SPEAKERS CONTENTS INSERTS
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AVIATION RELATIONS BETWEEN THE UNITED STATES AND JAPAN
PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.
SUBCOMMITTEE ON AVIATION
TRANSPORTATION AND INFRASTUCTURE
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HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTH CONGRESS
JULY 20, 1995
Printed for the use of the
Committee on Transportation and Infrastructure
COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
BUD SHUSTER, Pennsylvania, Chairman
DON YOUNG, Alaska
WILLIAM F. CLINGER, Jr., Pennsylvania
THOMAS E. PETRI, Wisconsin
SHERWOOD L. BOEHLERT, New York
HERBERT H. BATEMAN, Virginia
BILL EMERSON, Missouri
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
SUSAN MOLINARI, New York
Page 3 PREV PAGE TOP OF DOCWILLIAM H. ZELIFF, Jr., New Hampshire
THOMAS W. EWING, Illinois
WAYNE T. GILCHREST, Maryland
Y. TIM HUTCHINSON, Arkansas
BILL BAKER, California
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
PETER I. BLUTE, Massachusetts
JOHN L. MICA, Florida
JACK QUINN, New York
TILLIE K. FOWLER, Florida
VERNON J. EHLERS, Michigan
SPENCER T. BACHUS, Alabama
JERRY WELLER, Illinois
ZACH WAMP, Tennessee
TOM LATHAM, Iowa
STEVEN C. LaTOURETTE, Ohio
ANDREA SEASTRAND, California
RANDY TATE, Washington
SUE KELLY, New York
RAY LaHOOD, Illinois
BILL MARTINI, New Jersey
NORMAN Y. MINETA, California
Page 4 PREV PAGE TOP OF DOCJAMES L. OBERSTAR, Minnesota
NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
WILLIAM O. LIPINSKI, Illinois
ROBERT E. WISE, Jr., West Virginia
JAMES A. TRAFICANT, Jr., Ohio
PETER A. DeFAZIO, Oregon
JAMES A. HAYES, Louisiana
BOB CLEMENT, Tennessee
JERRY F. COSTELLO, Illinois
MIKE PARKER, Mississippi
GLENN POSHARD, Illinois
BUD CRAMER, Alabama
BARBARA-ROSE COLLINS, Michigan
ELEANOR HOLMES NORTON, District of Columbia
JERROLD NADLER, New York
PAT DANNER, Missouri
ROBERT MENENDEZ, New Jersey
JAMES E. CLYBURN, South Carolina
CORRINE BROWN, Florida
JAMES A. BARCIA, Michigan
BOB FILNER, California
WALTER R. TUCKER III, California
EDDIE BERNICE JOHNSON, Texas
BILL K. BREWSTER, Oklahoma
Page 5 PREV PAGE TOP OF DOCKAREN McCARTHY, Missouri
FRANK MASCARA, Pennsylvania
SUBCOMMITTEE ON AVIATION
JOHN J. DUNCAN, Jr., Tennessee, Chairman
JERRY WELLER, Illinois, Vice Chairman
WILLIAM F. CLINGER, Jr., Pennsylvania
HOWARD COBLE, North Carolina
WILLIAM H. ZELIFF, Jr., New Hampshire
THOMAS W. EWING, Illinois
Y. TIM HUTCHINSON, Arkansas
JAY KIM, California
VERNON J. EHLERS, Michigan
SPENCER T. BACHUS, Alabama
ANDREA SEASTRAND, California
RANDY TATE, Washington
SUE KELLY, New York
RAY LaHOOD, Illinois
BILL MARTINI, New Jersey
BUD SHUSTER, Pennsylvania
JAMES L. OBERSTAR, Minnesota
JERRY F. COSTELLO, Illinois
Page 6 PREV PAGE TOP OF DOCWILLIAM O. LIPINSKI, Illinois
ROBERT E. WISE, Jr., West Virginia
PETER A. DeFAZIO, Oregon
JAMES A. HAYES, Louisiana
BOB CLEMENT, Tennessee
BARBARA-ROSE COLLINS, Michigan
JERROLD NADLER, New York
PAT DANNER, Missouri
ROBERT MENENDEZ, New Jersey
JAMES E. CLYBURN, South Carolina
NORMAN Y. MINETA, California
Greenwald, Gerald, Chairman, and CEO, United Air Lines, Inc
Olcott, John W., President, National Business Aircraft Association, Inc
Smith, Frederick W., Chairman, CEO, and President, Federal Express Corporation
Page 7 PREV PAGE TOP OF DOC Stimpson, Edward W., President, General Aviation Manufacturers Association
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Clement, Hon. Bob, of Tennessee
Costello, Hon. Jerry F., of Illinois
Lipinski, Hon. William O., of Illinois
Mineta, Hon. Norman Y., of California
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Olcott, John W
Smith, Frederick, W
Stimpson, Edward W
ADDITIONS TO THE RECORD
Underwood, Hon. Robert A., a U.S. Delegate from Guam, statement
Page 8 PREV PAGE TOP OF DOC Freedoms of the Air
Civil Air Transport Treaty Between the United States of America and Japan
January 14, 1959 agreement
Order of the U.S. Department of Transportation, Office of the Secretary, June 19, 1995
News release, statement of U.S. Transportation Secretary Federico Peña on U.S.-Japan Aviation Talks, July 21, 1995
AVIATION RELATIONS BETWEEN THE UNITED STATES AND JAPAN
THURSDAY, JULY 20, 1995
U.S. House of Representatives,
Committee on Transportation and Infrastructure,
Subcommittee on Aviation,
The subcommittee met, pursuant to notice, at 9:33 a.m. in room 2167, Rayburn House Office Building, Hon, John Duncan (chairman of the subcommittee) presiding.
Mr. DUNCAN. Good morning. We're going to go ahead and call the Subcommittee on Aviation to order.
I want to thank everyone for coming this morning, particularly the witnesses who will testify shortly. This hearing is being held to examine the current state of aviation relations between the United States and Japan. The purpose of this hearing is to review our current policies and negotiating strategies with Japan in order to ensure that U.S. interests are being adequately protected.
Page 9 PREV PAGE TOP OF DOC More specifically, the subcommittee would like to focus on the current air cargo dispute between Japan and the United States and other ''fifth freedom'' rights for U.S. carriers. It is my understanding that Japan Airlines can fly these very same routes, ''sixth freedom'' routes from a Japanese perspective, with absolutely no restrictions or limitations. We also want to look into the issue of access for U.S. business aviation interests to Japan.
Our hearing today seems to be very timely and appropriate given the fact that Secretary Peña and the Japanese Transport Minister will be meeting later this afternoon to discuss these very same matters. Secretary Peña and other administration experts expressed an interest in testifying this morning but could not be here because of their meeting in Los Angeles today. They have asked that we consider holding an additional hearing on this issue, and we will not hesitate to hold such hearings on this issue should the current situation deteriorate or get any worse than it is right now. Hopefully, there will be an improvement based on concerns that come out at this hearing this morning and also because of the meetings that will take place this afternoon with Secretary Peña and the Japanese Transport Minister.
Last year, eleven million passengers travelled between the United States and Japan. Air cargo between the United States and Japan totalled 730,000 freight tons with a U.S. share of 55 percent. Gross operating revenues for passenger and cargo travel reached over $6 billion for U.S. companies in 1994. And so this is a very significant thing that we're looking into this morning.
We have a strong viable U.S. airline presence in Japan. I only hope that we can continue to make progress similar to what we've done recently in our agreements with Canada, the United Kingdom, and possibly Germany in the near future. Our success in foreign markets around the globe will certainly go a long way in helping to improve and strengthen our economy.
I think, on the other hand, it is very sad and really a disgrace that the United States currently has a $66 billion trade imbalance with Japan. It is my opinion that our Government should be doing everything within its power to negotiate and assist our carriers in one of the only markets that the United States currently experiences a surplus with Japan. Our trade relationship with the Japanese presents a tremendous number of challenges. I have encouraged, and remain hopeful that our negotiators will help keep the U.S. airline industry strong in the Pacific and not allow the Japanese to eventually dominate aviation like they do in many other areas, sometimes with unfair restrictions and limitations placed on American companies.
Page 10 PREV PAGE TOP OF DOC There are many important issues which I'm sure our witnesses will discuss. They all have extensive experience with these matters, and we welcome them before the subcommittee today.
I welcome now any comments from the ranking member and the man I refer to as my co-chairman, Mr. Oberstar.
Mr. OBERSTAR. You're very kind, Mr. Chairman. Thank you very much for calling these hearings. It is a pleasure to work with you in the partnership that we have enjoyed since your assuming the chairmanship early this year. You have a judicious and thoughtful approach to the very significant issues before this committee and in continuing the spirit of bipartisanship that has characterized our work on aviation over the past decade.
Before I proceed, I would like to ask unanimous consent that the statement of Mr. Mineta be included in the record at the appropriate point.
Mr. DUNCAN. Without objection, so ordered.
Mr. OBERSTAR. The hearing today is extremely important. It is very timely for you to call this hearing, and I fully concurred from the outset that we ought to have a hearing. It is regrettable we don't have the Secretary of Transportation, and we will hear from him at another time when they have concluded their negotiations now underway.
The hearing this morning focuses on two issues of very long-standing concern to this committeeour relations with Japan and policies for international air cargo. I've read the testimony of the witnesses for today and I must say the issues they raise, the complaints, the charges lodged against specifically the Japanese in this case and the questions raised about inadequacy of international policy, inadequacy of negotiation on the part of the United States, are not new. There are some new aspects to the testimony presented very skillfully by both of the lead-off witnesses, but I can go back through the decade of hearings this committee has conducted on international air cargo service and find those same issues raised again and again, issues addressed by this committee on which we have made progress.
Page 11 PREV PAGE TOP OF DOC We have resolved over time many of the ''doing business'' issues that were raised by the predecessor carrier to Federal Express, the Flying Tigers, again and again before this committee, in one-on-one meetings and in open hearings with me and Mr. Gingrich when he was the ranking member as I was the chair; with Mr. Clinger, with Mr. Molinari, and previously when Mr. Mineta was chairman of the subcommittee. These issues keep coming back. We pressed the executive branch to develop an international air cargo policy. In fact, at the witness table this morning when we received the testimony, Bill Clinger and I both looked at it and I said if I were grading this paper I'd give it a C only because you turned it in to our then negotiators and Assistant Secretaries of State and Transportation. It was inadequate, it was inappropriate, it was thoughtless, it did not address the issues presented by international air cargo service. They went back and 6 months, 7 months later presented the committee with a two volume in-depth study that served as the basis for a reasonable policy to address our international air cargo concerns.
I think our problem is that we have not adhered consistently to a defined policy. We have negotiated away rights and we have yielded to the Japanese time and again, paying for rights that we had already negotiated and won; and paying for those rights again by increased access to our market by Japanese carriers; and second, by falling into the trap of negotiating passenger rights at the same time as we're negotiating cargo rights, trading away cargo interests for passenger interests. The Japanese have consistently said that the 1952 bilateral was forced upon their weakened country in the aftermath of World War II, that it was shoved down their throats, it was an uneven policy. In fact that 1952 bilateral agreement is the exact same terms as we negotiated with every other trading partner in the world. It is no different. It is no more onerous, no more burdensome on Japan than on any other country. In fact, every other country had the same language in the bilateral that we negotiated with them.
The policy Japan followed, however, was that of designating only one carrier and its insistence on payment for multiple U.S. designations. That led to a one-way flow of benefits to the Japanese over a period of almost a decade until this committee got involved, got active and took action. Our hearings and follow-up reports guided our Government in eliminating discrimination against our carriers by Japan on a range of doing business issues, but many of those doing business issues still remain. If I were to read through Mr. Smith's testimony this morning, it is a repetition of what we heard a decade ago from Flying Tigers with some notable items eliminated.
Page 12 PREV PAGE TOP OF DOC We now have trade of 11 million passengers a year between the United States and Japan, 730,000 tons of freight a year. The reality is that Japan, as a powerful economic force worldwide and in the Pacific, is the gateway for U.S. carriers to provide service with Asia and between Asia and the United States. While we have through aggressive action by our committee, by negotiation, by forcing repeated negotiations with our Japanese trading partners, improved the position of U.S. passenger and cargo carriers with the Japanese on a one-way U.S.-Japan basis, it is the beyond service where Japan continues to enjoy an enormous benefit. It goes far beyond what is fair, what is reasonable, and is reflective of Japan's policy of Asia to the Asians, said again and again.
Cargo is a very different kind of service. It requires a different kind of trading regime with our trading partners. It ought to be handled separately. We ought not to negotiate cargo rights away for passenger rights. I would note that as an interesting sidelight to our 19871988 negotiations Federal Express gained access to the Japan market as a concession for Nippon Cargo Airways to gain access to the United States. It wasn't specifically Federal Express, it was a small package service that was part of the deal. But the onerous limitations imposed in that agreement have never been fully overcome. We need to negotiate much more vigorously, much more aggressively, and not cave in to the Japanese negotiators at their intransigence.
Federal Express now wants to operate service beyond Japan markets via different routings using a hub concept that they have developed so effectively in the United States and now at Subic Bay in the Philippines. The government of Japan has taken the position that FedEx must apply for permission to make the change. There is no such requirement in the U.S.-Japan bilateral. That agreement requires approval in 45 days for new service beyond Japan and we ought to insist on it, we ought not to back down, we ought not to give new concessions, we ought not to give anything away. We've already conceded too much.
