Segment 1 Of 2     Next Hearing Segment(2)

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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 []. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.







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MARCH 27 AND APRIL 30, 1996

Printed for the use of the

Committee on Transportation and Infrastructure


BUD SHUSTER, Pennsylvania, Chairman

WILLIAM F. CLINGER, Jr., Pennsylvania
THOMAS E. PETRI, Wisconsin
HOWARD COBLE, North Carolina
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JOHN J. DUNCAN, Jr., Tennessee
WILLIAM H. ZELIFF, Jr., New Hampshire
BILL BAKER, California
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
PETER I. BLUTE, Massachusetts
JOHN L. MICA, Florida
ZACH WAMP, Tennessee
RANDY TATE, Washington
RAY LaHOOD, Illinois
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NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
ROBERT E. WISE, Jr., West Virginia
BOB CLEMENT, Tennessee
ELEANOR HOLMES NORTON, District of Columbia
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
BOB FILNER, California
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FRANK MASCARA, Pennsylvania
GENE TAYLOR, Mississippi

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
JAY KIM, California
RANDY TATE, Washington
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RAY LaHOOD, Illinois
BUD SHUSTER, Pennsylvania
(Ex Officio)

PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
(Ex Officio)


MARCH 27, 1996
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    Gibson, Scott C., Vice President, Planning and Corporate Strategy, Trans World Airlines, Inc

    Hirst, Richard B., Senior Vice President, Northwest Airlines, Inc

    Murphy, Cyril D., Vice President, International Affairs, United Air Lines, Inc

    Prestowitz, Clyde V., Jr., President, Economic Strategy Institute

    Smith, Frederick W., Chairman and CEO, Federal Express Corporation

    Weidemeyer, Thomas H., President, United Parcel Service Co


    Costello, Hon. Jerry F., of Illinois
    Cramer, Hon. Bud, of Alabama
    Lipinski, Hon. William O., of Illinois
    Traficant, Hon. James A., Jr., of Ohio


    Gibson, Scott C
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    Hirst, Richard B

    Murphy, Cyril D

    Prestowitz, Clyde V

    Smith, Frederick W

    Weidemeyer, Thomas H


    Letter to President Clinton from Members of Congress concerning the U.S. Aviation Agreement with Japan, March 26, 1996

APRIL 30, 1996

    Fegan, Jeffrey P., Executive Director, Dallas-Fort Worth International Airport, accompanied by Kevin Cox, Deputy Executive Director

    Freidheim, Cyrus F., Jr., Vice Chairman, Booz Allen & Hamilton, Inc

    Greenwald, Gerald, Chairman and CEO, United Airlines, Inc

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    Hunnicutt, Charles A., Assistant Secretary, Aviation and International Affairs, U.S. Department of Transportation, accompanied by Patrick Murphy, Deputy Assistant Secretary, Aviation and International Affairs


    Frost, Hon. Martin, of Texas

    Menendez, Hon. Robert, of New Jersey

    Traficant, Hon. James A., Jr., of Ohio


    Fegan, Jeffrey P

    Freidheim, Cyrus F., Jr

    Greenwald, Gerald

    Hunnicutt, Charles A


    Freidheim, Cyrus F., Jr., Vice Chairman, Booz Allen & Hamilton, Inc., study prepared for United Airlines, Shaping Pacific Aviation in the 21st Century
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    Gaines, Paul B., Director, Aviation, City of Houston, statement

    News Release, U.S. Department of Transportation, May 1, 1996

    Bimonthly Summary of International Aviation Negotiations, November and December 1996



U.S. House of Representatives,

Subcommittee on Aviation,

Committee on Transportation and Infrastructure,

Washington, DC.

    The committee met, pursuant to notice, at 2 p.m. in room 2167, Rayburn House Office Building, Hon. John J. Duncan, Jr. (chairman of the committee) presiding.

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    Mr. DUNCAN. I call this meeting of the Aviation Subcommittee to order.

    Before we get started, I want to thank all of the distinguished witnesses today for adjusting their very busy schedules in order to accommodate the subcommittee. Many of our members are returning from their districts right at this time, since the House will not begin voting until 5:00 o'clock.

    I must say that it is always a pleasure for me, and I think I can speak for all of my colleagues, to have two very talented and knowledgeable business executives from outstanding and very successful companies testifying before the subcommittee today. On the first panel, Mr. Smith, of course, has testified before the subcommittee in the past. And I thank him for being here with us again today.

    I had the pleasure of meeting with Mr. Weidemeyer a few days ago, and I also would like to thank him for being here. Federal Express is a very important company to the State of Tennessee, and I have a very large UPS operation in my own district. And these are two very fine companies.

    The purpose of this hearing is to review the current stalemate in aviation negotiations with the United Kingdom and with Japan. Although we have made some progress since last, although we made some progress last July with Japan and I hope that it was at least in part a result of this subcommittee's hearing on that issue, we still have not seen adequate movement entirely from the Japanese government. However, I do understand that an agreement was reached late last night in Tokyo for our cargo carriers. And I hope that this will eventually lead to successful passenger traffic negotiations in the very near future.
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    This is the second time this has happened, and I hope that it's, as I said, in part a result not only of our earlier hearing, but the Senate Aviation Committee held a hearing on this, and of course, everyone knew we had this hearing scheduled today. Unfortunately, for the most part, our aviation negotiations with the United Kingdom have not been as productive. Despite the success of the U.S. Air-British Airways code sharing relationship, our progress, or lack thereof, has been very discouraging to our aviation industry as a whole. Of course, the major issue here is more access for U.S. carriers to Heathrow and the need for U.S. cargo carriers to fly to points beyond London.

    It's kind of disappointing that the market share for U.S. airlines between the United States and the United Kingdom continues to decline. Currently, British airplanes fly 59 and a half percent of the passengers between the U.S. and the U.K., while U.S. carriers carry only 40.5 percent. The U.S. share is down from the 1994 level of 46 percent, which I think is something that we all need to work on.

    In my opinion, the Administration should be doing everything within its power to move these negotiations with Japan and the United Kingdom forward. I think that we need to place a much higher priority on these negotiations, and that we must be decisive and tough. We cannot afford to be timid in our positions.

    Moreover, I do not think that our negotiators should buy into the Japanese strategy which pits one U.S. carrier against another. The fact is that we currently have a huge trade imbalance with Japan. And as I said last July, our Government should be embarking on a cohesive policy which protects our carriers in one of the only markets that the United States currently experiences a surplus with Japan.
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    In my opinion, we must negotiate these agreements from a position of strength. And by standing together, I think we can accomplish these goals, not only for U.S. carriers and passengers, but for our Japanese and British counterparts as well.

    I look forward to hearing from the witnesses today on these very important issues, and I now yield to the ranking member of the subcommittee, Mr. Lipinski.

    Mr. LIPINSKI. Thank you, Mr. Chairman.

    Mr. Chairman, first of all, I want to say I have a formal statement which I would like to have permission to insert into the record at the appropriate time. And I'm sure you'll have no objection to that, right?

    Mr. DUNCAN. Fine.

    [Mr. Lipinski's prepared statement follows:]

    [Insert here.]

    Mr. LIPINSKI. Thank you.

    I welcome the two gentlemen here today. The Chairman got in a plug for Federal Express in Tennessee, so I have to get in a plug for United Parcel. United Parcel has two of the largest facilities in their gigantic empire located in the Third Congressional District in the State of Illinois, which I just happen to be fortunate enough to represent.
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    So now that the commercials and the plugs are even, I want to say I welcome the two gentlemen here. I think this is a very important hearing that we are going to have today. I am looking forward to the opinion both from Federal Express and from United Parcel on the agreement that apparently was agreed to in Japan within the last 24 hours.

    Now, I understand that nothing has been committed to writing as of yet. But I understand that a handshake deal has been agreed to. I have some preliminary information about that. I will be looking forward to ascertaining from both of you gentlemen what information you have about it and what your views are on it.

    As the Chairman mentioned, aviation and international aviation in particular is extremely important to the United States of America. It's one of the places where we certainly have a very significant lead over the rest of the world. And I think it's the duty and the responsibility of the United States Government to see to it that all our carriers, whether they be passenger carriers or cargo carriers, have the opportunity to expand their service all over the world.

    And I think that we should do everything possible to see that that comes into play, whether it be the Executive Branch or the Legislative Branch. And I want to at the present time conditionally compliment our negotiators in Japan for apparently putting together an agreement where we are really getting what we are entitled to, plus expanding our other carriers, such as United Parcel, service that will benefit American consumers and Japanese consumers.

    And Mr. Chairman, as I say, I'll put my formal statement in the record. I'll be anxious to hear the two gentlemen testifying, so I yield back the balance of my time.
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    Mr. DUNCAN. Thank you very much, Mr. Lipinski.

    Mr. Cramer.

    Mr. CRAMER. Thank you, Mr. Chairman.

    Just very briefly, I would like to submit a statement for the record. I am very interested in this hearing. I represent north Alabama, the Fifth District of Alabama, certainly our region of the country feels like to some extent we've been left out of service to Japan. We have a space camp down there at the Marshall Space Flight Center. We have a lot of participants, young people, that come in there from Japan. We have now worked out a partnership to open a space camp in Japan as well. So needless to say, we have those issues on our minds when we think about this.

    But this is a very important subject matter today, and I will be listening as well for any agreement or understandings that perhaps have already been reached.

    Thank you, Mr. Chairman.

    [Mr. Cramer's prepared statement follows:]

    [Insert here.]

    Mr. DUNCAN. Thank you.
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    Ms. Danner.

    Ms. DANNER. Thank you, Mr. Chairman.

    Although as you know I usually submit my statement for the record, this morning, or this afternoon, I should say, I would like to voice it.

    I'm pleased that the Aviation Subcommittee is holding this hearing on the U.S.-U.K. aviation relationship. At a time when the United States, along with many other countries, is attempting to liberalize bilateral aviation agreements, the United Kingdom appears to be resisting these efforts. Under the current aviation agreement, known as Bermuda II, only two U.S. airlines are granted access to Heathrow Airport. Because of such restrictions, British airlines currently carry 60 percent of the air travelers between the United States and the United Kingdom.

    For some time the United States has attempted to negotiate a more equitable air agreement. After more than 1 year, these negotiations have led only to a mini-deal that does not address the major concerns of the United States. In the past, the United States has taken many steps to prove that it is negotiating in good faith. These steps include the approval of code sharing agreements and the granting of several additional U.S. routes to British carriers. These gestures, however, have not convinced British negotiators to address U.S. concerns fully.

