German court rejects challenge to air traffic tax

* Case brought by German federal state Rhineland Palatinate

* Court says tax does not contravene rights of passengers

* Airline industry to continue lobbying for abolition (Adds reaction from airlines, industry bodies)

KARLSRUHE, Germany, Nov 5 (Reuters) - Germany's constitutional court has rejected an attempt by the federal state of Rhineland Palatinate to challenge the legality of the country's air traffic tax, which German airlines and airports say is hurting their business.

The court said on Wednesday that the tax, which has been in place since 2011 and applies to all passenger flights leaving German airports, is constitutional and does not contravene passengers' or companies' rights.

The tax brings the German government around 1 billion euros ($1.25 billion) a year, with Lufthansa, the country's largest airline, paying around 350 million euros in 2013.

The suit was brought by the German state of Rhineland Palatinate, situated in west Germany, which argued airports in border regions were losing customers to rival airports in neighbouring countries such as the Netherlands, Belgium and Luxembourg, which do not levy similar charges.

German airlines say the tax burdens them unfairly and that it cannot be passed on to passengers because of tough competition on ticket prices. They have been lobbying fiercely to have the tax scrapped and some lawmakers have indicated they are in favour of phasing out the payment.

However, the finance ministry, aiming for a balanced budget this year, has repeatedly rejected the idea of changes to the tax.

Loss-making airline Air Berlin (Xetra: AB1000 - news) , which paid 143 million euros in the tax last year, said it would continue to lobby for the tax to be abolished.

The government says the tax brings environmental benefits, but those campaigning against it say the funds have served only to swell the finance ministry's coffers.

The BdL air industry association said by the end of 2014, German companies will have paid 2 billion euros due to the tax, enough to buy 28 more fuel-efficient and quieter Airbus A320neo jets.

Irish low-cost airline Ryanair, keen to expand in Europe's largest economy, has also called for the charge to be dropped, urging Germany to follow the example of Ireland (Other OTC: IRLD - news) , which decided in April to discontinue its own air travel tax.

"Axing travel tax is the only way to allow all German airports to become competitive once more," a spokesman said on Wednesday.

The German tax sees flights of up to 2,500 kilometres hit with a charge of 7.50 euros, which rises to 23.43 euros for up to 6,000 kilometres and then to 42.18 euros for flights of over 6,000 kilometres.

($1 = 0.7995 euro) (Reporting by Norbert Demuth; Additional reporting by Victoria Bryan and Peter Maushagen; Editing by Maria Sheahan)