Page 13 PREV PAGE TOP OF DOC The FedEx application was filed 2 years ago and it is still hanging. Now the United States has proposed countermeasures against Japanese carriers, both JAL and NCA. I think they are carefully tailored. I think it is the right response to be equivalent to the unlawful restrictions placed on Federal Express that it would prevent the two Japanese carriers from carrying traffic in countries beyond Japan to the United States. If we stick to that course, if we hang to it and just be patient and wait them out, they'll back down and they'll give us the rights that we've already paid for.
I don't think our committee or any U.S. carrier wants to have a trade war. But until we remain firm and stand firm, we're not going to convince the Japanese that we're serious. In my long experience, I think their strength is patience, their strength is consistency in negotiators. When I first began hearings on this subject in 1985 the chief negotiator for the Japanese was the same person who negotiated the 1952 bilateral during which time we had changed negotiators as often as you'd change shirts.
So there are lots of lessons for us to learn. I think the hearing this morning will again air these age-old issues, give new members to the committee an exposure to some very deep-seeded, complex, very significant and very important commercial trade issues in aviation and help us all to push this issue forward. I hope that we can put the dispute behind us, go further with efforts to expand and improve aviation service, and move to liberalization of both cargo and passenger trade in the international marketplace as President Roosevelt proposed to Prime Minister Churchill at the time of the 1944 Chicago Convention.
I'm sorry to have imposed so much time on members, but I feel very deeply about this issue. Thank you, Mr. Chairman, for the time.
[Mr. Mineta's prepared statement follows:]
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Mr. DUNCAN. Thank you very much Mr. Oberstar for a very fine statement.
One of the most active participants in the deliberations and hearings of this subcommittee is the very distinguished chairman of our full committee. It is always an honor and privilege to have him with us. I would like to call on Chairman Shuster at this time for any opening statement that he may wish to make.
Mr. SHUSTER. Thank you very much, Mr. Chairman. I'm certainly pleased to have our witnesses with us today. The only criticism I would have of my good friend from Minnesota and his comments is that he was perhaps a bit too timid.
I could not feel more strongly that it is time for us to get tough. Time and time again we think we've negotiated something with the Japanese and time and time again they violate agreements which we've entered into in good faith. I strongly urge the Department of Transportation to be tough in these negotiations now. And if they're not tough enough, it's time for us to consider legislation up here. Thank you.
Mr. DUNCAN. Thank you, Chairman Shuster. I think that possibly the Japanese are already getting a message from these hearings this morning.
I would like to call on the vice chairman of the subcommittee, Mr. Weller from Illinois.
Mr. WELLER. Thank you, Mr. Chairman. I do have a brief statement. First, I want to commend you for focusing attention on what is an extremely important issue. I come here today with pretty serious concerns about the present situation between the United States and Japan on aviation relations, particularly the issue of international air cargo policy.
Currently, we're operating under a 1952 bilateral agreement that regulates air traffic between our two countries. Bilateral agreements are negotiated in order to serve the interests of both countries and it is important to honor those agreements. While Japan has expressed some concerns about the current agreement, it is unreasonable to believe that we would negotiate a new bilateral when they do not currently abide by the existing agreement. Japan argues the 1952 agreement is outdated and favors the United States. Some may concur that the agreement may need some revising. But we need to settle this issue which is at hand today.
Page 15 PREV PAGE TOP OF DOC I am pleased to know that Japan's Transport Minister will be meeting with Secretary Peña today. I am hopeful that this issue which is so important to American carriers as well as their employees will be resolved in a timely and productive fashion, also a fair fashion for the United States.
So I want to welcome our witnesses here today. I look forward to hearing their testimony.
Mr. DUNCAN. Thank you very much, Mr. Weller.
Another fine member of our subcommittee from Illinois, Mr. Lipinski.
Mr. LIPINSKI. Thank you very much, Mr. Chairman. I will be extremely brief. But Mr. Clement and I want to make a motion that the member who has the shortest opening statement gets to ask questions first. Could we possibly accommodate that?
Secondly, I would like to say I want to associate my remarks with Mr. Oberstar's remarks and Mr. Shuster's remarks. I have a statement which I will submit for the record.
I will be looking forward to be called upon first for questioning. Thank you.
[Mr. Lipinski's and Mr. Costello's prepared statements follow:]
Mr. DUNCAN. Thank you very much.
Mr. Clement, do you have any statement?
Mr. CLEMENT. Thank you, Mr. Chairman. I'll submit my statement for the record.
I'm pleased to have our witnesses today, particularly Mr. Fred Smith who is a fellow Tennessean. I'm looking forward to hearing their testimony. This is a concern of mine as well, particularly with the Japanese going back on their word as well as the negotiations that have taken place previously all the way back to 1952. I feel strongly, as do the other members of the committee, concerning the Japanese actions and inactions. I know this committee, Democrat and Republican alike, are joined to try to do everything we possibly can to correct this inequity that presently exists.
Page 16 PREV PAGE TOP OF DOC [Mr. Clement's prepared statement follows:]
Mr. DUNCAN. Thank you very much, Mr. Clement.
Mrs. Kelly, do you have any statement?
Mrs. KELLY. Thank you, Mr. Chairman. I'm anxious enough to hear the witnesses that I have no opening statement. Does that mean I win?
Mr. DUNCAN. Right. Well, thank you very much.
Ms. DANNER. Thank you, Mr. Chairman. I wish to associate myself with the remarks both of the chairman of the full committee as well as the chairman and ranking member of the subcommittee. I too have grave concerns about this issue. I will submit a statement for the record. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much.
I would like to welcome the first panel. The first two witnesses at our hearing this morning are Mr. Frederick W. Smith, the chairman, CEO, and president of the Federal Express Corporation; and Mr. Gerald Greenwald, chairman and CEO of United Airlines.
Gentlemen, it is a very special honor and privilege for us to have both of you before the subcommittee. You may begin your testimony and you may go in the order that you choose; I'll leave that up to you as to which one of you goes first.
TESTIMONY OF GERALD GREENWALD, CHAIRMAN AND CEO, UNITED AIRLINES, INC.; AND FREDERICK W. SMITH, CHAIRMAN, CEO, AND PRESIDENT, FEDERAL EXPRESS CORPORATION
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Mr. GREENWALD. It occurs to me that between us we should be nicknamed the PC Panel for passengers and cargo. Mr. Chairman, members of the committee, I thank you for the opportunity to be here today representing our growing number, I think we're about 57,000, employee-owners at United Airlines. I have submitted a detailed written statement, but I would like your permission to speak a few moments and summarize the key elements of that written statement.
In most respects, this could be described as an exceptionally good year for U.S. international aviation. Secretary Peña's DOT has obtained landmark liberal air service agreements with Canada and with nine European countries. The DOT has broken the logjam on negotiations with the UK and it stands, in our view, on the verge of negotiating an extraordinary agreement with Germany covering free trade in air transportation.
Unfortunately, aviation relations with Japan appear to be headed in the wrong direction. We are, in our view, at a critical juncture now in our dispute with Japan over rights of U.S. airlines to serve points in Asia from Japanese airports. The core of the issue is simply this: Japan does have a problem. Its flag carriers are suffering a significant, but I would underline temporary, disadvantage in their ability to compete with U.S. flag carriers. Quite simply, their costs are too high and they have been late in coming to grips with their problem. Rather than wait until that situation adjusts itself, as it certainly will, Japan is seeking to roll back the clock. They want permanent restraints on the competitive abilities of the U.S. flag carriers.
This is where the history of aviation policy, in my view, has so much to teach us. The U.S. has been here before. The names have changed but very little else. In 1976, then government-owned British Airways was a woefully inefficient enterprise not unlike the Japanese flag carrier today. Britain was concerned with the fate of its competitively beleaguered British Airways, so much so that they demanded that the U.S.-U.K. aviation agreement be rewritten. Then U.S. Special Ambassador Alan Boyd appeared before this committee and catalogued the British complaints. This chart describes what he had to say. As you will quickly recognize, they are essentially the same complaints that Japan is making today.
Page 18 PREV PAGE TOP OF DOC The lesson of 1976 is one we should certainly heed today. Airlines' competitive positions are not permanent, they are not static. To assure a balance of benefits under the U.K. agreement, the U.S. made the mistake, got suckered into surrendering key U.S. carrier' rights and thereby left the U.K. carrier with a permanent competitive advantage. That agreement is called ''Bermuda II''.
As you can see from the chart, British Airways' efficiency did, in fact, improve, allowing it to exploit the structural advantage it gained in Bermuda II and drive the U.S. share of the marketmarked defined as air travel between the U.S. and the U.K.drove the U.S. share of the market down by a full 24 percentage points. I want to remind everybody that there is only British Airways and a bit of Virgin competing with all the U.S. carriers for that market, yet they were able through Government negotiation to create a structural advantage that caused that 24 point movement.
A key element in this shift was the U.S. decision to surrender most of the authority that our carriers had to operate in, in this case, beyond London, to develop a feed network at that point to compete with the natural advantage of British Airways' enormous and growing global reach.
This chart shows what the U.S. carriers had by way of beyond London authority before Bermuda II and what we're left with today. As I'm sure Secretary Peña would confirm, an inordinate amount of this administration's attention has been focused to try to correct the mistakes of 19761977 negotiations with the United Kingdom. We are beginning to make progress. Now that's positive. But it does not change the fact that a mistake made almost 20 years ago is still hurting us and badly today.
Now, just as we're moving forward with the U.K., we are being asked to move backward by the Japanese. Indeed, they are simply refusing to honor their agreement with respect to the rights of U.S. carriers. The U.S. is correct in insisting that Japan must honor its existing commitments before we can talk about changes. Obviously, a situation in which one side can decide which trade provisions it will honor and which it will ignore is, in fact, an empty agreement and therefore an unacceptable agreement between Nations.
Page 19 PREV PAGE TOP OF DOC But what we really face is a repeat of Bermuda II. Japan wants a permanent advantage for its side built into the agreement so that, like British Airways accomplished, it can achieve a balance of benefits while its flag carriers are relatively inefficient and can then dominate the marketplace as those airlines retool and regain efficiency. Quite simply, Bermuda II is a movie that none of us should want to have made into a sequel.
Mr. Chairman, as I have said before, the starting point for any negotiation is a detailed economic analysis of the Japan aviation market and its relationship to U.S. air carrier competitiveness in Asia. We're going to do all we can to assist the DOT in conducting such a study. And we will commit ourselves to support its conclusions regarding negotiations.
This chart shows the Asian and Pacific points that United serves today over Japan and the authority that it holds to expand that Asian network in the future as the transpacific air market grows. As you can see from the overlay, most of those potential expansion markets lie well beyond the non-stopmeaning flights from the U.S. nonstop to a destination in Asialie well beyond the nonstop range of even a B747/400. Therefore, for a U.S. carrier to serve them on a sensible basis, an intermediate traffic stop in Japan is essential. Now with such a network, U.S. carriers can remain a competitive force in the Pacific. Without such intermediate traffic rights, service between these countries and the U.S. will be dominated by the Japanese carriers as they continually expand their Asian feed networks.
If the Japanese can do what the U.K. did, if they can use Government policy to win advantages that they cannot secure in a free competitive marketplace, if they can freeze or reduce our networks while allowing their carriers' networks to expand, then U.S. carrier market share in the Pacific will certainly decline as it has across the Atlantic to the U.K.
Transpacific air transportation is one of the great U.S. success stories in international trade. If our Government defends and builds upon the rights that we have and that we've added to our success to date, and if it approaches our industry with an understanding of its economic underpinnings, our carriers will certainly continue to capture business internationally and to generate jobs at home.
Page 20 PREV PAGE TOP OF DOC Mr. Chairman, hearings such as yours this morning are very important to focus attention on both the threats and the solutions. Thank you for allowing me to express our views this morning.
Mr. DUNCAN. Thank you very much, Mr. Greenwald, for your very informative testimony and also for the charts that you have brought. They demonstrate in a dramatic way exactly what you're talking about.
We will hear now from Mr. Fred Smith. Mr. Smith, thank you for being with us this morning.
Mr. SMITH. Thank you very much, Mr. Chairman, for allowing Federal Express to appear before you today. Let me give you a couple of statistics about FedEx because I think they will be useful to understanding the issue before you today. Federal Express is an all cargo integrated express system employing almost 110,000 people today, 95,000 in this country alone. We operate a transport fleet of jet aircraft of almost 300 airplanes with another 250 feeder airplanes, a vehicle fleet of 36,000, and we serve either directly or through our global service partners 201 countries around the world. Each day we carry 2.4 million critical shipments in North America and throughout these 201 countries throughout the globe. It is important to recognize I think that the industry and the traffic which Federal Express represents is a significant national interest to the United States. Perhaps that is best indicated by the fact that the movement of goods by air today represents well over a third of the entire value of all U.S. trade, even though that transportation of goods by air represents less than 2 percent of the total tonnage moved in international commerce today. If you remove commodities such as agricultural products and petroleum from the mix, then the movement of goods by air represents as best we can tell almost half of the total value of U.S. trade. The best example of that perhaps is best seen by the chart to my left which shows the aggregate value of U.S. exports moved by air to various countries in the Pacific. As you can see in the case of Malaysia, the Philippines, Singapore, Thailand, about half of the total value of all of our trade is moved by air.
Page 21 PREV PAGE TOP OF DOC There are three types of systems which move goods by air. One is in the underbellies of passenger aircraft, the way United and British Airways participate in the air cargo market. The second is through traditional airport-to-airport freighter services either done as supplementary operations by combination carriers, such as the eight 747 freighters operated by Northwest Airlines or the all cargo airplanes operated by Japan Airlines, or by a few traditional all cargo specialists. And then third, and by far the fastest growing segment of the air cargo market, are the integrated express operations of which Federal Express with $9.4 billion in total revenues in our last fiscal year is by far the largest.