    While much of the negotiating process is highly technical, the effects of closing off Heathrow to additional U.S. service has real cost to our Nation's airline and to our economy.
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    And now I come to the crux of my statement. Missouri-based TWA has been attempting to gain approval for a New York to Heathrow frequency. The benefits such a service would provide are enormous. TWA forecasts annual revenues of more than $100 million annually resulting from this route. Such gains would go a long way toward ensuring the continued recovery of our airline, TWA. With tens of thousands of employees and more than $1 billion in revenue, the continued success of TWA is vital to both our national economy and the economy of our State of Missouri. The United States must continue to do all that it can to negotiate a fair bilateral aviation treaty with the United Kingdom. I believe such a treaty should include provisions granting TWA access from New York hub to Heathrow.

    I would also like to take a moment to welcome Scott Gibson of TWA, who will be testifying later in this hearing. And I know that if I have failed to convince you of the importance of this matter, I feel assured that Scott will.

    Thank you, Mr. Chairman.

    [Ms. Danner's prepared statement follows:]

    [Insert here.]

    Mr. DUNCAN. Well, thank you very much, Ms. Danner.

    Mr. Ewing, do you have a statement you wish to make at this time?

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    Mr. EWING. Mr. Chairman, were you talking to me? I had too many people whispering.

    Mr. DUNCAN. Do you have an opening statement?

    Mr. EWING. I do not, but I am pleased to be here. I think the subject matter of this hearing is one of extreme importance, and I'm pleased to be here to participate in it.

    Mr. DUNCAN. Thank you very much.

    Mr. Hutchinson.

    Mr. HUTCHINSON. None, thank you.

    Mr. DUNCAN. All right, then. Mr. Ehlers

    Mr. EHLERS. Thank you, Mr. Chairman.

    Just a comment. I agree with the gentleman from Illinois that this is an extremely important issue. As you know, international agreements and negotiations are very difficult and touchy, one might say. But one thing I would want to point out. I think it's something extremely important to recognize and remember in all these discussions on this issue, is to maintain the fifth freedom rights, or the beyond rights that we currently have in Japan.

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    Those are so difficult to obtain. We do have them. We're using them judiciously. They are beneficial to our airlines and our Nation. I think whatever position this committee might take or might get involved in or the position adopted by the Administration in their negotiations should do whatever is possible to ensure that we maintain those rights. And I would like to have that entered in the record with my opening statement.

    Thank you.

    Mr. DUNCAN. Thank you very much, Mr. Ehlers.

    Mr. Costello.

    Mr. COSTELLO. Mr. Chairman, I'll put my statement in the record.

    [Mr. Costello's and Mr. Traficant prepared statements follow:]

    [Insert here.]

    Mr. DUNCAN. All right. Thank you very much.

    We have two very distinguished panels, and we will hear later from representatives from Northwest Airlines, TWA, United Airlines and the Economic Strategy Institute. But at this time, we're very pleased to have with us Mr. Frederick W. Smith, Chairman and Chief Executive Officer of the Federal Express Corporation, and Mr. Thomas H. Weidemeyer, who is President of United Parcel Service Airline Company. So thank you, gentlemen, for being here. And Mr. Smith, I suppose we'll start with you.
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    Mr. SMITH. Well, thank you very much, Mr. Chairman. I would like to personally thank you and the committee for the leadership you've shown on this issue. I believe that if the United States makes any significant progress in these aviation disputes in large measure the credit will go to the Congress. And the significant support for U.S. interests has been demonstrated by key members on both the Senate and the House sides and on both sides of the aisle.

    I'd also like to say to Mr. Cramer, just to ingratiate myself to him, it's not only Japanese youngsters that go to space camp. I'll have a daughter in space camp in June down there. So we'll be adding to the north Alabama economy.


    Mr. SMITH. I have a prepared statement, Mr. Chairman, that I'd like to submit, and just try to make some brief comments to bring this issue into focus. I'd like to say at the onset that cargo issues are vastly different than passenger issues. The passengers issues have a different set of circumstances. Just for starters, they are bilateral in nature, because we all like to come home when we go some place. Cargo only goes one way.

    So flexible operating agreements, for that reason, and increased variability of seasonality and the demand for goods in various parts of the world require very flexible operating agreements for all cargo carriers, whether it's traditional or the integrated express carriers like ourselves and UPS to be successful.
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    In the hearings in the Senate last week or the week before, the GAO testified, and I thought there were a couple of telling points that were made in that testimony. The first was the observation that historically, and almost incredibly, the United States has done little if any econometrics analysis of its air service agreements to determine whether the agreements reached were in the best interests of the United States as a whole, and what the respective values of the aviation rights that were being afforded to the various parties represented in terms of economic advantage.

    And second, and perhaps even more telling, was that the United States had no strategy whatsoever to resolve the dispute with Japan and the United Kingdom. Now, to understand the profundity of those observations made by the GAO, and observations which by the way we strongly agree with, you have to recognize the historical context in which all aviation treaties are constructed. And they are based on a bilateral aviation trading regime established in 1944 over the objections of the United States, which required individual treaties between each country that wanted to engage in air commerce one with the other.

    This so-called 1944 Chicago Convention was built around an agreement which was importantly called the Five Freedoms of the Air. The first and second freedoms were the ability to fly over a country and the ability to fly through a country with a technical stop without enplaning traffic. Third and fourth freedom traffic was the ability to move traffic from one's homeland to another country and vice versa. And fifth freedom, or beyond traffic rights, were the ability of a U.S. carrier to go to another country and enplane traffic from that country to yet a third country and vice versa, back to the treaty signatory.

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    The opposite economic opportunity in the agreement in 1944 was called anterior fifth freedom rights. So U.S. carriers were to receive fifth freedom rights, foreign carriers were to receive anterior fifth freedom rights.

    About 20 years or so, for reasons best known to U.S. officials at the time, the United States let foreign interests begin to advance a new concept. And the term anterior fifth freedom traffic or beyond rights was supplanted by the term sixth freedom traffic rights. And sixth freedom traffic rights are the ability of a foreign carrier to pick up traffic destined to the United States, making a stop over that carrier's homeland. So in the case of Great Britain, a sixth freedom traffic flow would be a Polish shipper or citizen moving over the United Kingdom and the United States, and in Japan, an example of it might be a shipment or a passenger from Thailand moving over Japan into the United States.

    Note importantly that what I am describing is U.S. trade. In the case of cargo, it is something that has been bought or sold by a U.S. interest.

    In 1952, when the United States established an air service agreement with Japan, which was based on the principles of the 1944 Chicago convention, this air service agreement predictably called for reciprocal or relatively equal beyond rights for the two parties, as was conceived in the 1944 bilateral trade agreement. And so the Japanese carrier, which at that time was Japan Air Lines, just arising from World War II, and three U.S. carriers, Northwest, Pan American, whose rights were bought by United Airlines, and an all cargo carrier, Flying Tigers, which was purchased by Federal Express.

    And with the purchase of those rights by FedEx and United, we received, under the treaty between the United States and Japan, the ability to move traffic to and from the United States and Japan and from Japan to any point and from any point to Japan, which was the opposite economic opportunity the Japanese carriers were receiving.
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    And in fact, the charts which we have over there represent these opportunities. The first chart shows that Japanese carriers exercising their anterior fifth, or now so-called sixth freedom rights, have access to the entire population of Asia, some two billion people, that they can flow goods and of course passengers, which again is a different issue, but goods over Japan into the United States. On the other side of the coin, we have the rights, as does United or Northwest, to take traffic to and from points in Japan to other points and vice versa.

    If one measures the relative economic value of those two beyond rights, you can see that the Japanese have a 9.3 to 1 advantage over the United States, because there is much more trade going to the United States traveling many more miles. Despite this, the Japanese, over the past 2 1/2 years, have attempted to restrict FedEx's ability to operate, utilizing our beyond rights. And in fact, this intransigence and unwillingness to honor the terms of the treaty, which has been confirmed by our U.S. Department of Transportation, costs FedEx in excess of $100 million.

    Now, the agreement which we understand has been reached with the U.S. and Japan today, we applaud. It is a major step in the right direction, in our opinion. But we wanted from these negotiations only one thing. And that was for the United States and Japan to assure that we would be able to enjoy the rights which we hold. And if those rights were not honored, the United States would move swiftly and decisively to restrict Japan's huge sixth freedom traffic opportunities in order to permit us to engage in our fifth freedom traffic opportunities.

    I also understand that the agreement gives some new rights to UPS, which we applaud. Because we support the concept of open skies. And perhaps during the question period, we can return to this.
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    In the case of the U.K., I'll just make one comment. I see my time is up. If one measures those relative economic opportunities between Japan and U.S. interests in terms of third, fourth, fifth and sixth freedom markets combined, which is the only way that one can really look at the totality of the market, and which is in total accordance with the 1944 regime which the United States acceded to, in the case of the United Kingdom, that ratio would be 43 to 1 in favor of the United Kingdom.

    And the United Kingdom's intransigence in this regard is directly related to the fact that the U.S. gave them, in the Bermuda II agreement, a trading advantage of unprecedented proportions. And we believe strongly that the United States should press the United Kingdom to liberalize that agreement. And in fact, we were assured that that was in fact the case in the so-called mini-deal that was done last year, and then which was conveniently abandoned several months later.

    So I will yield now to my friend, Tom Weidemeyer, and answer questions as you want, or come back to any of these subjects during the question period as you want, Mr. Chairman.

    Mr. DUNCAN. All right, thank you very much, Mr. Smith.

    Mr. Weidemeyer.

    Mr. WEIDEMEYER. Thank you, Mr. Chairman, and members of the committee. And sometimes you have opportunities for coincidence or good fortune. And I likewise have a son and daughter that are going to space camp in August this summer.
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    Mr. DUNCAN. Let's keep this going now.

    Mr. WEIDEMEYER. I'm out of children.

    I have a number of prepared statements here. I have one that I've submitted for the record, a formal statement with some exhibits. And I'm going to try to paraphrase some of what's in there. Much of what's in there has changed overnight, as Mr. Lipinski alluded to.

    I think as time goes by and the information age begins to become a reality, and we look around and we see information moving at the speed of light or faster, we see the monetary system almost mirroring the same thing, there's one great difficulty that still exists. And that's the limitations that are put on the movement of people and goods.

    There has to be a recognition which driving the economy of the U.S. and other economies of the world is very different today than it was a generation ago, and move from a regulatory climate to one that enhances and helps develop world trade. We have the opportunity as the U.S. has great potential to be effective in these markets, we have the opportunity to lead the way by asking for, demanding in the appropriate manner, the opportunity for open skies. Mr. Smith has alluded to it. UPS likewise agrees with the comments of Federal Express that open skies is in the best interests of U.S. carriers and consumers in the U.S. We have no fear of being able to compete, being put on an even playing field with our foreign competitors.
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    As Mr. Smith mentioned, last year there was a mini-deal that was struck between the U.S. and the U.K. We were given assures that when that mini-deal was being negotiated that shortly thereafter, perhaps in as few as several days, that cargo liberalization and open skies would take place. Nine months has passed. To my knowledge, there hasn't even been a meeting to discuss the issue.

