More turbulence ahead: a bumpy ride during U.S.-Japanese aviation talks exemplifies the need for a pragmatic course in future aviation negotiations.

• Author: Lick, Derek

1. INTRODUCTION

   As U.S. firms collectively weather the relatively hostile business climate in Japan, certain United States-based airlines have been flying above it all for years. Those U.S. airline carriers allowed to take advantage of the trans-Pacific passenger and cargo market are doing well competing against their Asian counterparts particularly on routes into and out of Japan. In 1995, U.S. airlines carried about sixty-five percent of the passengers flying between the United States and Japan.(1) This success alone generated a $5.3 billion aviation trade surplus in 1996---the only U.S. trade surplus with Japan.(2) Additionally, this trade surplus is growing at a quarter of a billion dollars annually(3) and it accounts for sixty percent of the $26 billion travel surplus the United States has with the rest of the world.(4) However, most of the revenues generated by U.S. airlines operating in the Japanese market have gone to just two passenger carriers (Northwest and United) and one cargo carrier (Federal Express).(5) This concentration of revenue is the result of a 1952 bilateral aviation treaty between the United States and Japan that provided significant access into the Japanese market only to those three U.S. carriers.(6)

   After more than four decades under the treaty, the United States and Japan agreed to a major revision of the agreement's terms in 1998.(7) The new aviation agreement substantially alters the original post-World War II treaty,(8) but falls short of the initial U.S. goal of creating "open skies" between the two countries.(9) Under an open skies agreement, both countries would have opened access to international airline routes between the two countries and eliminated practically all domestic restrictions on international carriers.(10) The inability of the United States to convince Japan to accept an open skies agreement may signal trouble for future aviation agreement negotiations unless the United States maintains its pragmatic approach, reaching the optimal agreement given the economic and political climate in the countries with which the United States is negotiating.(11)

   This Note analyzes the U.S.-Japanese aviation agreement and the negotiations that led to its signing. More specifically, it examines how the parties involved--including U.S. airline carriers who disagreed as to how the United States should proceed--influenced the negotiation process. Part II of the Note focuses on the current U.S. policy of expanding open skies when negotiating bilateral aviation treaties with foreign countries. Part III looks at the U.S.-Japanese aviation market and its importance for U.S. airlines. Part IV examines how the Japanese government successfully used its strategic placement in the Asian market to avoid U.S. efforts to impose an open skies agreement. In this section, emphasis is placed on the peculiarities of relations between the two countries under the 1952 agreement and how the details of the new agreement represent a middle ground that both countries hope to exploit. Part V describes the new 1998 bilateral agreement. Finally, Part VI predicts how the Japanese agreement may impact future aviation "liberalization" negotiations: did the United States compromise its bargaining position in future negotiations by "caving in" to Japan and accepting an agreement that falls short of open skies? Or did the United States correctly approach the negotiations pragmatically and with an eye toward reaching the best agreement possible given the circumstances? The Note attempts to answer these questions and proposes how the United States should conduct future aviation negotiations.

2. U.S. INTERNATIONAL AVIATION POLICY BASED ON EXPANDING "OPEN SKIES"

   In an effort to better effectuate what had been an unsuccessful U.S. international aviation policy goal of promoting "unfettered operations for airlines,"(12) the Clinton administration sought to renegotiate bilateral agreements to encourage competition.(13) Patrick Murphy, the Clinton administration's Deputy Assistant Secretary of Transportation for Aviation and International Affairs, summarized the rationale for the current U.S. policy while testifying before the House Aviation Subcommittee in June of 1997: "Our aviation liberalization policy is working to create a global environment in which well managed, competitive air transportation companies can deliver the best possible transport options to the travelling and shipping public while earning profits for owners and offering well paying jobs to employees."(14) In trying to create an international aviation market based on competitive economic principles, the United States has fought to eliminate foreign barriers that limit U.S. carrier access to foreign markets when negotiating or renegotiating bilateral agreements with other nations.(15) Traditionally, bilateral aviation agreements have strictly defined what routes may be served between signing countries, whether the fares are subject to each government's approval, how frequently flights may be offered, and how many airlines may fly under the agreement.(16) As Deputy Assistant Transportation Secretary Murphy bluntly described before a congressional committee, the United States is trying to move away from the traditional "tit-for-tat" protectionist bilateral aviation agreements.(17) Instead, the United States has promised foreign countries greater access for their carriers if they open their aviation markets and commit to increased competition.(18)