In the United States, integrate express operations now move well over 90 percent of all shipments moved by air in this country and represent about 70 percent of the tonnage. In the international cargo market, most observers, including Boeing, McDonnell Douglas, and so forth, believe that the movement of goods by air will continue to grow at a rapid rate, someplace between 6 and 8 percent compounded per year with the amount of tonnage represented by express transportation growing from 4 percent of the revenue ton miles at present to well over 30 percent by the year 20102013, in that timeframe.
So hopefully by recounting these statistics, the committee will understand that this is a critical issue for the trade in general of the United States of America, particularly in those sectors which are commonly referred to as ''high value added'' tradecomputers, electronics, microprocessors, avionics, aircraft parts, medicines, pharmaceuticals, intellectual property, high fashion items, gourmet foodsall of the things that the United States excels in producing and selling abroad.
The fastest growth market for our exports in general, and certainly for the movement of goods by air, is the Pacific Basic which is growing at the rate of in excess of 10 percent compounded per year. I think with that background it is important to look at some of the issues that Mr. Greenwald talked about in the context of the Pacific.
Page 22 PREV PAGE TOP OF DOC As he mentioned, the situation with Great Britain and Japan are the mirror image of one and the other over the Atlantic and the Pacific. That's for a very simple reason. If you plot on a great circle mileage basis the shortest route from North America to all of the points in Europe, the Middle East, and Africa, and then in the Pacific from the United States to all of the points in Asia, the Middle East, and Southeast Asia, you will find that Great Britain and Japan represent the first intermediate point on that great circle route. London is a community of almost 12 million people; the next largest city in Europe is Paris with about 10 million people; the next three markets are Madrid, Rome, and Berlin of about 3 million; and then the next largest cities are less than 1.5 million. So London is the natural collection point for Europe. Tokyo, and to a lesser degree Osaka, has exactly the same position in the Pacific.
All aviation treaties in the United States have the same heredity. They all derive from a convention held in Chicago in 1944 while of course the world was still at war. At that meeting, the United States tried very hard to achieve a multilateral aviation regime. The other countries that participated in that convention, which was virtually everyone except the Axis belligerents, felt instead that the aviation regime in the post World War world should be one of a bilateral treaty regime. That view prevailed. And because of that, there are well over a thousand major aviation bilateral treaties.
The construct of the 1944 convention and these aviation treaties is built around ten freedoms of the air, and they are known. The first and second are technical and the ninth and tenth are also arcane and technical. But for the purposes of the understanding of this committee, the most significant are the third, fourth, fifth, and sixth freedom rights. The third and fourth freedom traffic rights are simply the rights to carry traffic to and from one's own home country to another. Where the issue becomes arcane but hugely important is the issue of fifth and sixth freedom traffic rights, as Mr. Greenwald pointed out in his excellent primer on the significance of the Bermuda II agreement in 1977. The fifth freedom traffic is the right of a carrier such as FedEx or United to land in Japan or the United Kingdom and enplane cargo or passengers from Japan or the United Kingdom to another country, or vice versa. The sixth freedom traffic is exactly the same economic right but by the carrier of that country enplaning traffic from another point to yet a third point. An example of that might be Japan Airlines or Nippon Cargo Airlines picking up a load of semiconductors in Malaysia bound for the United States, commingling it with traffic to Japan, stopping in Tokyo, off-loading the traffic destined for Japan and picking up traffic destined for the United States. That is called ''sixth freedom traffic.''
Page 23 PREV PAGE TOP OF DOC In the Asia Pacific market, I think you will find this very significant. For a counties in Asia other than Japan, Japanese carriers have a 5.4-to-1 advantage in terms of traffic opportunity over our fifth freedom traffic opportunities. As you can see, 4.4 billion ton miles to 819. This chart here presents it in even more stark terms.
Now the United States, by virtue of the 1952 bilateral treaty based on the principles of the Chicago Convention of 1944, has three carriers which have broad beyond rights over JapanUnited Airlines as the successor to Pan American whose Pacific routes it bought some years ago; FedEx as a successor for all cargo operations only to Flying Tigers, a company which we bought 6 years ago; and Northwest Airlines, which has enjoyed those routes and rights for many years. The treaty was amended slightly in 1959 and 1989 but basically the rights that it gives those three U.S. carriers are to participate in the fifth freedom markets beyond Japan without hinderance by the Japanese government. And the treaty is very specific and very straightforward.
The maps here, as Gerry Greenwald showed you, simply represents the sixth freedom opportunities which Japan enjoys versus the fifth freedom opportunities which U.S. carriers enjoy in terms of revenue ton miles over the Pacific.
Now beginning approximately 2 years ago in the summer of 1993, FedEx filed routinely a flight schedule to fly between Tokyo and Cebu, an industrial city in the Philippines. The treaty specifically provides that our flight schedules shall be approved within 45 days of filing. The Japanese refuse to approve that flight schedule. We then filed a complaint with the Department of Transportation and, after significant investigation, the DOT found that in fact the Japanese were violating the bilateral treaty by refusing Federal Express the right to fly this route and issued an order and, in fact, took counter measures against Japan by withholding what should have been the routine approval for Japan Airlines to fly a passenger service from Sendai in the northern part of Japan to Hawaii.
Page 24 PREV PAGE TOP OF DOC For a number of reasons, the U.S. Department of Transportation last fall withdrew that countermeasure. And then this spring Federal Express filed a number of flight schedules over a new facility which we've constructed in the Philippines which should have been routinely approved by the Japanese. I might add that the flight schedules which we filed in the spring were for one additional flight over Japan to Subic Bay where we use smaller aircraft to connect to these points in the Southeast Asia depicted on this map. And assuming that a route purchase of an authority to China is approved, a second flight to stop on its way to the United States to and from China. So this was not a significant endeavor in our mind in terms of the overall market. More importantly, the treaty provides for its immediate approval.
I should point out as I conclude here that it is our opinion that the Japanese actions in this matter are motivated by a simple objective; and that simple objective is to disadvantage U.S. interests, specifically our's in this case, to the advantage of Japanese carriers, and to restrict U.S. carriers' ability to operate in the Pacific. Now for reasons that are best known to the United States Department of Transportation, for many years, in fact only until recently, for some reason the U.S. permitted foreign carriers and governments to somehow depict fifth freedom authorities as illegitimate whereas sixth freedom opportunities were there for the asking with these foreign carriers. They are exactly the same economic opportunity.
As I hope I have demonstrated in these charts, in the case of the Japan market it is outrageous because their sixth freedom opportunities measured in revenue ton miles are 5.4 times ours and they want to restrict our remaining fifth freedom opportunities. If you look at the transpacific cargo market as not just third and fourth freedoms, U.S. to Japan and vice versa, but as third and fourth and fifth and sixth freedoms markets in the cargo area, you will find that Japan has a 5248 percent advantage in the all-cargo areas. The Japanese position, again, for many years has been somehow these fifth freedom operations that the United States has shouldn't be permitted. And they too, I agree with Mr. Greenwald, would very much like to have this Bermuda II situation where we're now trying to correct mistakes that were made almost 20 years ago.
Page 25 PREV PAGE TOP OF DOC So the Japanese position in this matter is arbitrary. It is designed to advantage Japanese aviation interests to the detriment of U.S. aviation interests. In our case, despite the fact of our having briefed the Japanese Ministry of Transport on our plans well over a year before we were to open our Subic operation, they have refused to approve our flight schedules. In the quarter that we are in of our fiscal year, June, July, and August, it will cost FedEx on the bottom line $10 million for this delay. If we are delayed from inaugurating these flights past September, which is the heavy shipping season of the year, most of our big customers will make alternative arrangements and the damages which we will suffer will be in the tens of millions of dollars.
So the conduct of Japan in this situation is egregious. It is not supported by the treaty which is currently in force between the United States and Japan. Their action has been unilateral. We have urged the Department of Transportation, if the conduct continues, that they take forceful countermeasures, and the countermeasures which we would recommend would simply be to shut down the sixth freedom traffic flows that Japanese carriers enjoy over Japan into the United States. Reduced to its ultimate absurdity, total bilateralism would mean that a person with a passport from Thailand could transport themselves only on a Thai or a U.S. carrier, and the same would be true in cargo. So, clearly, the intermingling of this fifth and sixth freedom traffic opportunities is strategically important to the United States.
In the case of cargo, for many years, as Mr. Oberstar mentioned, cargo has been treated as a stepchild. Most aviation agreements have traded off cargo interests for passenger or combination interests. Cargo is not bilateral inherently in nature. It is unilateral; it only goes in one direction. The traffic flows are vastly different from many countries one to the other where passenger flows are almost always equal. Hong Kong, for instance, has a 4 or 5-to-1 tonnage export versus import tonnage. So you have to have the flexibility in all-cargo operations to operate with fifth freedom authorities.
Page 26 PREV PAGE TOP OF DOC I might point out one final thing in conclusion, Mr. Chairman. This is a situation which hopefully will be resolved in these negotiations in the next day or so. But it has been so egregious over the years with the failure of our Government from looking at these traffic rights on an economic equivalency basis that I would suggest that the Congress consider legislation making it much more specific as to the parameters within which our negotiators can deal with these issues. The policy statement is very clear. If you read the policy statement, which is the one you were talking about, Mr. Oberstar, it is very clear as to what our negotiators should try to achieve. But for reasons best known to the dust bins of history, we have been very, very timid in asserting United States' rights and insisting that our carriers have the same economic opportunities as foreign carriers. And most important, as the current situation with FedEx and the government of Japan illustrates, is that when we have a treaty we should insist that our trading partners honor those treaties; otherwise, why in the world would we go to the trouble of negotiating them in the first place. Thank you.
Mr. DUNCAN. Thank you very much, Mr. Smith, for a really fine statement. I can tell from the fact that, among other things, you did not refer to any notes I don't think while you were testifying. You have tremendous knowledge of this subject. It is very, very important to Federal Express and to United, and I hope that one message that comes out of these hearings is that we let the people of this country know that this is a very important subject to all Americans and has a tremendous effect on our overall economy.
I am going to go first for questioning to the chairman of the full committee who has some other meetings to attend. Chairman Shuster, you may begin your questioning.
Mr. SHUSTER. Thank you very much. We certainly appreciate your excellent testimony. Both of you have really enlightened the discussion on issue. I came to the Congress as a free trader, and while it is a wonderful economic theory, it really isn't being practiced in many places, and certainly the Japanese are the most egregious violatiors. And I think both Republican and Democratic administrations have been quite timid in looking out for America's interests and in demanding a level playing field. I have long ago come to the conclusion that the only thing the Japanese understand is toughness and economic negotiation in which it is clear thatif they're not going to uphold the treaties that we've entered into with them, if they're not going to create a level playing fieldthen the only thing we can do is inflict economic pain. That's a harsh thing to say but, sadly, I think that's the only thing the Japanese understand.
Page 27 PREV PAGE TOP OF DOC Am I correct in understanding from your testimony that if sanctions are imposed and, indeed, if they are ratcheted downand let's suppose we get into an economic war here and let's theoretically assume we shut them down completely and don't let them in our market and they don't let you enter their marketmy understanding is they have more to lose than we do? Is their volume greater than your volume? There are two parts to the question. The first relates to the volume question, and second is the percentage of your total business. What percentage of your total business would you lose if we ultimately have a trade war and we shut them down and they shut us down?
Mr. SMITH. Mr. Chairman, that's the relative opportunity. The Japanese carriers have a 5.4-to-1 relative opportunity compared to us. Let me give you a couple of other statistics which really bring this home. In the last 5 years, cargo traffic, I'm just talking about cargo traffic, I defer all passenger issues to Mr. Greenwald, but cargo traffic between Japan and the United States has grown on a small basis. In fact, we have reduced our capacity in the Japan-U.S. market significantly, concentrating on the door-to-door express business. More and more of the traditional air freight that goes intercontinentally goes in the underbellies of the highly efficient long-range airplanes like 747 and 777.
In the other Asia markets, in other words China, Thailand, Singapore, Korea, and so forth, traffic to the United States has grown about 36 percent. Traffic from all of those markets to Japan has grown 10 percent. Japanese all-cargo capacity on the other side of Japan has grown 57 percent. So what are they doing? They're not putting it in place to carry stuff to and from Japan, it's only grown 10 percent. Japan has put 57 percent more all-cargo capacity on the other side of Japan to carry this traffic.
Mr. SHUSTER. So if we pulled the plug completely, the pain would be 5.4 times as great on the Japanese as it would be on us?
Mr. SMITH. If that's what the Department of Transportation does, the Department of Transportation's show cause order basically was, in our opinion, timid because it did not make clear that if the Japanese did not honor their treaty, this is what would be restricted. In fact, there were press reports after the show cause orders were issued where Thai carriers said, look, we'll just work in concert with the Japanese, we'll carry this traffic from Bangkok up to Japan and then we'll put it on a Japanese carrier and bring it into the United States. If we have an aviation bilateral confrontation with Japan, it must be very, very decisive what the United States must do as to restrict this sixth freedom traffic. Then I don't have any question that this issue will be resolved promptly.
Page 28 PREV PAGE TOP OF DOC Mr. SHUSTER. Right. What percentage of your $910 billion a year business is tied up with this issue?
Mr. SMITH. Our Pacific business is about a billion dollar business that is growing at 2225 percent per year. The end game of all this, Mr. Chairman, and what the Japanese would like to do, as Mr. Greenwald mentioned, is the same arrangement with the Bermuda II which would have the effect basically of pushing us out of the Pacific markets with the exception of a few north Pacific points.