    I think it once again is time to help our cause by taking a firm stand with the U.K. to get additional access. UPS is in an interesting position, because we are one of three carriers designated with beyond rights out of the U.K.

    However, we operate out of East Midlands, which is 150 miles from London. And fortunately, one of the beyond points we have goes to Germany, which is where our international hub is located in Europe. If we wanted to go to places other than where designated, such as France or Spain or Italy, at this point in time we are precluded from doing so. We think that we should have the unfettered rights to do whatever is safe and what the customers, the consumers around the world, desire services to be rendered.

    On the issue of Japan, the testimony that has been submitted has a series of exhibits which were intended to show that the negotiating position of the U.S with regard to Japan was very vital to UPS. We certainly hope that open skies is the ultimate outcome of ongoing negotiations with Japan. But we certainly recognize as well that with the difficulty we've had in negotiating those agreements that we had to take a step phased-in approach. And we also recognize that there are carriers that have become known as the incumbents that had rights that were already existing that our Government should protect and should not jeopardize.
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    We had suggested to the U.S. Government that there were ways to do that, that the 1952 agreement should be held without further negotiation. Both parties think they know what it means, and that should not encumber the negotiations to create greater opportunities for aviation liberalization.

    We also said we did not fear additional Japanese cargo carriers having additional rights in the U.S., and that was fine with us. And at the end of the day, the worst possible position for us was the status quo. That is, that no agreement could be reached whatsoever. In that situation, the incumbents, although how much they've been able to exercise certainly has been subject to debate with the Japanese, the incumbents nevertheless have substantial rights.

    We as an MOU, memorandum of understanding, carrier, one of the new fellows on the block, have very restricted operations. Basically, six frequencies a week into Narita, no beyond rights. If no agreement is reached, or if no agreement had been reached, in the future, that was the limit of the rights that we could have. Because they were specifically spelled out in the agreement. Unlike the 1952 incumbent carriers, who theoretically and in practice have been able to put up as many routes as necessary to meet the demands of the business.

    As a consequence, the handshake, which we only have sketch reports of at this point, which has recognized the rights of the incumbents, as well as granted additional opportunities for UPS to have frequencies to Japan as well as beyond rights to at least one point beyond Japan to link up with our intra-Asia hub, have given UPS the opportunity to be able to provide even more access for our consumers.
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    We applaud those actions of both our U.S. negotiators, as well as the Japanese negotiators, in finally taking a step forward. And we at UPS hope that this is just the first step in many towards the liberalization of aviation agreements around the world.

    And I would also recommend if perhaps we can use this in negotiation with a very tough trading partner as a basis to use a similar negotiating strategy with the U.K. to perhaps, let's get off the dime and get something negotiated and truly get to an open skies arena.

    Thank you very much, and I'm available for questions.

    Mr. DUNCAN. Thank you very much, Mr. Weidemeyer.

    We've now been joined by several other members of the subcommittee, and I would like to ask any of them if they have an opening statement at this time, before we get into the questions. And we'll go first to our vice chairman of the subcommittee, Mr. Weller.

    Mr. WELLER. Well, thank you, Mr. Chairman. I would just ask unanimous consent, I have a statement I'd like to insert into the record. Thank you for the courtesy.

    [Mr. Weller's prepared statement follows:]

    [Insert here.]
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    Mr. DUNCAN. Thank you very much.

    Mr. DeFazio.

    Mr. DEFAZIO. No, thank you, Mr. Chairman.

    Mr. DUNCAN. Mr. Menendez.

    Mr. MENENDEZ. No, thank you, Mr. Chairman.

    Mr. DUNCAN. All right. And Mr. LaHood.

    Mr. LAHOOD. No, thank you, Mr. Chairman.

    Mr. DUNCAN. All right, thank you very much.

    Mr. Smith, I'll be very brief so we can move to other members. But what, how much of your cargo, roughly what percentage of your cargo that you carry from Japan to points in Asia originate in the United States? You know, there's been some concern expressed by the Japanese in regard to the local traffic.

    Mr. SMITH. I can't give you the specific numbers, but let me address that question this way, Mr. Chairman. In the air service agreement between the United States and Japan, Article 12 states very clearly that the primary purpose of the air transportation services between the two countries must be to accommodate third and fourth freedom traffic flows. In the passenger side of the house, the Japanese have taken the position that that means 50 percent of the people on board the airplane must originate or terminate in the United States. U.S. carriers have predictably objected to that.
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    In the cargo side of the house, all of our flights throughout the Pacific, on the other side of Japan, are scheduled with Article 12 in mind, meaning that the primary purpose of those flights is to serve the third and fourth freedom markets. That's not too hard to do when one understands that Japan today represents 70 percent of the gross national product of all Asia.

    Japanese carriers, on the other hand, carrying this sixth freedom traffic, in the 5 years prior to today, increased their all cargo capacity by 57 percent while growth of Japan to other points in Asia traffic increased by 10 percent. So where did that capacity, what was it being used for? It was being used to carry U.S. trade on a sixth freedom traffic basis in the United States.

    So we have no problems in terms of that mix of utilizing our beyond rights and have expressed to the Japanese the opinion that if you want to have any kind of a reasonable control on fifth freedom traffic flows, we're happy to accommodate that, so long as you're willing to accede to the same type of controls on your sixth freedom traffic.

    It's important to recognize the Japanese have never advanced such a theory in cargo. Because if they're concerned about the percentage of our traffic on the other side of Japan being fifth freedom traffic, you ought to look at some of their planes, and you'll find that they are chock-a-block full of American trade being moved in sixth freedom traffic.

    Let me make one other, I think it's very significant, about the agreement that was just reached, as we understand it. The important point from our part is that the United States representatives expressed in the strongest possible terms to the Japanese that they expected our rights to be honored, and if not, that we would respond in kind to embargo of sixth freedom traffic flows on Japanese carriers in the United States.
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    The new services which were provided for by Japanese carriers in this agreement, again, as we understand it, are from any point in Asia that they serve into their United States points. The new services which are provided for United States carriers, specifically UPS, which we applaud, and is a step in the right direction, specifically limit that from one point in Asia to one other point in Asia, not to all of the points in Asia.

    So it needs to be just a first step towards further liberalization. And it is very important that the United States protect these incumbent rights that we hold. And we have been assured at the highest levels of the United States Government that the U.S. will, in fact, protect our rights in the Pacific, and respond in kind.

    And this is hugely important to us. Let me say again what I said in the testimony. For 2 1/2 years, we were kept from flying routes in the Pacific to which we were legally entitled. And over $100 million of our business was confiscated.

    So this is the only issue we wanted out of these negotiations. We support the further liberalization and believe that open skies is where we ought to get to. There were also some points, the way we understand it, where incumbent carriers could go to several additional points in Japan. But there are no ''beyonds,'' which means that those additional authorities are not meaningful.

    Mr. DUNCAN. I turned to Mr. Sever when you mentioned the $100 million figure a while ago in your testimony and asked him were you talking about each year. But you meant the $100 million over that 2 1/2 years?
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    Mr. SMITH. Yes, that's right.

    Mr. DUNCAN. Let me ask you this. When you were here a few months ago, when we got into this issue, you mentioned your hub in Subic Bay. And I believe you mentioned some threats that the Japanese had made to shut it down or take other actions. How has your Subic Bay hub worked out?

    Mr. SMITH. Well, other than the fact that the Japanese delayed us from opening it about 6 months, and was the largest portion of those costs that I just mentioned, and other than the fact that obviously, I'm sure a lot of our shippers can't be too thrilled that the Japanese, as late as a month ago, put down on the negotiating table, not a verbal threat, but a written threat, that if the United States did not accede to what they wanted done that they would shut FedEx down.

    Now, we're very grateful to the Government for calling the Japanese to task on that. And in fact, they did remove it. I would simply point out that the basic framework of the agreement that was being discussed at that time is essentially what's now been agreed to.

    Mr. DUNCAN. Mr. Weidemeyer, Mr. Smith mentioned a 9 to 1 disparity with Japan, and said the comparable figure would be 43 to 1 with the United Kingdom. You have in your prepared statement a paragraph that I think is interesting, in regard to the bilateral relationship with the United Kingdom. It says, we approached our own U.S. DOT to help us solve this misinterpretation of the agreement.

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    To our amazement, our DOT told us that the U.K. was right, and that they had always interpreted the agreement this way. They further told us that they would be happy to redesignate us as directed by the U.K. DOT, but that they would not pursue the matter with the U.K. DOT.

    Is it fair to say that you have been surprised or disappointed by the position of the Department of Transportation in that regard? Do you think that—I assume that you're pleased with this latest agreement or this progress that's been made in regard to Japan. But you see that much more needs, I assume you would say that much more needs to be done in regard to the United Kingdom.

    Mr. WEIDEMEYER. Mr. Chairman, I think the situation that I alluded to in the testimony is an example of what we're also talking about with Japan, and that's the framework of the bilateral agreements themselves. The difficulty with bilateral agreements is that they are negotiated by regulators, they are put in place and then they are subject to interpretation somewhere down the road where perhaps the people that negotiated them are no longer available.

    In the case of our difficulties with the U.K., we had a designation that we could fly at one point, at that point in that time, that was Stanstead. We decided for operational purposes that we wanted to shift our flight to East Midlands, which is 150 miles or so away. The understanding that the two governments had was that the agreement, once you changed designated points, took away your fifth freedom rights.

    We obviously heartily opposed that, and went to our DOT and say, you know, they can't do this just because we're going to a different airport for our operating convenience. Certainly there is not a flood of business at either Stanstead or East Midlands, as is the case at Heathrow. It's a very different situation. And because of the lack of understanding of these bilateral arrangements, there was an inability of DOT to come to the same conclusion we had. So we went out on our own and were able to establish with folks in the U.K. that indeed there was nothing wrong with us changing our point.
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    Mr. DUNCAN. Let me ask you this, and then I need to move on. You mentioned just now that these bilateral agreements are negotiated by regulators.

    Do you feel that the Department of Transportation should have a closer relationship with your company, or with both of your companies, in regard to negotiations at this time? Do you think you could provide information that would be helpful to them? Do you find that you have to get your side or your position or your story out in hearings like this? Or do they, does our Department of Transportation ask you for your input in regard to these negotiations or these agreements before the negotiations get down to the nitty-gritty?

    Mr. WEIDEMEYER. Over the last few years, there has been a great increase in the ability of carriers like FedEx and UPS to provide input to our negotiators. What I was really referring to was regulators such as the folks that put together bilateral agreements, rather than trade negotiators whose business it is to make sure that the world economy, or the U.S. economy in our case, has an opportunity to expand and grow and foster trade through the agreements we reach with other nations. When trade becomes involved with the regulatory climate, people get a much more realistic idea of what needs to be accomplished, rather than providing regulations to be enforced to prevent commerce, you can come up with trade agreements which enhance commerce.