   Despite financial problems in the 1990s, and what the U.S. government characterizes as the "resurgence in foreign government protectionism," U.S. air carriers competing in international markets are experiencing record profits.(19) Furthermore, the airlines are projected to do well financially for years to come.(20) In 1996, the major U.S.-based passenger and cargo airlines reported a combined operating profit of $6 billion and a combined net profit of $2.8 billion, according to the U.S. Department of Transportation.(21) International operations alone generated a combined operating profit of $629 million and a net profit of $204 million.(22) The Transportation Department attributes the strong financial position of U.S. airlines in the international markets to the generally strong world economy, U.S. airline efficiency, and the increasing demand for international air travel caused by economic globalization.(23)

   Currently, forty percent of all world trade, as measured by value, is transported by air.(24) Between 1992 and 1996, the number of international passengers flying U.S. airlines increased by more than twenty-two percent.(25) That increase amounted to ten million more international passengers flying U.S. carriers.(26) United States carriers are doing so well that it is not uncommon for them to carry more passengers traveling between a foreign country and the United States than the competing foreign carrier.(27) The amount of international freight carried by U.S. carriers is increasing at an even faster pace than the passenger market. Between 1992 and 1996, the amount of international cargo carried by U.S. airlines increased by fifty-nine percent.(28) In real terms during the same time frame, international cargo traffic on U.S. airlines increased by one million freight tons.(29)

   1. Open Skies as a Vehicle for Breaking Down Aviation Trade Barriers

      Under U.S. aviation policy, the ultimate goal for the United States is to reach international agreements that embrace "open skies."(30) An open skies bilateral agreement allows for air carriers of both signatory countries to compete on an equal basis for passengers traveling between the two countries.(31) Under this type of pact, governmental barriers limiting a foreign carrier's access to routes into and out of its country are eliminated and replaced with a market-dominated allocation.(32) Under a pure open skies agreement, all restrictions on routes, capacity, frequency, pricing, and entry are eliminated.(33) The only aviation restrictions left in place are those created by physical space constraints at airports or required because of safety concerns.(34) Furthermore, an open skies agreement permits airline alliances in which a domestic and foreign carrier join forces to jointly market and operate routes assigned to them.(35) This is known as code-sharing because the two carriers may use each other's "designator code" when listing their flights on computer reservation systems.(36) Essentially, these marketing alliances allow for "seamless connection" of internal ticketing and seating operations between the partner carriers.(37)

      After what the U.S. Transportation Department calls "careful consideration of their potential competitive consequences," it has granted antitrust immunity to several of these strategic alliances between U.S. and foreign carriers in an effort to increase competition in the international aviation markets.(38) Although not highlighted publicly, the Transportation Department understands that the "carrot" of antitrust exemption creates an incentive to get countries with powerful airline carriers to the negotiating table.(39) According to the U.S. Transportation Department, antitrust immunity allows domestic and foreign carriers to integrate their separate systems into a highly efficient network.(40) Transportation Department officials have said that the agency believes antitrust immunity may reduce competition among the partnership carriers, but it results in more efficient competition among various multicarrier networks.(41) United States officials and aviation industry analysts supporting a free trade approach argue that the increased competition will lead to lower fares for consumers, better air service flying to more cities, increased tourism, and more jobs.(42)

      Another ingredient of the open skies agreement is a provision that allows carriers from the signatory countries to fly through each other's countries and on to third-country...