Mr. SHUSTER. And what percentage of the two Japanese airlinesNCA and Japan Air Lineswhat percentage of their business is tied up in this?
Mr. SMITH. In sixth freedom traffic flows?
Mr. SHUSTER. So you would lose, if we pulled the plug, both ways. You would lose a billion dollars?
Mr. SMITH. No, sir. I'm sorry I misunderstood you. Our fifth freedom traffic business today is only about $7590 million business. My guess is that the Japanese sixth freedom cargo flows over Japan are measured in the hundreds of millions of dollars. That's what makes this so egregious.
Mr. SHUSTER. So you could sustain this loss and live with it with less pain than they could.
Mr. SMITH. We are strongly in support of the United States taking these countermeasures because at the end of the day this is U.S. traffic. If they did that, we would be disadvantaged far less than they would.
Mr. SHUSTER. I understand. Your suggestion if this matter doesn't get handled fairly, is that legislation might be timely?
Mr. Greenwald, do you agree with that or disagree?
Mr. GREENWALD. I would like to try to answer your question by observing that the negotiations that are being conducted at the moment are focused totally on cargo. We think that's appropriate. We're not quite sure what will unfold, but we know that right behind the cargo issue is the passenger issue. We also have filed to start flying using some of our beyond rights and we've been held back also.
Page 29 PREV PAGE TOP OF DOC To the question of what would happen if both Nations started down the path of sanctions, I guess maybe I'm stating the obvious but I need to, what we're trying to measure here is relative loss. But the fact remains that both sides would lose. Why is it important, however, that we stand and insist on existing agreements? I guess that's obvious, too. So we need to face this and we need to get it resolved. Hopefully, between our two Nations we both won't want to shoot at each other or hurt each other economically.
Mr. SHUSTER. But they might shoot off one of your toes; you might shoot off their foot?
Mr. GREENWALD. That's the point. To the core of your question, Chart 1 is what I want to bring back here for a second. When both the U.S. carriers and the Japanese carriers were relatively healthy as companies it seemed to be working just fine. About 1986, we got strong, they got weak and the gap has opened. So if one were to measure the potential pain, I think it is fair to say that in terms of the agreements themselves we would suffer about equally. I hope it doesn't come to that. I hope between our Nations we can get this straightened out.
I think at the moment, if we found ourselves in a situation where we were temporarily losing some authorities and the Japanese carriers were losing some authorities, we would face some peculiarthat's probably a bad word. Let me describe one. After many years of emotional pain, the Nations of the United States and Vietnam are moving toward diplomatic relations. Well, when that time comes, I should think that we all would want to see U.S. flag carrier traffic business and tourist traffic from the United States into Vietnam. As this other chart shows, it is beyond the capability of any passenger plane to fly direct. Unless we can get this issue resolved with Japan, there aren't going to be any U.S. flag carriers flying U.S. passengers into Vietnam or, for that matter, Jakarta, or just a long list of cities as they become important markets to us.
Page 30 PREV PAGE TOP OF DOC Mr. SHUSTER. Thank you very much. My time has expired. I have many other questions and I would like to submit them for the record if they're not covered in the testimony.
Mr. SMITH. Mr. Chairman, may I just make one comment here. When you talk about the U.S. taking sanctions against Japan, it is a slight difference in terms but I think the appropriate thing to cause any such actions on the part of the United States would be countermeasures. The Japanese have already taken sanctions against U.S. carriers, specifically against Federal Express and United as well. It has simply been our Government has not taken decisive actions or countermeasures against them. They've already sanctioned us. And what's really tragic in this situation is that we provide very important services to the shippers of Japan as well.
I think at the end of the day, just as Gerry does, that what they're doing is to try to compensate for the huge run up in the value of the yen and the cost escalation in dollar terms of Japanese air carriers' costs. Well, what's caused the run up in the yen? What's caused the run up in the yen has been year after year they are running $125130 billion trade deficit with the whole world, half of which is ours, and so there's not enough yen out there to pay for it. Our VIP of regulatory affairs told me the other day he had a glass of orange juice, some oatmeal, and something else at his hotel and it was a $42 bill.
Mr. SHUSTER. Sounds like New York City.
Mr. SMITH. The point is the cause of a great deal of this problem is the same type of mercantilism they are attempting to do in aviation.
Mr. SHUSTER. Okay. Thank you.
Mr. DUNCAN. Thank you very much, Mr. Chairman.
Mr. OBERSTAR. Thank you, Mr. Chairman. I appreciate the testimony both our witnesses have presented, especially the charts that rather graphically demonstrate the issues at hand and the concerns that they have. As I said earlier, this is not new. There are some new aspects, there is one significant difference and that is FedEx's proposal to hub in the Philippines as you do in the U.S., but there is nothing extraordinary about that proposal. It is within the ambit of the 1952 bilateral. It is in effect paid for by access to U.S. markets that the United States has granted to Japanese carriers.
Page 31 PREV PAGE TOP OF DOC The lesson of our long relationship with Japan, as I said in my opening statement and I'll just simply repeat it because it bears emphasizing, is that every time the United States has tried to exercise rights under the bilateral it has had to pay for those rights by giving Japanese carriers greater access to the U.S. marketplace. In addition, our carriers have not been able to fully exercise the rights they hold under the bilateral because the Japanese have imposed obstacles. And when we negotiate with them over removing the obstacles, they say we'll do that provided you give us this, that, or the other service into the U.S. marketplace.
Until 1985 it was Japan's decision to have only one carrier. They decided that even though they could operate as many carriers as they chose to operate in international service, they chose to have only one. We have a multiplicity of carriers and they complain repeatedly, well, look at all these carriers that are coming at us in competition and we have only Japan Air Lines. Now they have NCA and ANA. But that was their decision. We didn't force it on them. They chose to have one carrier that the government of Japan could finance, protect, and for which it could manipulate the market.
The Japanese have consistently refused our initiatives undertaken by a succession of presidentsJohnson, Nixon, Carter, Reagan, Bush, and now Clintonto open the market and provide equal opportunities. The reason the Japanese have not wanted to have open market and equal opportunities is because market forces, not government regulation, not government controls, will determine market share. And that's what you're up against.
The Department of Transportation has proposed for the first time in our relationship with Japan countermeasures that would preventlet's be specificJAL and NCA from carrying traffic from countries beyond Japan to the United States. That's the part of the traffic in which you have the 5.4-to-1 advantage for Japanese carriers over U.S. If that were imposed, if we stuck to it, I would like your opinion, both of you, what would be the effect, and would that be a sufficient countermeasure?
Page 32 PREV PAGE TOP OF DOC Mr. SMITH. In our opinion, Mr. Oberstar, if the United States were to be willing to do that, this issue would be resolved because obviously the Japanese are very astute in business and at the governmental level. The facts of the matter are that the Japanese do not believe that the United States will enforce any such countermeasures. The reason that I know that is because over the past several weeks executives of their carriers and personnel from their Ministry of Transport have said that.
Mr. OBERSTAR. Not just the past several weeks; the past 20 years.
Mr. SMITH. Well, I'm sure of that. But they have said specifically that they do not believe that the United States is prepared to take countermeasures, and that if they take countermeasures, they will be ineffective and weak. That's their public position. I can only tell you that. In our opinion, why in the world in the cargo areaagain, I defer to Gerry on the passenger issuesbut in the cargo area, which in the world would the Japanese put at risk a market which is clearly beneficial to them, where they've added 57 percent more capacity in the past 5 years.
Mr. OBERSTAR. The point is, you support those countermeasures?
Mr. SMITH. Yes, sir.
Mr. OBERSTAR. Mr. Greenwald?
Mr. GREENWALD. Mr. Oberstar, as I said earlier, the issue at present is the cargo issue that is being negotiated. But we're up next. I believe strongly that position No. 1, 2, 3, 4, and 5 has to be existing agreements have first got to be complied with. And whatever it takes to make that happen is what we need to do.
Mr. OBERSTAR. You don't fear some after-effect upon passenger service if we get tough on cargo?
Mr. GREENWALD. Yes, I do. Oh, I'm sorry, I started to answer your question before you finished the question.
Page 33 PREV PAGE TOP OF DOC Mr. OBERSTAR. You answered the question you thought I was asking.
Mr. GREENWALD. I think that there are signs in the negotiations that both parties prefer to resolve the cargo issue independent and separate from the passenger issue and then the passenger issue will be addressed.
Mr. OBERSTAR. I could run through ten issues on doing business items, and I'm going to do that later, that have been sticking points over the past. I want to see where we stand on those today but we have other members who want to ask questions.
When our chairman said if we pull the plug the Japanese will lose more than we will, just one moment. There is another carrier involved who is not testifying today, and that's their choice, but the fact is that Northwest Airlines has a very significant passenger and cargo service into Japan and there would be an adverse effect on them as well. Therefore, I think the countermeasures that specifically attack the issue that is at stake here, that Federal Express is not allowed to engage in hubbing service in the Pacific Rim and that the Japanese are seeking to widen their advantage in fifth and sixth freedom rights should be curtailed and only that much of that market should be attacked. And you concur in that approach, Mr. Smith?
Mr. SMITH. I agree with that, Mr. Oberstar. I think that it should be specific to our situation.
Mr. OBERSTAR. And you would concur that we need to have some staying power?
Mr. SMITH. Well, we need to be very decisive and be prepared to stay the course.
Mr. OBERSTAR. I think that's been the big shortcoming in our negotiations in our trade dealings with Japan over the years. We keep changing negotiators, we don't even have an assistant secretary for international trade at DOT. And every time we do get one, it goes through a long training process and learning process and by that time they've stolen the march on us again or denied us rights and denied us access.
Page 34 PREV PAGE TOP OF DOC I would like to explore, and we can maybe do that later, what would be the countermeasures that Japan would impose on the U.S.
Mr. SMITH. They have said that if the United States puts countermeasures in place that they will take some action against ourselves and Northwest. I think it is significant because Northwest has taken a very different position than we have and United, which Mr. Greenwald can speak to far better than I, and their position is that the treaty notwithstanding that this issue should be handled on a more ad hoc basis. I refer to the White Paper that they have circulated around the Hill on both the Senate and the House side. We strongly disagree with that but, obviously, Northwest has the right to their opinion. But despite the fact that they have attempted to approach the situation in that manner, I think it is significant the Japanese have specifically targeted them for countermeasures as well. This is something that many countries and many foreign carriers recognize about the U.S. system, they generally have one or two carriers involved in any issue where we have a multiplicity of interests. So they attempt to get those interests pursuing different objectives, which is the case here with Northwest as opposed to FedEx and United.
Mr. OBERSTAR. Playing cargo off against passenger. We must not fall into that trap.
Mr. SMITH. And one carrier against the other, as was the case in the recent U.S.-U.K. negotiations.
Mr. OBERSTAR. My time is up. We will come back later for other questions.
Mr. SMITH. Mr. Chairman, could I clarify one technical issue here because it is critical to the understanding. The treaty provides under Article 12 that the flight schedules shall be primarily scheduled for the benefit of third and fourth freedom traffic. The schedules which we have filed with the Japanese government meet that test. We actually should call the Subic Bay operation a transshipment center as opposed to a hub. All in the world it is, is one additional flight over Japan that goes to Subic and there we use smaller airplanes in what's called a change of gauge operation. The primary focus of those flights, both change of gauge and the single flight that comes back over Japan, are designed to facilitate third and fourth freedom traffic. The Japanese on a number of occasions have intimated that they want to put in some sort of reporting controls where each flight they would look to see if it is third and fourth or fifth freedom traffic on board. We've told them that we're perfectly willing to submit to any reporting and restrictions that they want on fifth freedom provided they are willing to do the same thing on sixth freedom. Of course, predictably, they've dropped their interest in that.
Page 35 PREV PAGE TOP OF DOC Mr. OBERSTAR. You're right about that. But go back to 1986 when Flying Tigers wanted to have service into Osaka in which service they could shift from one aircraft to another and one type of service to another and the Japanese refused to allow it while permitting such change of gauge and change of service for their carriers. It's not a new issue. We're entitled to it. We ought not to give up anything for it.
Mr. SMITH. I agree with that, Mr. Oberstar. All I was pointing out is that we're not talking about a change of gauge in Japan. The change of gauge takes place down in the Philippines. The Japanese should have nothing to say about that.
Mr. OBERSTAR. All the more justification for us to have that service.
Mr. DUNCAN. Thank you very much, Mr. Oberstar.
Mr. Smith, a few days ago one of our leading national newspapers, the ''Christian Science Monitor,'' a paper that has been very friendly to the administration, had a headline that said, I don't have the headline in front of me, but it said something to the effect that U.S.-Japan trade spat fizzles into vague agreement. And the lead paragraph of the story said the U.S. backed down, and it used that language. You testified a few minutes ago and said the history of U.S.-Japan aviation relations have shown that we have been very timid for reasons that you said have been relegated to the dust bin of history. Have you made this concern about our timidity very clear to the administration, and have you received any assurance that they will be strong in their negotiations, in their discussions this time for possibly the first time ever?
Mr. SMITH. As I said, Mr. Chairman, it has been going on for 2 years. The U.S. took countermeasures against Japan and then withdrew them. Since that time, I have spoken repeatedly to all sorts of people within the administration at Department of State, the Department of Transportation, in the executive branch. The President has been terrific on this. He has spoken about this issue to the Japanese Prime Minister on three separate occasions, the last of which was at Halifax. And so I give the administration very high marks over the past year in focusing on the issue. And I do believe that they are prepared to take action.