    Mr. DUNCAN. Just to sum up the positions, from the positions of both of you, is that you want to see, you don't want any special protections or considerations, you just want to see the skies as open as possible, so you can compete on a fair basis with companies all over the world. Is that correct?
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    Mr. WEIDEMEYER. That would be correct.

    Mr. DUNCAN. All right, Mr. Lipinski.

    Mr. LIPINSKI. Thank you very much, Mr. Chairman.

    Mr. Smith, based upon what you said, it seemed to me that the Japanese delayed giving you your rights because they were attempting to capture some cargo for their cargo airlines over the course of 2 1/2 years that they delayed you, and it cost you $100 million. Is that what you were conveying to me, or to us?

    Mr. SMITH. Well, yes, sir, except I would just like to correct you on one thing. They didn't deny us our, what they did is they would not approve our flight schedules. We got the rights in 1952, or our predecessor company did. They just wouldn't approve our flight schedule. We then in essence took a complaint about that to the U.S. Department of Transportation. And the U.S. Department of Transportation issued an order finding in our favor. And they put on a sanction which they withdrew for various reasons. And so we sat there for 2 years.

    Then we filed our flight schedule for the Subic Bay operation, which we had fully briefed the Japanese operation about, and the U.S. Government about. The Japanese said, we're not going to approve that schedule.

    Mr. LIPINSKI. What was their rationale, though, for not approving that particular schedule?
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    Mr. SMITH. What was our reaction?

    Mr. LIPINSKI. No, what was their rationale for not doing it? Why did they say they weren't doing it?

    Mr. SMITH. Because they wanted new authorities and rights for their carriers. And they decided to use us as the point of leverage, as the whipping boy.

    Mr. LIPINSKI. No, that I understand. I was saying, what rationale, though, did they express any rationale publicly?

    Mr. SMITH. Yes. The rationale that was expressed publicly was why I went through that history lesson, is that somehow the beyond rights that the U.S. 52 incumbent carriers had, that these were somehow illegitimate, that these were imposed upon them when they were a war-ravaged economy, and had they been stronger, they never would have agreed to it. The reality is that fifths and anterior fifth freedom opportunities were known in 1944 and 1952 to be equivalent economic opportunities.

    What led the Japanese to take this position, and bear in mind, for 40 years, they had honored the agreement. It was only in 1993 that they came to this new interpretation. And what made the Japanese very aggressive in this are the economic problems of their own carriers. I think they did have some legitimate issues about wanting more freedoms for their carriers, which we fully supported, as we do today, the agreement that was just reached.

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    And then third, and I don't think the importance of this can be underestimated by this committee, they saw the tremendous success of the British, under their moving from Bermuda I, which was very similar to the 1952 air services agreement with Japan, to Bermuda II, which took away almost all of the United States' beyond rights, but was moot about the British anterior fifth or sixth freedom traffic flows.

    Well, this gave them an incredible inherent advantage over the United States. And in fact, the ratio, if you take the revenue ton mile opportunities for all of the British carriers' sixth freedom markets into the United States, and compare them to the U.S. fifth freedom or beyond opportunities, the ratio is 43 to 1.

    The one final point, Mr. Lipinski, that's very important, and I agree with Tom, I mean, what we would support is a liberal open skies regime worldwide. But what has created a lot of these problems has been that many of these agreements that the United States has entered into have not been based on any economic analysis whatsoever. And that is one of the two criticisms that the GAO made of them.

    And I would just request, what I would suggest to the committee, if you really want to get into this and see what the issue is, ask for the supporting analysis on any agreement that they make, and I think you'll be amazed.

    Mr. LIPINSKI. Well, we have an excellent turnout here for the committee today, and it's obvious that people have a tremendous amount of interest in this subject. You were talking about the sixth freedom rights. Now, correct me if I'm wrong. That means a Japanese carrier can pick up cargo in Peking, fly and stop in Tokyo, and fly into Los Angeles, correct?
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    Mr. SMITH. Correct.

    Mr. LIPINSKI. Now, are there any of those routes that exist for Japanese cargo carriers that do not exist for American cargo carriers?

    Mr. SMITH. Well, under the terms of the 1952 agreement—

    Mr. LIPINSKI. No, I'm talking in reality, today.

    Mr. SMITH. Well, I'm trying to answer the question. Under the terms of the 1952 agreement, in the plain, unalterable language, there is no such difference. Under the interpretation that the Japanese adopted since 1993, there are huge differences. And hopefully this new agreement will resolve those.

    Again, as I mentioned to you, we had only one objective in these negotiations. We wanted the United States to unequivocally inform the Japanese that FedEx's or the incumbent carriers' rights would be protected, and if not, the United States' response would be to take down Japanese carriers' ability to move sixth freedom traffic flow. It's quid pro quo.

    Now, if in fact that has been clearly communicated, and it has been clearly communicated to us by the highest levels of the U.S. Government that that will be the case, then we are very, very happy and think this is a great progress. And we applaud any additional rights that we can get for other U.S. carriers moving towards open skies. I would point out, however, Mr. Lipinski, that the Japanese did not in writing confirm that. And in fact, the agreement, we understand, will specifically say that both sides retain their interpretation.
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    So I hope I am wrong on this. But it would not surprise me if I'm not up here a year from now or 2 years from now.

    Mr. LIPINSKI. I assure you, if it is not put into writing and the American carriers are not satisfied with it, you'll be back here much sooner than that. Because I'm sure the Chairman will see to it that you have the opportunity to be back here.

    Let me go to another question for you, Mr. Smith, and then we'll get over to Mr. Weidemeyer. In regards to negotiating these bilaterals, do you think it would be wise to have the U.S. trade representative be involved in this?

    Mr. SMITH. I think that the involvement of the U.S. trade representative might well be a good solution. Today it is the statutory responsibility of two departments, Department of State and Department of Transportation. One of the problems has been historically, in the years I have been in the business, has been, as the GAO said, the lack of econometrics analyses as to what the respective economic opportunities are. It's been simply a political battle.

    And many times, the political battle has been fought utilizing the multiplicity of U.S. interests against the singular or near singular interests of foreign carriers. So we tend to get a horse trade, which makes a lot of sense for an individual carrier, getting some new right. But in the scheme of U.S. interests overall, it's been a very poor agreement. That really is the case in Bermuda II.

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    So one of the things that the U.S. trade rep might perform is the role of scorekeeper with an institutional memory based on trade. And furthermore, I think that an idea which may be worth evaluation by the Congress would be U.S. trade reps involvement on the cargo side of the house. Because you see, the ability to move goods back and forth by air represents today almost 37, about 37 percent of the total value of U.S. trade. Our estimate is, FedEx, it will be 60 percent of the value.

    So if U.S. carriers can't be involved in U.S. trade and a foreign entity can use one of these air service agreements to sit like Gibraltar over an airborne trade route, it will be a serious impediment to our ability to trade internationally. So I think there might be a real rationale to get USTR in as a scorekeeper and perhaps give them some sort of portfolio on the cargo side of the house.

    Mr. LIPINSKI. Thank you very much, Mr. Smith.

    Mr. Weidemeyer, what are your feelings in regard to the U.S. trade representative being involved in these negotiations?

    Mr. WEIDEMEYER. As I said earlier, I think what we're facing in today's economy and the future global economy is, we have to recognize that trade has take precedence over regulation. As a consequence, I think they should be involved.

    Air cargo, and you just heard Mr. Smith's figures of where we think it's going, and I'll accept his figures, 60 percent is a pretty attractive number looking out in the future, air cargo becomes the facilitator of that trade, and as such is really an arm of trade rather than a regulated transportation mode. It becomes the facilitator of trade.
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    Mr. LIPINSKI. Thank you very much, Mr. Weidemeyer. Mr. Weidemeyer, one last question before I give the microphone back to the Chairman. But I'll be back for other questions later on.

    According to the report that I have, United Parcel is going to obtain 12 new flights to Osaka, including six fifth freedom flights to Taipei. Is that your understanding of the agreement?

    Mr. WEIDEMEYER. That is what we would hope it is. We have not been given a specific designation of a point. But the point that we requested was Taipei.

    Mr. LIPINSKI. Mr. Smith, do you have—is that the information you have also? Because we're trying to put together what was agreed upon in Japan.

    Mr. SMITH. Yes, our understanding is that United Parcel Service will get 12 additional flights to the new Kansai Airport in Osaka, 6 of which may be continued to another point in Asia, restricted to the fifth freedom traffic flows between the Kansai point and that point, and six blind sector, which means that they could fly to that point and beyond. And again, I think that's excellent progress. I really do think our negotiators have done an outstanding job of moving the ball down the field. But I would hope that it would be—

    Mr. LIPINSKI. Only the first step, by any account.

    Mr. SMITH. The first step.
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    Mr. LIPINSKI. Mr. Weidemeyer, do you want to add anything to what I said, what you said, or what Mr. Smith said here?

    Mr. WEIDEMEYER. No. I think just for clarification, I think all that's been agreed is that there will be one beyond point. It's our hope that, we will request that it be Taipei.

    Mr. LIPINSKI. Well, my information tells me it's Taipei. That doesn't necessarily mean it's true, but that's what my information tells me at the present time.

    Thank you, Mr. Chairman. I have questions I'd like to talk to these panelists later on, but I know there's a lot of people here. Thank you.

    Mr. DUNCAN. Thank you very much.

    Mr. Weller.

    Mr. WELLER. Thank you, Mr. Chairman, and like my friend Mr. Lipinski, I come from the Land of Lincoln, the State of Illinois, which is very, very trade dependent. The economy and many, many jobs in our State are very dependent on international trade and opportunity and access to overseas markets. And frankly, my questions are a little bit similar to Mr. Lipinski's.

    As I understand it from testimony, both FedEx and UPS are supporting the agreement that was reached as of yesterday. And I was wondering, particularly, going a little further than what we've already discussed, you were talking about the need for economic analysis as part of the discussions and seeing what the results of an agreement would be. I was wondering, can you give us, from the standpoint of working families back home, your best estimate of what the economic impact is for the United States as a result, what benefits we will get economically as a result of this agreement, Mr. Smith?
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    Mr. SMITH. Well, we've done our own independent analysis of this. And I'm not ducking the question here, Mr. Weller. But you have on the next panel one of the leading experts on this particular subject in the form of Clyde Prestowitz, who recently published, last weekend, published a comprehensive paper on this. And he might be better to answer that more objectively than us.

    In his report, it made the point, if you looked at open beyond environments in future years, the difference to U.S. economic interests was measured in the multiple billions of dollars and in the tens of thousands of additional employees. And we concur with that wholeheartedly and think that the analyses in his report may well be understated. And I'm sure in terms of the relative relationships of the U.S. and Japan interest in this particular case, he could probably give you a more objective picture of it than I could.

    Mr. WELLER. From your own company's standpoint, can you project, will you be hiring additional employees, will you be purchasing additional equipment?

