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Can Airlines Survive $7.5B U.S. Tariffs on EU Imports?

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The World Trade Organization (WTO) recently announced a ruling in favor of the U.S. administration, allowing it to impose tariffs on $7.5 billion worth of European products beginning Oct 18. This followed WTO’s finding that the European Union has been providing illegal subsidies to Airbus, violating fair trade practices.

Following the imposition, the European Union will face a 10% import tax on aircraft and a 25% tariff on goods ranging from agricultural items to industrial goods, per a Bloomberg report.

How Did the News Impact Airline Stocks?

Stocks of major U.S.-based airlines witnessed a steep fall post the decision. This is evident from the chart given below, which shows that shares of Delta Air Lines (DAL - Free Report) had plunged the maximum at 7.3%. Shares
of American Airlines, the world’s largest airline, (AAL - Free Report) fell 5.7%, while United Airlines (UAL - Free Report) lost 5.2%.

Why Airlines Stocks Are Likely to be Hit

Over the past seven months, many U.S.-based airlines shifted to Airbus due to issues with Boeing's (BA - Free Report) 737 Max aircraft grounding. Currently, most U.S.-based airlines have pending orders with the European aircraft giant.

In June 2019, American Airlines placed orders for Airbus’ 50 A321XLR aircraft. At the end of August, American Airlines had a total of 114 aircraft units, which are yet to be delivered by Airbus. During the same month, Delta Air Lines placed orders for five additional A220-100 aircraft. The company, as of Aug 31, awaits the delivery of 254 aircraft from Airbus. Another U.S. airline, United Airlines, currently awaits the delivery of 45 aircraft from Airbus.

Per a recent report by Reuters, the Trump administration plans to impose a 10% tariff on Airbus production facilities located in Spain, Germany, France and Britain, which manufacture large civil and passenger aircraft. This will bump up costs of Airbus’ aircraft, raising the possibility that many airline companies will shift to Boeing as an immediate alternative.

The WTO ruling has spooked investors, driving them away from U.S. airline stocks which in turn is reflecting on their share prices.

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