Page 36 PREV PAGE TOP OF DOC My big concern is twofold. First, as Mr. Oberstar and Mr. Greenwald said, that to resolve this situation that they will make concessions to the Japanese. In other words, that we will negotiate against ourselves and give them rights just to simply honor the rights we already have. We don't want to stop Japanese carriers from doing anything. We welcome them to have any kind of rights in terms of all-cargo operations that they want in the United States. But that's a very big concern that they will do that. And then second, if we're unable to come to an agreement, my big concern is that the United States countermeasures will be insufficient to resolve the issues. The show cause order, quite frankly, was not nearly as comprehensive and as decisive as it should have been in our opinion.
Mr. DUNCAN. This morning we have cameras from the three major Japanese television networks. We do not have the major American networks here. What does that say to you? Does it say that the Japanese realize the importance of this issue to a greater extent than perhaps the American public does at this time? What message does that send to you?
Mr. SMITH. Traditionally, Japanese news coverage is much more focused on international and business issues than U.S. news media. And secondarily, I think that the Japanese government and the Japanese press do understand that this is a huge issue. This is one of the largest bilateral trade relationships in the world and the aviation issue is simply symptomatic of much broader issues such as you talked about. So there is much greater interest on this in Japan. And not just in Japan, Mr. Chairman, there's interest in it all over Asia because based on what the United States does in the Japanese situation, it will have a direct effect on the approach that Chinese aviation negotiators will take with the United States as well. So much more interest there than here, don't you think, Gerry?
Mr. GREENWALD. I would like to underscore the last observation Fred made. To me, it comes back to this basic principle, which is if two nations reach an agreement, one shouldn't be able to pick and choose from the agreement which parts of it they like, which they don't, which ones they're going to comply with. If we among nations start down that path, there's just a crazy end in sight. It is true in my view that this is an issue primarily about the U.S. and Japan, but it is being watched by other Nations and I think we have got to be absolutely firm on compliance with existing agreements. I sure wouldn't like to have whoever is involved in all of this conclude that the American business community or the American public for that matter are less interested in this subject than may be true in Japan. I suspect that one of the reasons this morning is that this subject is competing with some other interesting subjects for U.S. television coverage.
Page 37 PREV PAGE TOP OF DOC Mr. DUNCAN. Mr. Oberstar made the interesting comment that our networks are showing O.J. Simpson and Susan Smith and that our people are viewing soaps while the Japanese are selling soaps.
Mr. DUNCAN. But as I said earlier in this hearing, this does give us a real opportunity to send a message to the Japanese.
Let me ask you this, Mr. Greenwald. Mr. Smith testified a few minutes ago that his Pacific business or Asian business was now about a billion dollar business for his company and that it was growing at the rate of 22 to 24 percent a year which is pretty phenomenal growth. I think that one message here is that the opportunities that may be out there are perhaps even greater and so the potential is amazing. But what does this mean to your company? Have you analyzed that and what does it really mean to United Airlines in the future?
Mr. GREENWALD. Passenger traffic throughout the world is growing but it is growing in the United States typically at about a 2 to 3 percent a year rate. It is growing in the rest of the world at a pace of 5 to 6 percent a year. The Pacific Basin is growing faster than all the rest of the world, I don't have the specific percents. Their economies are rising in percentage terms faster than the average around the world.
For Untied Airlines, the Pacific market is very important to us. As we look at our current operations, nearly half of all of our flying now is flying outside of the United States, and of that half, nearly half of that is in the Pacific. As we look at where we want to grow in the next several years, we see our best opportunities in the Pacific.
Mr. DUNCAN. Let me ask you one last thing very briefly. Your company has prepared several photographs showing a great disparity between the conditions at the main airport for Tokyo between what the Japanese carriers are given and what the American carriers are given. Would you tell us a little bit about that, what effect it has.
Page 38 PREV PAGE TOP OF DOC Mr. GREENWALD. I'd like to do that, Mr. Chairman. What we're referring to is a document which is really photographs of the two passenger terminals at the primary airport in Japan at Narita. I want to take the opportunity to make a point, which is that with regard to passenger activity between Japan and the United States that the issue of efforts to advantage the Japanese airlines does not stop with the trade agreement per se, but goes on to be seen in the form of on the ground efforts in Japan to favor the national carriers.
This is not the only example but it is the clearest one that I have brought to the committee this morning. Narita was an older airport that had older terminals. But a new terminal has been completed in which are housed JAL and ANA, the two passenger carriers of Japan, and they in turn lease to some smaller airlines to fill up the rest of the space. It is a wonderful passenger friendly terminal. The bigger foreign carriers, United and Northwest, are in another terminal, an old terminal.
The original plan for the airport was that the old terminal would be replaced with a new terminal 17 years later. The U.S. Government did negotiate with the Japanese to reduce the time to 10 years. We are now one year into the 10 years and we are told that the Japanese are already 1 year late on the 10 year timetable. Now this is from some of the world's most efficient construction companies and I cannot in my wildest dreams, wildest nightmares believe that a new terminal couldn't be constructed in 3 years. It is crowded, it is unfriendly to passengers, and it is a disadvantage when competing for passenger traffic.
Mr. DUNCAN. Thank you very much. I've gone way over my time. I want to go next to Mr. Clement.
Mr. CLEMENT. Thank you, Mr. Chairman. It's a pleasure to have you here, Mr. Greenwald, Mr. Smith. Several newspaper editorials have labelled this dispute as the recent auto dispute in reverse. In the auto dispute, the Japanese argued against managed trade. In this dispute, the Japanese desire managed trade to ensure their chunk of the cargo and passenger markets. What are differences between the air cargo dispute and the auto dispute with Japan, and why is Japan reversing its position?
Page 39 PREV PAGE TOP OF DOC Mr. SMITH. Well, the most significant issue, Mr. Clement, is the fact that there is an existing very, very detailed and specific treaty. I suppose someone could make an argument, as I understand it in the auto parts dispute, that the United States did not have the authority to act unilaterally before taking it to the World Trade Organization and there was some ambiguity. But in this particular case, the aviation treaty between the United States and Japan is crystal clear.
I think the only thing I could say as to why they are doing it is I guess it's human nature to take whatever position is most advantageous to your own about supporting managed trade or not supporting managed trade. Traditionally, the Japanese have referred to the 1952 treaty as somehow unfair or unbalanced. But that goes back to the point that both Mr. Greenwald and I made that over the years the United States has let people around the world somehow say that sixth freedom traffic flows are all mine and fifth freedom traffic flows are somehow illegitimate and you shouldn't have those rights. They are the same economic opportunity. So I think it has just been rhetoric. I can't answer why they're taking one position on one issue and another on the other.
I might also say that in my written testimony we describe exactly the same type of thing that Gerry Greenwald is talking about in the passenger terminal as it applies to cargo operationslack of intermodal authorizations, lack of self-handling, so forth. It is a very difficult system in which to operate. And by design or by accident, the government of Japan tends to take those actions which advantage their commercial interests. That is a pattern which is indisputable over a long period of time.
Mr. GREENWALD. I think the way that you describe your question is an accurate way of describing the situation. It is convenience. That when it came to autos, the Japanese wanted free access to the U.S. market and they were quite content to use indirect protection to discourage free trade in the auto sector in Japan. I would draw a parallel to what goes on on the ground in the airline industry with regard to the tactics used, I think there is a similarity. The two terminals on the ground, the Japanese in the auto area using indirect methods to make it difficult to distribute U.S.-made autos in Japan; there's a parallel.
Page 40 PREV PAGE TOP OF DOC The big difference that I am really repeating, as Fred has pointed out, there was some ambiguity in legal agreements or documents when it came to the auto issue because the Japanese have used indirect methods for protection. On this subject there is no ambiguity. There are written agreements and they have unilaterally chosen not to comply.
Mr. CLEMENT. Explain to me why it is necessary for the U.S. to propose unilateral sanctions against Japan rather than multilateral sanctions?
Mr. SMITH. It goes back to the construct of the world aviation regime. The 1944 convention rejected multilateralism and specifically adopted a bilateral framework for all aviation agreements among the countries of the world. So there is no multilateral forum to appeal this case to. The aviation industry is specifically not covered by the GATT agreements because of the 1944 convention and the bilateral framework in which we operate. So the only opportunity that the United States has to protect the interest of its carriers, many of whom, as we have and United, have invested hundreds of millions of dollars in these enterprises, is to take unilateral action.
Mr. CLEMENT. Chairman Greenwald, I understand that you support the firm stance Secretary Peña and DOT have taken in this dispute. Yet, I am unclear what you believe the DOT should do at this point. If the U.S. should not pursue sanctions or renegotiations on behalf of Federal Express, American, and Delta because it might affect the benefits of the current bilateral, then why should the U.S. pursue more benefits for your company in the U.K. bilateral negotiations, and what do you believe the U.S. action should be?
Mr. GREENWALD. I'd like to try to respond to that if I haven't been clear. I think your question brings up a good and new subject as well, that being access for other U.S. flag carriers. I believe that the position that the administration is taking is very appropriate. I know that my colleague Fred Smith supports the strong stand that the U.S. Government is taking. I simply wanted to observe earlier, and maybe that's why I confused my position, that in the end growing sanctions will hurt both sides. This is not a win-lose situation; it is a lose-lose situation. But I don't see any alternative at this point. If that perhaps makes it a little clearer.
Page 41 PREV PAGE TOP OF DOC With regard to additional access for U.S. carriers, I have read, I've heard publicly that both American and Delta would like more flying rights to Japan. We do not in any way object to their efforts. I might observe that was not necessarily true when it came to our efforts to add flying to the U.K. But I have stated to all of my colleagues that historically, look back 10 years, we have been so good at fighting with each other to the detriment of opportunities for all of us to fly more internationally that we ought to listen to a wake up call and that we ought to be focusing, all of us, on what is right for the United States and then we'll bid for whatever additional flying rights are achieved.
With regard to Japan in particular, our position is United has existing rights and those should be complied with by Japan. We think it would be a very bad trade, virtually a sucker trade, to have some of United's rights removed in exchange for adding some rights for American and Delta and permitting more rights for the Japanese. The United States end up with nothing, at best, and the Japanese end up with more. We think that's a sucker deal. We think the right direction, and it is consistent with our Nation's desire to liberalize trade, is that the Japanese should get some more rights and American and Delta should get some more rights.
Mr. CLEMENT. Mr. Greenwald, Mr. Smith, thank you for your comments. I might say, Mr. Chairman, both of our nations are great nations. We want trade opportunities, we want our people to do well and to prosper. But we want fair trade as well. The Japanese carriers already enjoy a huge 5-to-1 advantage in cargo ton miles in their service between other Asian points and the United States compared to the reciprocal market for U.S. carriers. Also, U.S. cargo capacity between Japan and other Asian nations has declined by 33 percent while Japanese capacity has grown by 57 percent.
I say also that if the State Department and the U.S. Department of Transportation are not going to represent our interest and represent the U.S. companies, I think, Mr. Chairman, we're going to have to look seriously at the U.S. Trade Representative Mickey Kantor taking over those responsibilities rather than the State Department and the DOT being involved at this time. Mr. Smith said a while ago, and I think he's correct, negotiators should try to accomplish objectives. Treaties should be abided by by both parties. That's not happening today. I do believe the Japanese feel strongly that we will not take countermeasures. That's surely not in our best interest. Thank you.
Page 42 PREV PAGE TOP OF DOC Mr. DUNCAN. Thank you very much, Mr. Clement, for your very fine statement.
We will go next to Mr. Hutchinson from Arkansas.
Mr. HUTCHINSON. Thank you, Mr. Chairman. I want to compliment you and thank you for calling this hearing today and I guess for your courage in calling them the same day they're having the Waco and the Whitewater hearings. Certainly as important as those issues are, the issues being addressed here today are equally important.
Thank you panel. Mr. Smith, thank you particularly for your testimony today. I think that the American people are conceptually and philosophically in support of free trade. I think, as Bob was saying, they believe in free trade and fair trade, but time and time again they've been frustrated by their perception that we get out negotiated, we get taken, that we're not aggressive enough, that we're too timid, and that we make sucker deals. I think that's the way the American people feel. And the experience that you've recounted today kind of underscores the basis for that frustration that the American people feel, the fact that in the auto dispute Japan was advocating free trade and now in this situation they advocate managed trade and capacity limits.
So while we all hope that there will be a very positive outcome to the discussions going on today and that this dispute will be resolved, it does not necessarily solve our bigger problem of this perception that the American people have and the basis of that perception of our being out negotiated.
Mr. Smith, I think earlier, I had to step out, but I believe in one of your answers you mentioned that you thought that it was appropriate for Congress, regardless of the outcome of this dispute and what happens today in the discussions that are taking place, that it is time for Congress to step in and to establish some parameters for our negotiators. I was wondering if you could just reiterate for moment what you see the congressional role being. What might we do that would be helpful in future disputes?
Page 43 PREV PAGE TOP OF DOC Mr. SMITH. Well, Mr. Hutchinson, I've been one way or another involved in this business now for 25 years, so I'm not just referring to the events of this issue. I have watched for many years the United States conduct aviation negotiation all the way back to Secretary Coleman in the Ford administration and have direct and personal experience in it for well over 10 years. Until very, very recently, this may sound incredible to you, but until very, very recently most of the aviation negotiations took place without any significant economic analysis. It was essentially approached on the basis of a horse tradeI want this, you want thatand the objective was not to secure certain economic opportunities and compare those against the economic opportunities of foreign carriers, it was simply to make a deal. I think in large measure that is what lead to the famous or infamous Bermuda II negotiations that Gerry Greenwald talked about.