    Mr. SMITH. Well, we have been a major purchaser of McDonnell Douglas MD-11 intercontinental aircraft. And assuming that our beyond rights in the Pacific are protected by the U.S. Government, I'm sure we will continue to buy the MD-11 or perhaps other airplanes, like 747-400s. But the MD-11 is really our primary airplane. We just bought five more of them, or are having five more delivered.

    And in fact, another airplane order was hanging on the balance, depending on what this negotiation turned out to be. So if it is as we understand it and we have those assurances that our rights are going to be honored, we'll go on and take that airplane, which I'm sure will be very good news to McDonnell Douglas, since it's already in our colors, I understand.
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    Mr. WELLER. From your perspective, Mr. Smith, for Federal Express, what do you see is the economic benefit to the United States as a result of the agreement that was reached yesterday?

    Mr. SMITH. You mean Mr. Weidemeyer?

    Mr. WELLER. Excuse me, Mr. Weidemeyer. Excuse me.

    Mr. WEIDEMEYER. From UPS' perspective or from a U.S. perspective?

    Mr. WELLER. Well, from UPS.

    Mr. WEIDEMEYER. Up to now, because of the limited rights we had in Asia, we really had a competitive disadvantage with being able to serve customers in southeast Asia. This will give us the opportunity to open up those markets, not only between points in Asia, but also to make that service available to and from the U.S.

    Historically, for UPS, every 70 packages we add to our network creates another job. I think there is a recognition in our work force, particularly with Rod Carey, who is the President of Teamsters, he understands that as well. And although we're not always on the best of terms, he has written a letter to President Clinton fully endorsing our position in this, that additional rights are necessary to help protect and create additional jobs.

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    Mr. WELLER. You say your formula is for every additional 70 packages, that's one more job? Is that 70 packages a day, or—

    Mr. WEIDEMEYER. Yes.

    Mr. WELLER. Okay, is one more job. How many more packages do you feel that this will generate in trade between the United States and Japan and the markets around Japan?

    Mr. WEIDEMEYER. Based on the size of the aircraft we have to fly between Asia and the U.S., Fred talked about MD-11s, we operate 747s. The size of the packages we handle are in the neighborhood of 10,000 or more. And in order for us to be successful, we have to develop markets that will fill up those aircraft. Obviously, day one, they're not going to be full with packages. But that's ultimately what we need to do. So that gives you an idea of what the scope may be.

    Mr. WELLER. That's a lot of boxes.

    Mr. WEIDEMEYER. A lot of boxes.

    Mr. WELLER. Following up on some of the questions that my colleagues have also brought up, about the role of the special trade representative as part of these negotiations, from your perspective, you've indicated that you feel the STR should be more actively involved in this process, because of the trade issues.

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    Mr. WEIDEMEYER. Yes, sir.

    Mr. WELLER. Involved here. Do you feel that there would have been a better agreement had the STR been involved?

    Mr. WEIDEMEYER. This particular instance, I'm not sure. And I'd like not to speculate on it because I don't know what underlying data would have been available. Mr. Smith has given some pretty graphic illustrations of the imbalances. And taking for granted his information is right, it's pretty obvious on its face that the imbalance needed to somewhat corrected. And every step we could take towards ultimately open skies, but along the way liberalizing it, is going to create additional opportunities for U.S. carriers.

    Mr. WELLER. With just a quick follow-up, I realize I'm running out of time, Mr. Chairman, and if you'll just grant me just a couple more seconds or another minute here, it appears we do have the agreement with Japan. Of course the U.K. issue still remains to be resolved. Just from the experience that we've had, do you feel that the Department of Transportation or do you feel that the special trade representative should take the lead in resolving the U.K. issue?

    Mr. WEIDEMEYER. At this point in time, I'd recommend that it be a joint effort. The Department of Transportation certainly is trying with every capability they have to obtain additional international rights for U.S. carriers, and Canada and Germany and now Japan are all indications that they are making progress. The U.K. may be a special situation. They have proven to be and continue to be rather intransigent in this area. And perhaps bringing some pressure to bear with trade issues as well could indeed enhance the opportunity to get an agreement.
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    Mr. WELLER. Okay. Mr. Smith, do you agree with Mr. Weidemeyer, or do you feel that one agency should have lead over the other, between STR and DOT in the U.K. negotiations that are still underway?

    Mr. SMITH. Well, our belief about the negotiations with the United Kingdom goes directly back to the point I made about equating sixth and fifth freedom traffic flows. And that the GAO noted the United States didn't have a strategy. It doesn't make any difference whether you get the USTR or anybody else involved, unless you have a strategy for dealing with the intransigents, why would they change? They have a marvelous situation.

    So I don't think the issue is the agency involved. I think it's the adoption of a strategy to get the British to liberalize. And I think that the appropriate response to the British is again, the relationship of fifth freedom and sixth freedom traffic flows.

    There's a lot of difference, by the way, I might point out, to the air services agreement between the United States and Great Britain today and the air services agreement between the United States and Japan. And those subtle differences are hugely, hugely important, which we certainly don't have the time or the inclination to go into those legal nuances. But they are very significant differences between the two treaties.

    Mr. WELLER. Well, thank you, and thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you, Mr. Weller.

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    Mr. DeFazio.

    Mr. DEFAZIO. Thank you, Mr. Chairman.

    I just want to follow up on the negotiating strategy a little bit with Mr. Smith. Tell me about comparative values here. What is, the way I always look at these issues is, what clout do we bring to the table. And what percentage of the revenues are derived by British traffic into the U.S. for some of your competitors versus what percentage you derive with traffic to the U.K. and beyond?

    What I'm getting at here is normally when you're dealing with a country of that size, we are the much more lucrative market. And their companies are much more at risk if we decide to get tough in the negotiations. Is that a correct assumption?

    Mr. SMITH. Precisely.

    Mr. DEFAZIO. So you'd be willing to take a risk here, that is in terms of, if when they, back 20 years ago, unilaterally renounced our original agreement, I mean, if we got really tough and said, look, we're just not going to tolerate this any more, I mean, if we got tough, don't you expect that those firms over there are so much more at risk that they would be putting extraordinary pressure on their government to say, look, they're finally getting serious over there in the United States. They're not going to be kicked around any more. FedEx can go for 20 years without access to our market, but we can't go for 6 weeks without access to theirs. ''I mean, I don't know that that's a good comparison.'' But I assume there's some sort of comparison like that.
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    Mr. SMITH. Mr. DeFazio, I like to think of myself as a student of history, and particularly commercial history. And the United States' willingness to accede to this position over the last 20 some odd years, led by the British, that somehow our beyond rights were unfair, illegitimate and what have you, but yet their beyond rights were sacrosanct, has been one of the damndest product positioning scams I've ever seen pulled off.

    And to this day, there is a reluctance on the part of many in this Government to equate those two economic opportunities. And the theory is, well, we hadn't said much about it until you folks started screaming about it. So ergo, we don't want to do it. And as I tried to explain in my background on the 1944 Chicago convention, framework that was put together, fifth freedoms for both sides were called fifth freedoms. One was fifths, and one was anterior fifths.

    So the proper strategy of dealing with a carrier that has an air service system which is viable only because of its sixth freedom traffic flows, which is certainly the case in the example that you said, to say that there's not a potential strategy for changing the agreement seems to be not well thought out.

    Mr. DEFAZIO. Well, I wish we could divine the root cause of the reluctance. I mean, I know in the past, of course, when we were locked in the cold war struggle with the Soviet Union, you know, basically State told Commerce or DOT, ''look, we've got to accede to our allies, or our bulwarks overseas against the evil empire here, and so what if it's to the disadvantage of our commerce, we're going to do those things.''

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    But I guess in today's competitive world, where I see the competition shifting to economics, I'm puzzled as to why the United States would continue this position. Is there any insight you can give me to any discussions you've had that aren't confidential with principals in our Government as to why they won't take that more consistent reciprocally tough line?

    Mr. SMITH. Mr. DeFazio, if I could tell you the number of hours that my business partners, some of whom are sitting behind me, have sat and speculated about that, I mean, I've spent days. I cannot understand why. I don't know why.

    Mr. DEFAZIO. Okay. Well, perhaps we'll have some Administration witnesses at a soon future hearing, and maybe they can—

    Mr. SMITH. Well, as I mentioned a moment ago, I would recommend to the Congress that they simply ask two questions. One, to be shown some of the economic analyses on these air service agreements that are made. And I think you will be thunderstruck. If the numbers that we and United Parcel and some of the other people, that we have, all of which, ours are produced not by us, these are produced by external consultants.

    Just ask to see those. And then ask why the United States Government does not equate beyond rights for foreign interests, which is U.S. trade—again, this is not foreign trade, this is U.S. trade—why the United States has been unwilling to equate the two. I cannot answer why the Government has been unwilling to do either of those two things.

    Mr. DEFAZIO. Okay, I thank you. I thank the Chairman for the time.
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    Mr. DUNCAN. Thank you, Mr. DeFazio.

    Mr. Ehlers.

    Mr. EHLERS. Thank you, Mr. Chairman.

    Just a brief question for both of you. I gather that you are reasonably happy with the agreement that was reached yesterday, reasonably satisfied with it. Mr. Smith, is that—

    Mr. SMITH. Well, we are extremely pleased and very grateful to the U.S. Department of State and the Department of Transportation for asserting in the last meeting this equivalency of economic rights and stating unequivocally that these rights would be protected by countermeasures against Japanese sixth freedom movements in the event that our rights were not honored. And we have been very gratified that that has been confirmed to us by the highest levels of the United States Government.

    And we think this agreement marks great progress, assuming that is correct. I simply point out to you that the written agreement that will be signed will simply state that both sides adhere to their interpretation of the agreement. And that means that the Japanese, should they desire to do so, can take the position 6 months, a year from now, 18 months, that the interpretation which they adopted in 1993 is again on the table and our flight to wherever is not going to be approved.

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    And that is exactly what we've been going through for the last 2, 2 1/2 years. And it has been extremely, an extreme impediment to running our business and taken a huge amount of time. And as I mentioned to Mr. DeFazio, it has done nothing short of amaze me that we've been permitted to be treated this way.

    Mr. EHLERS. Just a follow-up. Later on in today's hearing we'll be discussing passenger service to Japan and beyond. And there's a move by some American airlines, I understand, to say that we should give up some of our fifth freedom rights in exchange for more routes between Japan and the U.S. I take it from your comments you would advise against that?

    Mr. SMITH. Well, it's our understanding, by the way, Mr. Ehlers, in having heard this from my counterpart at American Airlines and Governor Baliles, who is the chairperson of the ACCESS Japan Coalition, that that is not their position, that they do not want to trade away U.S. beyond rights for additional access. And certainly that is the case in the cargo side of the house.

    I can't speak authoritatively on the passenger side. I can tell you in the cargo side that were the United States agree to limit or to eliminate beyond authorities for U.S. interests and trade for those interests strictly third and fourth freedom rights, it would be a poor trade at the most incredible levels. And again, to the Government's credit, they've made it very clear to the Japanese government, according to our information, that they will not countenance any such trade.

