Gallois. "It's not good for airlines and certainly not good for us. We are pleading for worldwide agreement inside [the framework of ICAO]. It's the only way to avoid something which is becoming a commercial war."

Airbus has not identified the carriers caught up in the Chinese stand-off, but estimates that 2,000 direct and indirect jobs could be jeopardised.

Mainland China's largest long-haul Airbus customers - Air China, China Eastern and China Southern - had outstanding orders for 35 A330s at the end of February, while Hong Kong Airlines, which has nine A330s yet to be delivered, has confirmed it is the A380 customer involved. It is also a customer for the A350, as is Air China.

China's foreign ministry says the country has "repeatedly expressed its concern" to the European Union over the emissions scheme.

"We hope the EU will take into consideration the overall political and economic interests and strive to resolve appropriately the issue of incorporating international flights entering and exiting the EU into its Emissions Trading System," the ministry adds.

Chinese government representatives have reportedly stated that they would not formally block aircraft sales, but Hong Kong Airlines' president has been quoted as saying the carrier "cannot do something which is against our country's interests".

Gallois says the ETS is "creating distortion" and needs a global forum to resolve. "The EU is absolutely isolated. All the countries outside Europe are against this scheme."

This position is underscored in the chief executives' ministerial letter, which warns of countermeasures including taxes and limits on traffic rights.

The European Commission has openly challenged those opposed to the ETS by demanding that they put forward "concrete and constructive alternatives" for a global initiative, rather than resort to retaliation.

While the USA has pursued legislative measures to bar its airlines from participating in the ETS, senior academics and economists last week implored the Obama administration to abandon its resistance.

"It is time we recognise this risk [from greenhouse gases] by putting an appropriate price on carbon emissions, in aviation and in all other sectors. The EU's ETS is a first step in that direction. Your administration should endorse the EU's efforts, not oppose them," they wrote in an open letter.

"Today the US is leading a coalition of unwilling countries on a course of refusing to price this risk in the commercial aviation sector. Rather than opposing the EU, we urge your administration to support their efforts to price carbon in the context of the ICAO.

"While we recognize that there are numerous obstacles to setting a uniform, global price on all carbon emissions, pricing them in the aviation sector would be a good start."

IATA insists that the EU needs to demonstrate to a greater extent its willingness to negotiate in order to encourage development of a global system - a system to which governments will also need to contribute.

"If the EU says: 'Oh, by the way, our scheme needs to go ahead but we are quite happy to talk', that sounds like: 'What's mine is mine, what's yours is negotiable.'

"I don't think it's going to get us very far. They have to show they are prepared to be flexible."