More recently, I think that because of the carriers' insistence, certainly ours, I know United approaches it this way and I think American does, there is a much more thorough understanding of the economics involved. But I will tell you these statistics that I showed you today and the relative economic opportunity came as an enormous surprise to many of the people in the U.S. Government because they had never bothered to do that type of economic analysis.
So the policy statements under which our negotiators are dealing are quite good. Mr. Oberstar mentioned the hearings that were held a number of years ago and he was very instrumental in laying out a series of policy objectives. But for one reason or another, those policy objectives have not been followed particularly well. Part of it, as Gerry mentioned and as I've mentioned, are the multiplicity of interests in the United States versus the generally singular interest of foreign countries and carriers. If you go to Hong Kong, Hong Kong's aviation policy has been traditionally set by CAFE Pacific. The United Kingdom's aviation policy has been traditionally set by British Airways. In Japan there are threeJapan Air Lines, ANA, and NCA. In Korea, there was one until very recently. In Taiwan there was only one until very recently. In France there is one.
Page 44 PREV PAGE TOP OF DOC So what has traditionally happened is that foreign carriers, with the assistance of their governments, try to use the aviation bilateral system as a sword or a shield, depending on what the circumstances are, and then to split U.S. economic interests to work against one another. To some degree that's the case in the Japan situation. Northwest has a very different point of view and makes the point that they've been favored by the Japanese and have gotten certain routes and what have you. Northwest, as a consequence of that, is arguing against countermeasures and more or less taking the Japanese line of thinking on this, which is their right. I disagree with them but they certainly have the right to their opinion.
So I think that the genesis of the problem is the fact that we have somehow let these foreign interests take the position that fifth freedom opportunities are somehow inappropriate, unfair when in fact they are exactly the same economic opportunity. Why should British Airways be able to take a Polish citizen or a shipment of Polish cargo to and from the United States, it's U.S. traffic now, and a U.S. carrier not have the same economic opportunity to take U.K. traffic to and from Poland? So they have positioned this, I don't say it is with the complicity of the U.S. Government folks, but just with the unwillingness of the U.S. Government people to approach it as the same economic opportunity and to quantitatively assess what those economic opportunities are.
Mr. HUTCHINSON. Boy, that red light came on quick. Do you think we could arrive at an objective economic basis for analysis of this kind of thing so that we could put that into a negotiating process?
Mr. SMITH. Sure. In my opinion, that's exactly what should happen. The issue should be then how do you distribute the benefits among our multiplicity of interests. I wholly concur with what Gerry Greenwald said, the issue is to liberalize from this point forward. Taking away existing rights and redistributing among existing U.S. interests is clearly not something we want to do.
Page 45 PREV PAGE TOP OF DOC Mr. HUTCHINSON. Thank you. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Hutchinson.
Mr. Smith, fifth freedom rights for the U.S. are exactly the same as sixth freedom rights for the Japanese.
Mr. SMITH. It's the same type of economic opportunity.
Mr. DUNCAN. It's the mirror image.
Mr. SMITH. It's the mirror image, exactly.
Mr. DUNCAN. We will go next for questioning to the gentleman from Illinois, Mr. LaHood.
Mr. LAHOOD. Mr. Chairman, I don't have any questions. I want to thank you for holding this hearing. As a new member of the committee, it is very enlightening to me that this is another example where the United States gets totally screwed by the Japanese government. I don't know any other way to put it. I just think this is outrageous. This is so outrageous on its face. I have tended to not lend credence to those Americans who want to be Japanese bashers. I think generally that's the wrong approach. But this kind of relationship is what drives Americans crazy against the Japanese. It drives them up the wall. And I guarantee you if America knew what was happening here, we would have as many people lined up outside of this hearing room as there is for the Waco hearings and the Whitewater hearings.
I think what we ought to do, Mr. Chairman, I hope that you or Mr. Shuster will introduce legislation. I guarantee you that if that happens, if you introduce legislation today, we would get their attention. If we attached an amendment to the transportation bill, we would get their attention. I hope that you will do that. I hope somebody will do that. This is just another classic case where America just gets pushed and pushed and pushed and there is no quid pro quo. Thank you.
Mr. DUNCAN. Thank you very much, Mr. LaHood. Very well stated. You have been an excellent member of this subcommittee and I appreciate your remarks. That's one of the purposes of these hearings today. You couldn't be here when we first opened, but I did express that Secretary Peña and the Department of Transportation has stated that it wishes to testify and express its views but the Secretary is meeting today with the Transport Minister from Japan in Los Angeles. So if progress is not made based on these hearings today and the meetings that are being held in Los Angeles this afternoon, then we are going to go further into this, I can assure you, with the Department of Transportation and, if necessary, on the floor of the House and through the full Congress.
Page 46 PREV PAGE TOP OF DOC I would like at this time to call on my good friend, Mr. Ewing. Illinois is well represented on this subcommittee.
Mr. EWING. Thank you, Mr. Chairman, and thank you for holding this hearing. Aviation is very important to Illinois and we think we have a lot of interest to protect in this committee. To Mr. Smith and Mr. Greenwald, thank you for being here and expressing your views.
Mr. Greenwald, you mentioned in your summary of your testimony that the factors which created the disparity are only temporary. Could you enhance that a little bit for me.
Mr. GREENWALD. Yes, sir. I would like for the moment to draw a parallel to the auto industry. Twenty years ago the Japanese auto manufacturers were not competitive. They did not produce quality cars. They did not produce cars targeted or tailored for the tastes and preferences of the U.S. public. Going back 15 years and certainly today, even with a strong yen they are very competitive. They do quite well head-to-head with U.S. auto manufacturers.
The parallel I wanted to draw is that at the moment the Japanese airline companies are not competitive. Their costs are too high. They are taking steps to bring their costs in line. I believe that it is a matter of time when they will be competitive. It seems to me a bad mistake to repeat Bermuda II by assuming that they need permanent help. If we were to make the mistake of changing the structure of the current agreement and they then get well, there is no question in my mind the U.S. flag carriers are going to end up losing a big part of that market share, as was true with the U.K.
Mr. EWING. Is your opinion then that the Japanese will be more flexible in granting U.S. flag carriers beyond rights in Asia when their airlines become more competitive?
Page 47 PREV PAGE TOP OF DOC Mr. GREENWALD. If we stick to the existing agreement, they will be more competitive over time, their revenues will grow, and our revenues will grow as those markets develop in Asia, markets such as I mentionedVietnam, India, Indonesia. We'll both prosper. But if we are refused the rights to fly into those markets, only they will prosper. I think that's totally inappropriate. If I could draw a parallel, it would be as if in the auto industry we said, sure, you're welcome to sell Japanese cars in the United States but not west of the Mississippi.
Mr. EWING. So the bottom line then is that we need to pursue those treaty rights vigorously to have our access to those other markets and the beyond rights?
Mr. GREENWALD. Yes, sir.
Mr. EWING. Thank you. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much, Mr. Ewing.
Mr. OBERSTAR. Thank you, Mr. Chairman. I appreciate the comments of our colleagues. There seems to be a very strong consensus of the support for countermeasures, firm action, and staying the course. My judgement is that there is no absence of authority that could be filled by new legislation. The Department of Transportation and Department of State have all the authority they need to be firm with the Japanese, to negotiate vigorously. Legislation, however, cannot implant steel in the backbone or wisdom in the negotiating process. That's what these hearings I find over the years have done is implant a little steel in the backbone of our negotiators to show that there is support in the Congress and therefore among the American public for the positions our negotiators take on behalf of our carriers. That's what we need right now is to be firm and to be consistent and persistent.
Working against other carriers, that's exactly what the Japanese have been successful in doing, pitting one or more of our carriers against other ones. Precedent is 198485 when we had negotiations with the Japanese and Japan wanted access to the U.S. market for a new all-cargo carrier, Nippon Cargo Airways, and our incumbent major cargo carrier Flying Tigers found great fault with that proposal, a serious threat, didn't want them into the Chicago market which then represented one-third of the U.S. cargo trade. There were some carriers that were interested in start-up service, or as the Flying Tigers then said ''upstart service,'' and a new service into this marketplace, a small package service. They said let NCA into the U.S. marketplace, we'll compete with them. The issue keeps coming around, coming around, and coming around. We must not allow them to play the ends against the middle. And U.S. incumbent carriers now have got to work together and recognize they all have a stake in this and they all have something significant to gain.
Page 48 PREV PAGE TOP OF DOC Mr. Smith, when you bought Flying Tigers, did you anticipate that you bought the beyond rights?
Mr. SMITH. The authorities held by Flying Tigers, Mr. Chairman, were the basic reason we bought Flying Tigers.
Mr. OBERSTAR. You anticipated having those rights?
Mr. SMITH. And the sale was conditioned on those rights being transferred.
Mr. OBERSTAR. Mr. Greenwald, when United bought Pan Am's Pacific routes, did you anticipate that you also bought beyond rights that were available under the treaty?
Mr. GREENWALD. There is a direct parallel here. United bought Pan Am's Pacific routes and that was also conditioned on the transfer of all those rights fully and it was always intended that they would be put to use.
Mr. OBERSTAR. And in the aftermath of the acquisition in both cases when both carriers tried to exercise those rights, is it not true that the Japanese came back and said you can't do that, we have other rights that we want to exercise in the U.S. in payment for exercising rights you claim under your acquisition. Is that correct?
Mr. SMITH. That's certainly been our experience.
Mr. OBERSTAR. Would you describe for us how the Subic Bay hub would work. It is a very different kind of service. You've said it probably shouldn't be called a hub, it ought to be called a trans-shipment center. Describe what service you're going to provide. I think in doing so you're not revealing any trade secrets because obviously the Japanese know what you propose to do there, that's why they want to stop you from doing it.
Mr. SMITH. Not only that, Mr. Oberstar, I personally went to Japan and met with the Minister of Transport's predecessor and his staff a year before we put the Subic Bay operation in place. We assembled all of the appropriate people from the U.S. Department of State, from the Department of Transportation and briefed them extensively on it 15 months in advance of the scheduled opening date precisely so that it wasn't a surprise to anybody and everyone understood it.
Page 49 PREV PAGE TOP OF DOC The description of it is very simple. Our flights to and from the United States and Japan over Narita and the new Kensai airport in Osaka simply continue on to Subic Bay, which ought to be Manila except for the fact that there is no additional cargo space available in Manila. Subic Bay is to Manila what Dulles is to Washington National. It's the same general metropolitan area. The Japanese have made a great deal out of that, by the way. We have under the treaty the perfect right to go to any point in the Philippines but they have made a big point that this is Subic Bay airport rather than Manilla.
When those flights arrive in Subic Bay, the traffic is then disassembled in essence and transported on to the markets of Southeast Asia using smaller aircraft, which is referred to in the aviation business as a change of gauge operation. So our McDonnell Douglas MD11s fly to Subic and there we have a number of airplanes, A310 twin engine wide bodies that go to Kuala Lumpur, Singapore, Cebu, Bangkok, Peñang, hopefully Vietnam. So that's the way it operates.
Mr. OBERSTAR. And you bring that cargo back to Subic Bay and combine it.
Mr. SMITH. And there we reassemble it and some of the traffic is in Tri-Asia, the fifth freedom traffic, and some of it is third and fourth freedom traffic going to and from the United States. The flights go back over Japan, deposit their traffic destined to Japan, and then pick up additional traffic from Japan to the United States and return home.
Mr. OBERSTAR. If you're not proposing to conduct that type of service but propose to simply go to one or another point, pick up service, then go to Tokyo directly, would the Japanese oppose that?
Mr. SMITH. Well, they have. In the summer of 1993, they refused to approve exactly that type of operation which was just a flight extension to Cebu, an industrial city south of Manilla. Again, the treaty gives us that right but they just simply refused to approve it. And it was on that disapproval that we filed our complaint and the United States took the countermeasure on the Sendai flight of Japan Air Lines.
Page 50 PREV PAGE TOP OF DOC Mr. OBERSTAR. The Japanese do not have any comparable transshipment point outside of Japan in Southeast Asia, do they?
Mr. SMITH. No, sir. But they don't need a transshipment point. They have it, it's called Japan.
Mr. OBERSTAR. They don't have one because they don't need it.
Mr. SMITH. Right.
Mr. OBERSTAR. What service beyond Japan does United provide?
Mr. GREENWALD. We are doing some flying, using beyond flying out of Japan at present. I should bring back a chart that will describe where we are.
Mr. OBERSTAR. Include both passenger and cargo service.
Mr. GREENWALD. Well, yes, sir. But the distinction in our case, of course, is we are primarily a passenger carrier and we do sell belly space on our passenger carriers for cargo.
Mr. OBERSTAR. Belly space but that's it. Okay.
Mr. GREENWALD. We do beyond flying at present. We have applied to fly from Japan to Seoul, Korea, and that is the flight that the Japanese have refused to grant. As I said earlier, once these cargo issues are hopefully resolved satisfactorily to both parties, this one is up next. We are looking progressively at flying to other beyond points. I've mentioned Jakarta as an example, we want to fly into China as well where we're not at the moment. And as each of these additional markets becomes a more interesting market, which they will, we will progressively want to fly to several of these other cities.
Mr. OBERSTAR. In the aftermath of the acquisition of Pan Am's routes, United really downsized and virtually abandoned the cargo service that Pan Am was operating. So now you don't really have any all-cargo service; is that correct?
Mr. GREENWALD. We do not fly all-cargo freighters.
Page 51 PREV PAGE TOP OF DOC Mr. OBERSTAR. But you did seek to develop fifth freedom passenger service beyond Japan?