    Mr. EHLERS. Thank you.

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    Mr. Weidemeyer, do you have anything to add to that, in response to my questions?

    Mr. WEIDEMEYER. Yes, Mr. Ehlers. I would just support what Fred has just said. It's our understanding as well that the U.S. Government has taken the firm position that the existing rights are not touched in any way by this and that these are additional rights, therefore enlarging the pie rather than splitting up a standard size pie in smaller pieces. We've made the pie bigger so that there are more entrants and more competition.

    Mr. EHLERS. All right. We'll learn more about it in the second panel.

    Mr. Chairman, I'll reserve the remainder of my time for questions during the next panel.

    Mr. DUNCAN. All right. Thank you very much.

    Mr. Cramer.

    Mr. CRAMER. Thank you, Mr. Chairman.

    And I'll be able to be brief, because many of the questions I had on my mind have already been asked of you. Both of you, you indicate your companies have had to be aggressively involved in negotiations in spite of what our Government was trying to do. And you've indicated that both the United Kingdom and Japan have presented challenges, certainly, to the old way of thinking and the old way of negotiating. And I hope we've learned from this.
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    On the U.K. side, would either of you care to comment about the progress we seem to be making and where we are, and where you think we are with regards to getting an agreement there?

    Mr. WEIDEMEYER. I may be in the dark, but I'm not aware of any progress that has been made. I have seen things in recent weeks that we're considering getting back together and hopefully we can make some progress. But I have no independent knowledge that that has taken place or meetings have even been scheduled.

    Mr. SMITH. Well, it's important to recount just a very small bit of history. Last year when the so-called mini-deal was put on the table, we objected very strongly to the fact that cargo was not included in the mini-deal. And I think UPS did as well.

    At that time, we were informed very directly by U.S. Government representatives that we should not oppose the mini-deal, because liberalization of cargo was ''a done deal,'' and that it would be very shortly thereafter addressed.

    In actual fact what happened is the Secretary of Transport of the United Kingdom left his post and took over a political position with Prime Minister Major, and a new group, a new Secretary of Transport came into the Secretary of Transport situation that did not feel bound by that agreement, I suppose, that had led to those comments to us.

    And in fact, the British position, when talks were held in September, were significantly regressive from even the most modest proposal the United Kingdom had put forward before. So far from being any progress since the mini-deal, there has been a significant retrograde movement, as far as we can tell.
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    Mr. CRAMER. All right. Mr. Weidemeyer, you recounted a history in your efforts to move from the Stanstead Airport to the East Midlands Airport, negotiating that. How long did that take you to finalize that?

    Mr. WEIDEMEYER. It seems like ancient history now. But it took a period of months. And I just want to reemphasize, the difficulty with the situation was not with the U.S. representatives. The difficulty with the situation is the bilateral agreements which are subject to interpretation and misinterpretation. And that's exactly what occurred in that situation.

    Mr. CRAMER. So that's what you mean when you distinguish between the bilateral relationship versus the bilateral agreement?

    Mr. WEIDEMEYER. Yes, sir.

    Mr. CRAMER. All right. Thank you. I yield back my time.

    Mr. DUNCAN. Thank you very much, Mr. Cramer.

    Ms. Danner.

    Ms. DANNER. No questions.

    Mr. DUNCAN. All right, thank you very much. Mr. Geren.
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    Mr. GEREN. No questions.

    Mr. DUNCAN. All right. Mr. Kim.

    Mr. KIM. Mr. Chairman, thank you for recognizing me. And I'm sorry I was so late. I had to go to another hearing.

    I don't have any questions at this time, Mr. Chairman.

    Mr. DUNCAN. Mr. Lipinski, do you have any other comments?

    Mr. LIPINSKI. I have a couple of questions, if you don't mind, Mr. Chairman.

    Mr. DUNCAN. Go ahead.

    Mr. LIPINSKI. I have a fax over here which is a document from the White House Office of the Press Secretary, then it goes on, it says United States Department of Transportation. And it's pertaining to the handshake agreement that we have achieved in Japan. And there's a paragraph in here I just want to ask both of you gentlemen, well, I don't have to ask you, Mr. Weidemeyer, because it doesn't pertain to you, only you, Mr. Smith. It pertains to you.

    And it reads the following: The agreement also provides additional operating flexibility for Northwest Airlines, Federal Express, and United Airlines. It permits these carriers to operate from any U.S. city and serve three additional Japanese points which may be combined with these carriers' existing Japanese rights.
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    Now, is your interpretation of that that Northwest, FedEx and United are going to get three each, or is it one per each one? Do you want me to read it to you again?

    Mr. SMITH. No. My interpretation of that, as I understand it today, is that each of the incumbent carriers could serve three each. The point that you should recognize, again, I point out to the information that I mentioned to you, the ability to serve those three points on the third and fourth freedom basis are of marginal, if any, economic utility to any of the carriers.

    Mr. LIPINSKI. Run that one by me again?

    Mr. SMITH. Well, let's take a real life example, Mr. Lipinski. I mean, the profundity of these traffic flows is very, very huge. If I'm a U.S. carrier flying from Memphis or Louisville or California or what have you, and I can serve one additional point in Japan, or three additional points, but I cannot serve any beyond, then I am limited only to the traffic which I can pick up in that catchment are in the United States, and to the catchment area in Japan.

    The Japanese carriers, on the other side, can fly from any point in Asia to any one of those three points, and do. And pick up traffic all over Asia and commingle it with traffic originating in that catchment area in Japan and move it to the United States, and conversely, in their movement from any point in the United States, they can pick up traffic not just to Nagoya or Fukiyoko or Sapporo, they can pick up traffic from any point in the United States to nay point in Asia that's connected by that airport. There's no economic benefit of having those three points.
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    Mr. LIPINSKI. But under your interpretation of our agreement with Japan, in my interpretation of it, if you are going to be stamped approved by Japan to fly into three new sites in Japan, should you not then be able to fly beyond that?

    Mr. SMITH. Yes, sir. That would be real liberalization there, from our standpoint.

    Mr. LIPINSKI. But underneath your interpretation and my interpretation, it would seem to me that this here is nothing particularly new. You should have had this ability in the first place.

    Mr. SMITH. Well, no, sir. The existing air service agreement limits FedEx, at least, to service three points in Japan. Tokyo's Narita Airport, Osaka, which is now the new Kansai Airport, and Okinawa.

    Mr. LIPINSKI. And now with those three you have beyond rights, correct?

    Mr. SMITH. That's correct. The three additional points, there are no beyond rights whatsoever.

    Mr. LIPINSKI. But in your interpretation and mine, there should be beyond rights with those?

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    Mr. SMITH. Well, the air service agreement would have to be modified to include those points on an unrestricted basis. You see, the air service agreements have rights and points. And we are restricted to three points in Japan: Tokyo, Osaka and Okinawa. And from those three points, according to the air service agreement that we have, our interpretation, DOT's interpretation, we can fly from those three points to any point.

    Mr. LIPINSKI. But if you—

    Mr. SMITH. As long as we meet the test of Article 12.

    Mr. LIPINSKI. Out of this latest agreement, Article 12, that's where—what is Article 12?

    Mr. SMITH. Article 12 states that, there are a lot of technical issues, but that the primary purpose of the air carrier service conducted between the two points shall be the movement of third and fourth freedom traffic. Let me give you a real life example, and it's something that doesn't apply to us, but which you can ask Mr. Hirst about from Northwest.

    Several years ago, Northwest wanted to fly over Japan to Australia, which sounds a little convoluted, but actually it's a fairly efficient routing. The percentage of seats on that flight sold between the United States and Australia were relatively small percentage. The Japanese objected to that under Article 12, and said it doesn't meet the primacy test. Well, where is that primacy test? Is it 5 percent? Is it 50 percent?

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    Mr. LIPINSKI. They were maintaining it was 50 percent in that case, weren't they?

    Mr. SMITH. In the passenger side of the house. But I noted to you before they've been silent on the cargo side of the house, for obvious reasons. The three additional points for the incumbent carriers as far as cargo is concerned will be of marginal benefit. Now, they may be of great benefit to Northwest and United. I don't know.

    But as I tried to describe before, Japanese carriers at these three points, any service that they have to any other point can be carried into the United States. Whereas our service to those points can only be carried between very small catchment areas between the two. So that is a very limited economic opportunity.

    Mr. LIPINSKI. But if you were to get beyond rights with these three new locations, then it would be very advantageous economically to you, correct?

    Mr. SMITH. And that is why we support open skies with Japan. Because we would like to have the ability to serve any point in Japan to any other point, not just the three points that we're currently authorized to do. And we are more than willing to see our ''advantage'' under our 1952 agreement go away, and let the market decide who's winners if we had that. But this agreement, again, it's not open skies. But we applaud the negotiators. It's a tough thing, and it is progress. And we appreciate it.

    Mr. LIPINSKI. Well, I applaud the negotiators also. And I hope we can get it totally and completely firmed up. Because it is a step in the right direction, but a great deal more has to be done, I believe, in regards to Japan and the United Kingdom.
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    I thank both you gentlemen for being here. I have many other questions, but I know we have to move on to a second panel, and I've had two opportunities to speak already. So Mr. Chairman, I turn back the microphone.

    Mr. DUNCAN. Thank you very much, Mr. Lipinski. And we do need to, we have some other witnesses that we need to move to.

    Gentlemen, let me say this. I just want to thank you once again, and we are going to continue to look very closely at this relationship with the United Kingdom. And as I understand it, and from the information, I received a call from Secretary Pena shortly before this hearing, and if the information that we've gotten from the White House and from the Department of Transportation about this agreement, apparently there's been a handshake agreement so far that will be formalized by mid-April.

    If the Japanese do not fully comply with that, if you have ''scheduling difficulties,'' Mr. Smith, after that, then you let us know. Because I can assure you, and I think you know this from the earlier hearing a few months ago, there is a very strong majority on this subcommittee that would be very willing to fashion some sort of legislative remedy if it was necessary to do that. We really want to avoid that. But the Japanese need to fully comply with this agreement that was reached yesterday, and we need to work toward other agreements of this nature as we move down the road.

    But thank you very much for coming to be with us today. Your testimony has been very helpful.
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    Mr. SMITH. We appreciate the support. Thank you.

    Mr. WEIDEMEYER. Thank you very much.

    Mr. DUNCAN. We will call our second panel at this time. And panel number two consists of Mr. Richard B. Hirst, who is Senior Vice President for Northwest Airlines; Mr. Scott C. Gibson, who is Vice President for Planning and Corporate Strategy of Trans World Airlines, Inc.; Mr. Cyril D. Murphy, who is Vice President for International Affairs of United Air Lines; and Mr. Clyde V. Prestowitz, Jr., who is President of the Economic Strategy Institute.