Mr. GREENWALD. Yes, sir.
Mr. OBERSTAR. And you've had to make application in each case. Am I correct that the Japanese treated that as a new application for new service beyond the bilateral?
Mr. GREENWALD. We have faced the same sort of difficulties that Mr. Smith has outlined for cargo. These are agreement rights. The intent had been that we file for information, not for approval, and that there would be a short period of time when our next plan would have been confirmed. Instead, by example, this Japan-Seoul application has been sitting there I think now for about a year.
Mr. OBERSTAR. I want to ask both of you to discuss the financial consequences of delay. But first, this is a characteristic Japanese tactic. In 1969, when Pan Am was designated for an all-cargo north Pacific route and Flying Tigers was designated for an all-cargo transpacific route, the Japanese held up the application and finally agreed only after they received additional rights, Japan-Anchorage-New York and Saipan via Guam. In the early 1970s, when the U.S. under the bilateral designated Continental and Air Micronesia, a joint venture, for service to Japan, the application was held up 14 months while the Japanese dragged their feet and then negotiated additional service for JAL, Guam-Saipan service. They have in the past delayed our access to Osaka, held our carriers up, the Flying Tigers' testimony, replete in the record, had 100 square meters space at the Osaka airport for cargo operations while JAL had the whole airport. And they held us down, held us down until we conceded more rights to their carriers into the U.S.
What is the financial consequence of delay in this case?
Mr. SMITH. In our case, just this quarter alone, June, July, and August, we estimate that it will be $10 million to the bottom line. If it continues on beyond that, because of the shipping pattern and moving into the heavy shipping season, it will be measured in the tens of millions of dollars.
Page 52 PREV PAGE TOP OF DOC Mr. OBERSTAR. Mr. Greenwald, for you?
Mr. GREENWALD. I don't have a precise figure but it is clearly in the millions.
Mr. OBERSTAR. What would you value the U.S.-Japan passenger market at now, in the range of $1012 billion both ways?
Mr. GREENWALD. I'm sorry, sir, I didn't hear the question.
Mr. OBERSTAR. What would you estimate to be the value of the U.S.-Japan passenger trade market?
Mr. GREENWALD. In the billions.
Mr. OBERSTAR. In the $10 billion, $12 billion, $15 billion range? About 5 years ago before the deterioration, it was in the range of $10 billion.
Mr. GREENWALD. I would suppose it is in the $1012 billion range.
Mr. OBERSTAR. We could pursue a number of other issues, and I think I'll just ask you to submit in writing, Mr. Smith, any ''doing business'' problems that you still have with Japanairport curfews, prime time slots, Osaka access, self-handling, warehouse access space, unit load devices, customs duties, ground handling equipment, fuel pipeline charges; some of the old and fondly remembered ''doing business'' issues, I suspect many of them still hanging around.
Mr. SMITH. They are.
Mr. OBERSTAR. I would like to pursue those matters when we have the Secretary of Transportation before us.
Mr. SMITH. Thank you. We would be happy to submit those.
Mr. OBERSTAR. Mr. Chairman, thank you for your generous allocation of time.
Page 53 PREV PAGE TOP OF DOC Mr. DUNCAN. Thank you very much, Mr. Oberstar.
Mr. Greenwald, let me ask you one last question. You said United has applied for rights to fly from Japan to Seoul, Korea, and that application was denied. What justification did they give you or what reasons did they give you, or do they do that?
Mr. GREENWALD. I'll give you the answer but I would not put it in the category in my view of justification. But when we continue to ask, the answer is we have not rejected your application. And when we go on to say but you haven't approved it either, they accept that view.
Mr. DUNCAN. Yes?
Mr. SMITH. Let me make a point. The treaty is quite clear. The press has used this term many times and, in fact, you did just then, Mr. Chairman, that this is an application. We don't have to make an application to the Japanese. We simply have to file our flight schedules. A few months ago, the Japanese were saying in the press that they felt that they had the right to approve these things, they just simply hadn't it done it for 40 years. This was a newly discovered right in the bilateral. They have dropped that argument over the last several weeks because the agreement is so clear.
United's application for Seoul or our application to fly to Subic Bay or Cebu or any of these things we're talking about, what the agreement calls for is those flight schedules must be filed with the Ministry of Foreign Affairs and they must be authorized within 45 days. There is no approval process. The Japanese may, after those services have begun, 6 months later, if they feel somehow that this is destabilizing the market or there is some issues involved, 6 months after those flights have been operated they can call for consultations. So there's no approval or application process called for in the bilateral agreement. It is simply you file your flight schedules and 45 days later they are to take effect. They just simply over the last couple of years have been refusing to abide by the agreement.
Page 54 PREV PAGE TOP OF DOC Mr. DUNCAN. It's in the bilateral agreement but as a practical matter, while you don't really have to apply, as Mr. Greenwald said, he referred to it as an application.
Mr. SMITH. No, I understand that. I think it is an arcane term but I just wanted you to know that the treaty does not call for an application process. It is just a schedule filing process. That's why they gave him the answer that they gave. We haven't not approved it, we just haven't given you authority to fly it.
Mr. DUNCAN. We've got to move on to some other witnesses, but I want to thank both of you for taking time out from what I know are very busy schedules to be here with us this morning and for presenting some very valuable testimony. I would like to say that I, and I think all the members of this subcommittee, have great respect and admiration for both of you. Sometimes in the media or sometimes even those of us in Government imply that to really help people or do good things you have to do it through the Government. But both of you lead companies that provide jobs and help keep our economy strong and make the lives of all citizens better by keeping prices down and making things more convenient. I think that probably you do more good in 1 week than most of the Federal Government does in a whole year. I want you to know that I really appreciate and admire and respect the service that you and your companies provide for this country. Thank you very, very much.
Mr. SMITH. Thank you for having us.
Mr. GREENWALD. Thank you, sir.
Mr. DUNCAN. Next, we have two outstanding gentlemen who have been very, very helpful to this subcommittee in many different ways. Our second panel consists of Mr. Ed Stimpson, the president of the General Aviation Manufactures Association; and we have Mr. John W. Olcott, the president of the National Business Aircraft Association. Two very important associations within the aviation community. Gentlemen, let me welcome you once again to the subcommittee. I appreciate very much that you have come here this morning to testify on these very important issues. We will proceed with your testimony. Once again, I will leave it up to you as to who goes first.
Page 55 PREV PAGE TOP OF DOCTESTIMONY OF EDWARD W. STIMPSON, PRESIDENT, GENERAL AVIATION MANUFACTURERS ASSOCIATION; AND JOHN W. OLCOTT, PRESIDENT, NATIONAL BUSINESS AIRCRAFT ASSOCIATION, INC.
Mr. STIMPSON. Thank you, Mr. Chairman. We have a joint statement and I will start off and Jack will follow me with a few comments. We do very much appreciate your interest in this subject. We are a little different from the testimony you've just heard in the fact that we don't have a bilateral agreement for service to Japan, but we do share some very common themes. One, we do have very severe restrictions on the use of business aircraft in Japan. Airlines talk about filing for rights, well we file for slots and we get turned down. We also regard this as a very serious trade matter because trade and commerce and communication between our countries is being restricted by our lack of access to Japan.
First, let me just give you a quick good news report. Coming back to one of my favorite subjects before this committee, this morning we are releasing our shipment numbers for the first half of 1995. Shipments of new general aviation airplanes are up 12 percent for the first half of this year and dollars are up 30 percent for the first half which is good news for our industry. This leads into the fact that we are seeing new aircraft, as we've previously testified before this committee, being produced in the industry. And it gets right back to why Japan is important to us again.
The Gulfstream V, which will fly in November of this year, is a 7200 mile statue mile airplane, non-stop Washington, D.C. to Tokyo. What company is going to think about buying an airplane if you can't land when you get there? This is just one reason why this issue is so important: we are building long-range airplanes for the new global marketplace. This airplane I have in front of me, for example, is the new Cassna Citation 10 which is the fastest airplane in the civil fleet outside the Concord. It made Los Angeles-New York in under 4 hours the other day, at mach .92. So we're seeing a whole range of new airplanes which are able to fly non-stop to the Pacific Rim. And if we can't use Japan and Hong Kong and other airports, the ability of American business to use these airplanes in these countries and these cities, will be extremely limited.
Page 56 PREV PAGE TOP OF DOC Administrator Hinson, who went to the Far East in November of this year, was a very articulate advocate for the removal of restrictions which have been placed on business aviation in Japan, in China, in Hong Kong. I think he pointed out very well the important role that business aviation is playing not only in terms of access to these markets, but also in terms of trade increasing and exports in these markets. This really works two ways. Access restrigtions not only hurt U.S. businesses wanting to go to Japan, but also limit the ability of businesses in those countries to buy U.S. products if they can't use them in their own country. So this is truly a trade matter and a very important one to our industry.
Fortunately, in Tokyo we think there is a solution. This solution stems around the fact that the old Tokyo International Airport, referred to as Haneda Airport, is an airport that offers a rapid solution to the access problems. Tokyo is very much like Washington, DC in a sense. You have a downtown airport like Washington National Airport , which Haneda is, you have Yakota, which is a military airport outside Tokyo which we are told can't be used because it involves all the defense agreements and joint forces agreements with Japan, and then you have Narita, which is like our Dulles which is 2 hours away.
Currently, the access to Japan is only through Narita Airport, where we have problems getting slots, and Mr. Olcott will talk about that in a minute. But Haneda Airport is downtown and is used only for domestic flights at this present time. It is used also for flights to and from Taiwan, it's got a beautiful monorail going out to it, a brand new terminal, and they're building a third runway over reclaimed land. We're told that airspace is not really the problem, the problem is where to park the airplanes. But I was out there about 3 months ago and it seemed to me there was lots of room to park airplanes.
The approach that Mr. Hinson and others are taking is: with the additional of the new runway, why can't we get some business access to this airport? This would really go a long way in helping trade relations between our two countries. Access to Japan would also help facilitate communication between companies not only based in the United States, but other countries which use these types of airplanes for business purposes in Japan and other Pacific Rim nations.
Page 57 PREV PAGE TOP OF DOC So we very much encourage this committee to take notice of these trade implications. Anything you can do to help forward this effort underway by Mr. Hinson and others would be much appreciated by both Mr. Olcott and myself and would be very timely.
Mr. OLCOTT. Mr. Chairman, thank you very much. I am Jack Olcott, the president of the National Business Aircraft Association. Our member companies are economic leaders, they have annual revenues in excess of $3 trillion, and they employ over 16 million people. They need transportation because transportation facilitates the economy. They need transportation into the markets of Japan and Asia.
This issue of access into Japan is a trade issue, plain and simple. Our member companies fly to the Pacific area at about a rate of 200 flights per month. About 35 percent of those flights have a need to land in Japan. We find that access into the Tokyo region, access into all of Japan is very difficult. Let me explain.
In Narita, the new international airport about 2 hours outside of Tokyo, there are 365 slots per day but only 5 of those slots are available to non-scheduled aircraft such as business aviation. However, the charter flights of let's say JAL also fall into that 5 allotment number. As a result, we only have access to about 2 slots a day in practicality. It takes close to 60 days to arrange access to those slots. We just spoke to a member company the other day, they indicated that with less than 30 days notice it is very difficult, if not impossible, to gain access into Narita.
They also have found that if a member company in the United States is invited to Japan, Japanese authorities can reduce that lead time significantly. The bottom linethis is a trade issue. It is not a capacity issue. We also have been led to believe that of the slots in Narita, 31 go unused each day. As a result, I make the point again, this is not a capacity issue, it is a trade issue.
Page 58 PREV PAGE TOP OF DOC We feel there is a solution. The Haneda Airport, the old Tokyo International Airport, the airport that is to Tokyo as National Airport is to Washington, will be adding an additional runway in 1997. Capacity will increase by 27 percent. We feel that it would be appropriate for business aviation to have access to that additional capacity. We feel this can happen if the United States recognizes the important role that business aviation plays in our trade picture and includes us in any sort of negotiations that they have with the Japanese authorities with respect to aviation issues of access. Thank you very much.
Mr. DUNCAN. Thank you, Mr. Olcott. Let me ask just something we're kind of wondering about. Not having been to Japan, how far in miles is Narita from Tokyo. You said it is 2 hours. Is that 120 miles or is it just because of the congestion and the traffic and so forth that it takes 2 hours?
Mr. STIMPSON. Mainly, it's congestion and traffic. I think it is about 40 to 50 miles outside Tokyo. I can get you the exact number.
Mr. DUNCAN. You have heard several references today to the fact that the Secretary of Transportation is meeting with the Japanese Transport Minister this afternoon. But I am told that this problem of access by business aviation is not one of the topics scheduled for discussion today. Is that your understanding as well?
Mr. STIMPSON. That's my understanding. We've had communication with the Secretary and his people. We have given them white papers and have met with them over a period of time. I guess we're just not at the top of the list right now. But I am very hopeful that this will become a priority item in the Department. It certainly has become a priority with the Administrator in his travels and his speeches and his discussions with the Japanese, and we do appreciate that very much.
Mr. DUNCAN. Obviously, if all of these predictions about the tremendous opportunities for growth for trade between the U.S. and the Pacific Rim countries become increasingly evident, then this is a problem that is going to become much more significant, much more important in the future, isn't it?
Page 59 PREV PAGE TOP OF DOC Mr. STIMPSON. Absolutely. And that's why we face somewhat the same situation that Mr. Greenwald was talking about. We go to Tokyo, we do business in Tokyo and then you go on to Korea or Vietnam or China or elsewhere. So Tokyo is a very important stopping off point because as we go non-stop from the United States to Tokyo by our longest range airplanes, we can't go much further than that either.
Mr. DUNCAN. Mr. Olcott, you said several times that this is a trade issue not some other type of issue. Are you indicating by that that this is something that the U.S. Trade Representative should work out rather than the Secretary of Transportation?
Mr. OLCOTT. We feel the issue should be high on the agenda of the U.S. Trade Representative because the companies that will facilitate trade with Japan and trade with China are the companies that are using business aviation. One of the firms that we were talking to yesterday is in the automotive industry. They were the individuals that pointed out that the difference between going to Japan on their own or being invited to come to Japan is the difference between easy access and difficult access. Furthermore, another one of our major companies in the oil business and does a lot of activity in China. They have found that because of difficulty associated with technical stops, stops for refueling, et cetera, in Japan, they have a great deal of difficulty with their schedules flying business airplanes into China.
Japan is an extremely important region of the world. It is extremely important from a business point of view, and it is also extremely important because it allows launching of flights into other parts of the Pacific Rim.
Mr. DUNCAN. You mentioned that as a practical matter it takes 30 days to get access into Tokyo for a normal business aircraft. Is there a similar problem anyplace else that you can think of where American business aircraft are trying to go into and they have as much difficulty as in Japan? And also, from a different angle, does Japan have any problems getting access or slots here?
Page 60 PREV PAGE TOP OF DOC Mr. OLCOTT. The Japanese flights into the United States are treated like all other flights into the United States. There is no preferential treatment or deferential treatment to them.
Mr. DUNCAN. That was my understanding, but I think we should put that on the record.
Mr. OLCOTT. Access into the Tokyo region tends to be about the most difficult in the world for our members.
Mr. STIMPSON. We do have serious problems in Hong Kong also but we are seeing some solutions come between Macao and the new Hong Kong Airport and Chinzan Airport. So we are more optimistic about Hong Kong than we are Tokyo at this point.
Mr. DUNCAN. Actually, lot of times we hear from witnesses in committees that just talk about problems, they're heavy on the problems but short on the solutions. But you gentlemen are saying that there is a solution here and really a readily available solution in the Haneda Airport.
Mr. STIMPSON. It seems that way to us. When I was there in November, as I mentioned, Mr. Chairman, I went out on this beautiful monorail. They have a brand new huge terminal, six story terminal building and shopping center. They are busy reclaiming land on the other side of the terminal to build this new runway. Many flights coming in but there certainly could be room for a few business aviation flights. Basically, Haneda now is just for domestic flights and the Taiwanese flights, and the Taiwanese people are located in a terminal over on the other side. But it is a lovely facility. And we say, gee, why isn't this available? It just makes no sense to us. I suggested when I met with the Japanese civil aviation authorities about the possibility of a test program. I said how about giving us five or ten flights a day to see how well it can work out. Well, that's very difficult, you know.
Mr. OLCOTT. Mr. Chairman, I believe that we can focus on this issue if the U.S. Government recognizes that business aviation is part of the Nation's transportation system. In the recent international aviation policy statement by the Department of Transportation, there was no mention of business aviation; yet, business aviation provides access to ten times the number of airports in the United States with any commercial service and a hundred times the number of locations with convenient service and 75 percent of all airline flights go into only 55 hub locations. We feel that business aviation is a partner with the airlines in providing our Nation with the finest air transportation in the world. Therefore, it should be included with any sort of policy statement, including any international policy statement, dealing with aviation.
Page 61 PREV PAGE TOP OF DOC Mr. DUNCAN. I think it is fair to say that this subcommittee recognizes the very great importance of business aviation in the overall picture and that is why we have you here today.
I want to go at this time to Mr. Oberstar.
Mr. OBERSTAR. Thank you, Mr. Chairman. I think it is most appropriate to include business aircraft in the hearing today. I fully concur in your observation about the importance of business aircraft in our domestic marketplace and in the world marketplace. As you know, we have on this committee worked very vigorously to advance the cause of general aviation aircraft manufacturers. I think we have achieved a milestone breakthrough in the last Congress; that is, permitting the manufacture of new generation aircraft that will open up new international market opportunities. We used to sell $135 million in general aviation aircraft overseas decades-plus ago before the toll of liability started catching up with the manufacturers and just about put them out of business.
But certainly in the business aircraft arena, we have, as the United States has everywhere, excelled. But it doesn't do us much good to make great aircraft if we can't sell them or operate them abroad. Has your association talked with the Department of Transportation and Department of State about access to Japan's markets? If so, what has been their response?
Mr. STIMPSON. Yes, we have talked to both of them as well as USTR. I think they are sympathetic and I think they have tried to understand our problem. We've had a lot of cable flow back and forth. But, unfortunately, no results as of this date. But we are not going to give up easy, and I think some of the things that Jack mentioned about the possibility of incorporating this into international aviation policy would be extremely helpful.
Also, some of our people have met in Tokyo with Ambassador Mondale, who has shown an appreciation of this and supports what we're doing here in this regard. So we are encouraged by some of the vibes we're getting out of the Government. I think it is just one of these things we need to really keep at.
Page 62 PREV PAGE TOP OF DOC Mr. OLCOTT. Mr. Oberstar, we've also been in contact with fledgling business aviation organization in Japan. So we are working the problem both from a community point of view in Japan and a political point of view and a trade point of view here in the United States.
Mr. OBERSTAR. The reality is that very few other countries have as much general aviation activity as we have in the United States. Does the fact that there is limited GA operation in Japan have an effect upon the thinking of our Japanese trade partners when it comes to the issues you're setting forth; that is, they simply don't understand it, on the one hand, and, therefore, don't treat it very well on the other?
Mr. STIMPSON. I think that's a very good point. I don't think they understand general aviation the same way we do. They historically have not had the infrastructure, the airport development, they have not historically had the emphasis, although they have made the Fuiji, a light single engine airplane, they've been involved in the Mitsubishi program, they've been involved in the Diamond Jet program. There has been activity in the general aviation area but they have not used it in the way we have in this country, no question about it.
Mr. OBERSTAR. Corporate aviation is not covered in the U.S.-Japan bilateral; is that correct?
Mr. OLCOTT. No, sir. I believe
Mr. OBERSTAR. Not specifically covered.
Mr. STIMPSON. As far as the manufacturing, of course, we are included under the aviation agreement of GATT. So as far as manufacturing
Mr. OBERSTAR. That's for sales of aircraft, correct?
Mr. STIMPSON. Yes, sales of aircraft but not the service aspect.
Mr. OBERSTAR. Not the operation of aircraft and service provided by aircraft.
Page 63 PREV PAGE TOP OF DOC Mr. OLCOTT. In that category, we share the same thing that Mr. Smith was referring to this morning.
Mr. OBERSTAR. I had quite some discussions last year with Mickey Kantor during the time of the GATT negotiations about aviation rights. I think you came out pretty well on that.
Mr. STIMPSON. Yes, we were very pleased with the outcome of that. We thank you for your effort.
Mr. OBERSTAR. What would you like to see, and have you set forth a position paper for the Department of Transportation and Department of State, on inclusion of the corporate aircraft operations under our bilateral? What would be the principal outlines?
Mr. STIMPSON. Perhaps I might be a little wary on that after hearing the two gentlemen here this morning going through what they do with third, fourth, fifth, sixth freedoms. I think this is perhaps a little simpler. I think we would like the same interest and emphasis from our U.S. Government but let's see if there is something we can't do over here about taking off some of the current restrictions and making some slots available. I'm not sure we need to get into the complications they do under their existing bilateral.
Mr. OBERSTAR. I understand that. But your problem is access to Japanese airports.
Mr. STIMPSON. Right.
Mr. OBERSTAR. Are the Japanese being resistant because those rights are not covered under the bilateral, or are they being resistant because they say there is congestion at Narita and Osaka and elsewhere and therefore they can't give you landing rights as requested?
Mr. OLCOTT. Sir, I think that if the Japanese were aware of our interest as a Nation in business aviation, we would do a great deal to help the cause that will be beneficial to the Nation as a whole. We will facilitate more trade. I want to point out that one of our sources indicated that there are about eight to ten denials of landing rights in Japan for U.S. business aviation per day and that some U.S. companies are saying we will by-pass flight plans dealing with Japan, we will look for other markets within the Asian community because of the difficulty of access into Japan. That's why I feel this is a very important trade issue.
Page 64 PREV PAGE TOP OF DOC Mr. OBERSTAR. You have observed in your testimony that ''the sale of U.S. aircraft to Japanese customers is limited.'' What does that mean? You haven't quantified it.
Mr. STIMPSON. No, and it is difficult I know. We feel, because of the huge business oriented market in Japan and then the whole access they use through Tokyo to the Pacific Rim as well as to the United States, that there should be a good market for the sale of business airplanes in Japan. One of the principal things which has restricted the sale has been the lack of access to the airports. We've seen cases where Japanese companies will come to the United States on Japan Air and charter an airplane once they get here because of the air space and airport restriction problems.
Mr. OBERSTAR. So it operates against Japanese companies as well?
Mr. STIMPSON. Yes. Right.
Mr. OBERSTAR. This airport access/space question.
Mr. STIMPSON. And as far as our companies, we have been recently quite successful in making sales to some Japanese government authorities for military and maritime surveillance and things like this, flight inspection. The sale of business jets in Japan, for example, I think there are only five or six business jets in Japan the last time I checked the record. So the use of business airplanes by Japanese businesses is somewhat limited.
Mr. OBERSTAR. So you have only a half dozen companies at most with business aircraft, business jets wishing to operate transpacific service to the U.S.
Mr. STIMPSON. Or in Japan.
Mr. OBERSTAR. Or in Japan. But for the purposes of the bilateral aspect of the issue, you would be willing to very likely give open access to Japanese business jets to the U.S. so long as we get the same right of service into Japan, frequencies, landing rights, time of day, operations.
Page 65 PREV PAGE TOP OF DOC Mr. STIMPSON. Absolutely. No question.
Mr. OLCOTT. Sir, they have it now in the United States. We don't have it in Japan as far as the access is concerned.
Mr. OBERSTAR. That would be done on a reciprocity basis. That is, we give them access
Mr. OLCOTT. They have the access in the U.S. airports today. There is nothing denying a Japanese registered business airplane. If Sony, for example, had an aircraft located in Tokyo and they wished to fly it to San Francisco, they are able to do that. That's not a problem.
Mr. OBERSTAR. All right. That's very helpful. I think that is something we shall have to press with the Department of Transportation.
Mr. Chairman, I don't have any further questions. I would like to offer just an observation in closing. My conclusion and my summarizing the testimony we've heard today and my counsel is that the U.S. response to Japan should be proportional to the problem and that our resolve should be firm and persistent. The countermeasures proposed ought to be taken, they ought to be enforced, we ought to stick with them, we ought not to back away. We ought to include access rights for business aircraft.
And notwithstanding Federal Express' concerns today, their interests in the future may very well be very different than they are today, and very likely will be based on my experience going back over hearings and discussions on these issues over the last decade. Federal Express in 198485 pressed hard for a small package, 70 pound package service. We made concessions to the Japanese in order to get that service for them by way of allowing Nippon Cargo Airways access to the United States. After trying the service for just about a year, Federal Express abandoned the service but then NCA continued to operate into the U.S., they continued to operate at very great advantage. Federal Express has in their testimony today demonstrated that Asia-U.S. markets are indeed five times as great as Asia-Japan markets, but I'm not convinced that they have established a case that Japan has a 5-to-1 advantage and that's something we need to explore with the Department of Transportation.
Page 66 PREV PAGE TOP OF DOC Clearly, our carriers are not being afforded access to the Japanese market in the same proportion as Japanese are afforded access to the U.S. market, nor are our carriers being allowed exercise of the beyond rights which they have and which should not be paid for under our bilateral. The hearing today has allowed those issues to be illuminated, to be expressed clearly, and to be pursued further with the Department. I thank you very much, Mr. Chairman, for your partnership here.
Mr. DUNCAN. Thank you very much, Mr. Oberstar. I would simply say for the record that my colleague Mr. Oberstar is one of the outstanding experts and real leaders that we have on aviation issues in this Nation. I would suggest that possibly those in Japan who are concerned about this issue should pay heed to his remarks.
Let me just ask one last little question here before we adjourn. Is there a difference between the landing fees in this country and in Japan? Is there some great disparity there, do either of you know?
Mr. OLCOTT. The fee structure for our member companies to land in Japan or China, et cetera, is different than the fee structure in the United States. It is significantly more expensive. But that right now is not the issue. The issue really is one of access, if we can get into those airports so that our member companies can conduct their business in that part of the world.
Mr. DUNCAN. Even though it is much more expensive, your companies would pay if they could just get the access?
Mr. STIMPSON. We also face handling fees in many places, too; not just landing fees but handling fees.
Mr. OLCOTT. Sir, it's not that we'll pay anything, the fees have to be reasonable, but I guess first things first. First, you have to be able to land before you can pay the landing fee.
Page 67 PREV PAGE TOP OF DOC Mr. DUNCAN. Right.
Mr. STIMPSON. Excuse me, Mr. Duncan. I just checked the map, it is about 45 to 50 miles from downtown Tokyo to Narita.
Mr. DUNCAN. Okay. Well, thank you very much for being here today and for giving us the benefit of your testimony and your response to these questions. Thank you for being with us once again.
Mr. STIMPSON. Thank you very much. I really appreciate the interest of both of you and the committee in this subject. We look forward to working with you in the future.
Mr. DUNCAN. We'll be looking into this issue further I'm sure as we move along. Thank you.
[Whereupon, at 12:22 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]