    Gentlemen, thank you very much for being with us. And we'll begin your testimony at this time. And I suppose that we'll just go in the order as we move down the table. And Mr. Gibson, we'll start with you, and then Mr. Hirst, we'll go to you, and Mr. Murphy will go third. And thank you very much. Mr. Hirst, you may begin your testimony. Mr. Gibson, I'm sorry.


    Mr. GIBSON. Thank you, Mr. Chairman and members of the committee. TWA appreciates the opportunity to appear before you today to present testimony on the important issues raised by the U.S.-U.K. bilateral negotiations.
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    Our aviation relationship with the United Kingdom has been difficult for many years. And it's resulted in high fares and limited service on the most important trans-Atlantic route of our Nation. The restrictive bilateral also produced a market in which the two British flag carriers have a 60 percent market share compared to 40 percent for six U.S. flag carriers. One issue for the United States is how to change this situation, how to expand service for the benefit of the traveling public, and enhance the competitive opportunities of U.S. airlines.

    I would also suggest that another major public policy issue related to these negotiations is how to give TWA the opportunity to succeed as a viable trans-Atlantic competitor. TWA provides important U.S. flag service to 12 major destinations in Europe and the Middle East. Although TWA has suffered a decade of financial adversity, it has turned the corner and begun the return to profitability. The strengthening of TWA's route system on the Atlantic will benefit the U.S. balance of payments, enhance U.S. flag competitiveness and preserve the jobs of TWA's 23,000 employees.

    As you know, in the last round of negotiations in October 1995, the United Kingdom made a proposal that would have allowed a limited transfer of service from Gatwick to Heathrow, and in a precedent-setting move, would have removed the ability of the U.S. Government to pick which carriers and which routes would receive this new service. It would have totally precluded TWA's proposal for new service between New York-JFK and Heathrow. TWA believes that the U.S. Government acted properly in rejecting this inadequate British proposal, and while we urge that negotiations be resumed and we hope that the end result will allow the United States to designate TWA in the JFK to Heathrow route.
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    In this testimony I will briefly review the history of TWA's financial difficulties, our attempts, with the dedicated support of TWA's employees, to returned to sustained financial strength, and the public benefits that would be achieved by TWA's New York to Heathrow route. Finally, I will review the course of the bilateral discussions and make recommendations for future steps. I also ask permission to submit a more detailed statement for the record.

    TWA has suffered massive financial problems over the past 2 years. It has endured two bankruptcies and has begun the arduous climb back to financial strength. We recognize that we still have substantial work to do. We succeeded in 1995, but it was a very good year for the industry, and we have to be prepared for the inevitable downturn. We have to take several more steps, including the following. We have to modernize our fleet, and last month we ordered 20 Boeing 757s with an option for another 20, which is TWA's first new equipment order in 10 years. We are negotiating with manufacturers for additional aircraft and are planning to hushkit our existing DC-9 fleet.

    We have to reduce our costs. We are reviewing all phases of our operation to increase efficiency, reduce costs and become more competitive. Our employee task forces have already identified over $100 million in cost savings.

    Finally, we have to fill the void at the heart of our trans-Atlantic route structure. To do this, we need a New York-Heathrow route.

    The New York-Heathrow route is not only of immense importance to TWA, but it's also the single most valuable route that the U.S. could achieve in these negotiations. While other airlines are proposing to switch existing service from Gatwick to Heathrow, only TWA is proposing entirely new service in a competitive market. TWA has worked hard to develop its major international hub at JFK and connects 26 domestic U.S. cities with 11 major European destinations. However, it is weakened because it lacks access to London, which accounts for almost one-third, and actually in 1994, it was 32 percent of all U.S.-Europe passengers.
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    TWA's inability to carry traffic between its major gateway and London, has an adverse impact on our trans-Atlantic system. Without access to London, we lack market identity at New York and cannot compete effectively for corporate traffic, because companies desire to contract with one airline for all major trans-Atlantic markets. Without the support of connecting London passengers, our domestic spokes are weaker, which limits our ability to expand on these domestic segments. A JFK-Heathrow route would give TWA badly needed market identity in the trans-Atlantic market, the support of connecting traffic and the ability to turn our international system into overall profitability.

    TWA forecasts that it will achieve $100 million annually in operating revenues on this route. In addition, we will earn between $20 million and $40 million in revenue on other trans-Atlantic routes that we do not today have access to, because of our inability to offer a comprehensive route system across the Atlantic.

    TWA recognizes that other U.S. carriers have legitimate desires for access to Heathrow, and would like to transfer current flights that now serve Gatwick. However, the public benefit for such transfers cannot match the gain that would be achieved by a new route for TWA. Only TWA would add entirely new service on this route, its daily Boeing 747 would provide additional U.S. flag competition for British carriers at New York, where TWA has traditionally been a major trans-Atlantic carrier, as well as new on-line service for the numerous points served by TWA's New York hub.

    The British remain intransigent. Their last offer was sharply circumscribed to allow switching of existing service from Gatwick to Heathrow while precluding any possibility of TWA providing its new service from New York. We are pleased that the Government stood firm. It was correct to be extremely dissatisfied with the nature of the British proposal, particularly after the United Kingdom had promised in the first round of 1995 negotiations to be more forthcoming with Heathrow authorities.
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    We are well aware that other carriers have also suggested that TWA would be happy to take the Gatwick route offered by the British and give up our attempts to return to Heathrow. TWA rejects this advice, because we want to be an effective competitor in the New York-London market, and we know this requires access to Heathrow. In this market, Gatwick is a distant second choice.

    We accept the testimony of Sir Colin Marshall, the Chairman of British Airways, who recently told the U.K. inquiry on the construction of Terminal 5 at Heathrow that expansion at Gatwick was not an alternative. He noted that Gatwick had the disadvantages of greater distance, time and cost for most passengers from the main markets in the southeast of the U.K. and was limited by a single runway.

    In the current negotiations, the British have also claimed that a route for TWA would be simply too much, that it would result in an imbalanced agreement that is far beyond the scope of the limited and balanced exchange of Heathrow routes that was intended. This argument comes with poor grace from a government whose airlines carry 60 percent of total U.S.-U.K. traffic. Only a government that believes in mercantilism rather than competition can be concerned about the impact of one flight by one carrier in a market the size of New York-London.

    TWA believes that negotiations should be resumed and that both the U.S. and U.K. should attempt to reach an agreement that will expand service opportunities between our countries. We do believe it will be possible to reach an agreement. Mr. Malcolm Rifkind, the British Foreign Minister, has recently indicated a willingness to resume negotiations on the basis of the last British offer. While that was inadequate, there are possible counteroffers that may lead to the British being more generous.
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    In this regard, I believe that Senator Pressler's recent speech to the International Aviation Club was very helpful in moving this discussion forward. To encourage a bigger, bolder and braver approach to negotiations by the British, he suggested movement by the U.S. on two issues, foreign ownership of U.S. airlines foreign carriage of Fly America traffic. TWA endorses both these proposals in a regime of true reciprocity, but believes that the current British proposal would not justify granting its carriers benefits in either category.

    If we are not successful in reaching an agreement in this round of negotiations, what do we do next? Because there is nothing left for U.K. carriers to gain from the U.S., there is no incentive for the United Kingdom to undertake negotiation to allow U.S. carriers to achieve their goals of entry into Heathrow and expanded access to the U.K. market. TWA believes since the British have nothing to gain, the only solution is to create a threat of loss. In my written testimony, I have discussed in detail our ideas for attacking British airways' excessive reliance on sixth freedom traffic, which we propose purely as a market opening tactic.

    Thank you for this opportunity. I'll be pleased to answer questions you may have.

    Mr. DUNCAN. Thank you very much, Mr. Gibson.

    Mr. Hirst.

    Mr. HIRST. Thank you, Mr. Chairman. On behalf of Northwest Airlines, by the way, I'd like to mention that we are a carrier that also has an interest in serving Heathrow. We also have strong views about Bermuda II, which we think was a disaster for the U.S. And we have views as to what the proper way is to deal with that. And I'll be happy to discuss those at some point.
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    But I'm here mainly to talk about Japan, and I have limited time. I would like to say that we congratulate the negotiators on the U.S. side on the cargo agreement today. Northwest is also, as you may not know, the largest operator of heavy cargo, or the largest operator of heavy cargo across the Pacific. We have eight 747s that are devoted entirely to cargo.

    And we are a strong supporter of open skies in the Japan air cargo market, as well as in the Japan passenger services market. We think this agreement is a step in that direction, an important step. And specifically, I would like to congratulate Mr. Turillo and Mr. Spiro, of the State Department, as well as Mr. Hunnicutt and Mr. Oppler of DOT on this agreement. Mr. Spiro was also the lead negotiator in the China agreement last December that led to Northwest's ability to serve Beijing non-stop from Detroit.

    And so we think they're doing a good job in defending U.S. interests. And I think that is the proper perspective from which to examine the relationship with Japan, that is, not from the perspective of the parochial interests of Northwest Airlines or any other airlines, but from the standpoint of what is in the U.S. interest.

    And from that perspective, we believe that what is most important is I think was implicit in Mr. Smith's testimony, that is, not so much the relationship in service between the U.S. and Japan directly, but rather, service between the U.S. and Asia. And the reason that I would say that is shown by the top map over here. See those lines, what they demonstrate is service into Japan and then from Japan into points like Bangkok, Singapore, Beijing, Taipei, many points in Asia, which can only be reached via Japan.
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    Most of the markets there are too thin or too distant to be served directly. And so the U.S. must have access to Asia via Japan. And that, we believe, should be the focus of U.S. policy in dealing with Japan at this time, although it's very important to open the Japan market to the extent possible directly.

    But the reason we say that is really twofold. First, the U.S. is actually winning the competition between the U.S. carriers and Japan carriers, and winning it very decisively. As shown by this next chart, a bit over 500 flights each way per week between the U.S. and Japan, the U.S. has two-thirds of those. The U.S. has 343, Japan has 158. So we have essentially two-thirds of the market, Japan has one-third. And this market advantage has generated a $4.8 billion trade surplus for the United States in its trade with Japan, one of the two major surplus areas in a trade that overall has a $60 billion deficit.

    Consumers are well served by the current market structure between the U.S. and Japan, contrary to what has been alleged by some other airlines. The market between the U.S. and Tokyo is less concentrated than the market between the U.S. and Heathrow, as measured by the HHI concentration index that the Justice Department uses, substantially less concentrated. Fares are comparable on a seat per mile, or cents per mile basis, between the U.S. and Japan versus the U.S. and the U.K. Load factors are actually lower across the Pacific than they are across the Atlantic.

    And as I think we've shown in a variety of places, there are actually more flights between the U.S. and Japan than there are between the U.S. and the U.K. when you include all of the U.S., such as Hawaii, in your calculations. We've produced a study, because there's been a lot of misinformation on these points, called Getting It Right, which addresses the nature of the U.S.-Japan market.
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    And we're releasing it today, it's a thorough study. It builds in part on work done by Mr. Prestowitz at the Economic Strategy Institute. And his excellent report was released last week. And Mr. Chairman, I would ask that it be placed in the record with your permission.

    [The information received follows:]

    [Insert here.]

    Mr. HIRST. Thank you, sir.

    As a summary point here, notice the trend in market share from 1975 forward. The bottom chart shows the trend in the U.S.-Japan market share. Often the Japanese, by the way, argue that the present agreement is unbalanced in the U.S. favor.

    But 10 years ago, even 15 years ago, Japan had more than half the market. Over the last 10 years, with United entering the market, and with United and Northwest both become more efficient as a result of deregulation, we have captured share from the Japanese carriers, under the agreement. The agreement hasn't changed substantially except to some degree against the U.S. during that period.

    During the same period, under Bermuda II, where beyond rights were capped, and eliminated eventually, the U.S. share has dropped from approximately 60 percent to approximately 40 percent.
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    The U.S. is doing fine as a country in this market, although we recognize that there are carriers that would like to participate in it and there are localities that would like more direct service.

    But again, turning to Asia, Asia is likely to be the most important market in the world to the U.S. by the year 2010. It's the fastest growing market in the world. Asian economies beyond Japan are growing three times as fast as those in Japan and Europe. It will be the largest market, the largest market, for U.S. exports by the year 2010. And over half of the U.S. international passenger traffic by the year 2010 will travel to Asia and points beyond Japan.

    So the U.S. must have access to Japan, and it should have access by its own carriers, whose costs are about half those of the carriers in Japan. But in order to provide that service, the U.S. must have hubs in Japan. You can only operate this kind of traffic via hubs. You need to aggregate traffic in one point, combine it with local traffic flows and flow it on. Japan is the only place that has the kind of flows and the kind of geography that allows that to happen.

    If the U.S. doesn't have hubs in Japan, it cannot compete with Japanese carriers for those flows, and Japan will dominate that traffic. So that's why this is so important.

    Japan understands this, and has used every negotiation since 1982, beginning with United's attempts to gain the right to serve Japan from Seattle. Japan has used every negotiation as an opportunity to restrict U.S. beyond rights. And we are concerned that as we move into passenger negotiations, as we should, in order to move in the direction of open skies in the passenger area, that Japan not be given that opportunity again.
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    We're concerned partly because of Japan's history in this regard and partly because some carriers have called for a trade in which the U.S. would be asked to exchange a cap on beyond rights which are essential to U.S. access to Asia, in exchange for additional third and fourth freedom rights for them. They have opened that door, and if we don't close it before talks begin, Japan will take advantage of it.

    So we believe there should be the following sequence pursued toward passenger talks. First, Japan should be required by the U.S. to grant pending fifth freedom applications by U.S. carriers. There are two that Northwest has and two that United has. We have the right, under the 1959 minute to the aviation agreement, to have those applications granted without any process by Japan. And if Japan believes they're not operated in compliance with the agreement, then Japan has the right to challenge that, ex post facto, after 6 months, in consultation. So they should grant those rights first, so they can't be used as leverage in a passenger negotiation.

    Second, we should move on to negotiating an agenda with the Japanese addressing what the passenger talks will consist of after all other pending fifth freedom issues are resolved. By that, I mean talks should be held under Article 12 which JAPAN has requested to settle the ground on fifth freedom issues after our applications have been granted and after we've resolved those pending Article 12 issues, pending fifth freedom issues, we're then in a position to move into passenger talks without having them contaminate the attempt of the U.S. and Japan to exchange additional opportunities for both sides.

    We believe if we follow that sequence, first pending applications are granted, second, other fifth freedom issues are addressed in talks as the Japanese have requested and as they have the right to request, and then third, we proceed to an agreed agenda that would exclude any fifth freedom issues from passenger talks, that the U.S. has a good opportunity to expand the pie, to gain new access to Japan, to do it without being leveraged by pending applications or other fifth freedom issues, and potentially to move in the direction of open skies in passenger as we've done in cargo.
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    Thank you.

    Mr. DUNCAN. All right, thank you very much, Mr. Hirst.

    And next we'll go to Mr. Murphy from United Airlines. Mr. Murphy.

    Mr. MURPHY. Thank you, Chairman Duncan, Congressman Lipinski and members of the subcommittee. I want to thank you for inviting me to appear today. I've prepared a written statement and I'd like to submit that for the record, with your permission.

    I would like now to summarize the points made in that document. There are three questions I would like to answer today. First, where are we in our aviation relationships with Japan. Second, what brought us to this present impasse. And third, what do we do to move forward in a way that advances U.S. interests.

    In 1952, the U.S. started out with a liberal open-entry agreement with Japan. I cannot improve on the words of Chairman Shuster when he described that agreement as, ''extremely liberal; so liberal that Japan has spent decades engrafting restrictions upon its basic terms. It is these restrictions that need to be removed. However, it seems that Japan wants to bring all of the rights granted in the 1952 agreement under its tight regulatory control. This should not be permitted.''

    If its provisions had not been whittled down over the years, there would be no Japan access issue today. The 1952 agreement guaranteed the U.S. the right to designate as many carriers as it wanted to serve Japan, with as many frequencies as those carriers felt the market required, and to continue those flights beyond Japan to Asia.
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    How, then, did we get from there to here? Well, according to a recent article by Mr. Hanyu, the Chairman of Japan's Aviation Delegation, the impetus for change was the British success in negotiating the highly protective Bermuda II agreement with the U.S. in 1977. To the Japanese bureaucrat, that agreement was a regulator's dream come true. With the Pacific version of Bermuda II, not only could Japan control every aspect of competition by U.S. carriers, but it constructed the environment to favor Japanese carriers, even when, as is the case today, U.S. carriers are more competitive.

    According to Mr. Hanyu, in 1977, Japan had decided that it, too, wanted a Bermuda II style agreement with the U.S. It called for renegotiations. To its credit, the U.S. had learned its lesson with the British. We did not jump at this opportunity to shoot ourselves in the other foot. Then in a tactic that has served it well over the subsequent years, Japan simply ignored its commitments under the agreement. When the U.S. Government, in the late 1970s, designated a new carrier, United, to operate to Japan from the Pacific Northwest, Japan refused to honor the designation. What followed was a series of agreements and actions that step by step effectively gutted the liberal provisions of the 1952 agreement. These steps are outlined on this chart.

    In 1982, to resolve the dispute over United's new authorization, the U.S. agreed that all new designations would be negotiated with Japan and they would not have the ability to operate hubs in Japan. This ensured that all subsequent awards would be in the form of point to point authority, with no rights to operate beyond Japan. The MOU carrier concept was born.

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    In 1985, the restrictions were expanded to include the 1952 carriers. The U.S. carrier operations were capped to those U.S. points that the CAB had previously named in the 1952 carrier certificates at that time. Because of that, the U.S. cannot today integrate its highly efficient domestic hub structure with its international routes to the Pacific, even for the original 1952 carriers.

    For instance, United, the biggest U.S. carrier to Asia, can fully integrate its Pacific routes with only one of its principal domestic hubs, San Francisco. In 1986, Japan designated a second Japanese carrier to perform international services, and it began developing Asian hubs and seeking access from them to the United States. In 1989, Japan expanded the number of U.S. routes and capacity under its regulatory control by limiting the expansion of new points to those only under MOU conditions. In 1994, Japan announced a freeze on both U.S. carrier, passenger and cargo airport operating slots when the new Osaka Airport opened, foreclosing long-awaited growth in Japan's second largest city, and with Narita's locked and strained since 1989, the only potential for growth into and beyond Japan for the foreseeable future.

    Under domestic pressure, Japan agreed with the U.S. carriers on a multi-year schedule of constrained growth at Osaka, then reneged on that agreement only months later, by disapproving our sole service and FedEx Subic Bay service in early 1995. In 1995, Japan and the U.S. reached an understanding that Japan would honor most of the beyond rights of U.S. cargo carriers. In March of 1996, Japan has again threatened to withdraw those promised U.S. cargo rights. Evidently yesterday we have now reached some limited agreement on cargo. But U.S. passenger rights beyond Japan remain both frozen and unaddressed.

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    What we are left with now is a Bermuda II agreement without a formal document. The only remaining item outside Japan's formal control is the 1952 carriers rights to operate hubs in Japan in order to serve the rest of Asia. And even there, as FedEx has experienced, and our own demonstrates, Japan now has its eyes on that last regulatory prize. Because of the rights previously surrendered, Japan can dangle the carrot of allowing some new service in front of our communities and carriers, if in return they will support Japan's negotiating efforts before the U.S. Government. That is where we find ourselves today with ACCESS U.S.-Japan.

    And that is why the Japan Times can confidently predict as these excerpts from its February 15th edition show, that ACCESS U.S.-Japan ''is likely to be a stronger supporter of Japan,'' and leading an MOU official to say that ''Tokyo welcomes the efforts of the MOU carriers.'' Sad to say, Japan has succeeded in pitting U.S. carriers against each other and should Japan succeed in its strategy, the economic loss for the U.S. economy will far outweigh the incremental gains by one or two U.S. carriers.

    The Asian market is enormous and growing faster than any other. As this chart shows, by the year 2010, there will be 10 Asian air transport markets that will match or exceed in size today's two largest markets in Asia. Why then is Japan so set on tightly regulating U.S. participation? The answer is that Japan's Ministry of Transport seeks to salvage a disastrous regulatory policy that has left JAL and ANA unable to compete effectively with U.S. and other lower cost carriers.

    This chart is illustrative. It plots a comparison of JAL and United's costs based on ICAO statistics. That's in the first chart. As you can see, as late as 1985, JAL's costs were below ours. By 1993, however, they were dramatically above ours and were continuing to trend in the wrong direction. Not surprisingly, it was after 1985 that the U.S. carriers' share of the trans-Pacific market began to exceed that of Japanese carriers. Clearly, the answer is relative costs. But to admit that, Japan's MOT must confess that its regulatory policies are an abject failure. It is far easier, they believe, to repeat their myth that the underlying 1952 agreement is somehow unfair.
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    Let me show you something interesting: the performance of Japan Air Lines against those of its Asian neighbors with more liberal aviation policies. As you can see from this chart, the airlines of Korea, Singapore and Taiwan, all of which have liberal aviation agreements with the U.S., have a rate of growth that has far outstripped that of the Japanese carriers in expanding their global coverage of the world's most important trade centers. Similarly, as you can see from this next chart, those same carriers have more than doubled their share of the U.S.-Asia market, while Japanese carriers' share has almost been halved.

    Also on a global basis, their participation in the global market has nearly tripled, while Japan's carriers show no growth over the past 18 years. Japan wants to salvage the reputation of its bureaucrats and carve out a protected market for its uncompetitive carriers by denying U.S. and foreign carriers the means to compete effectively. Japan's current objective, therefore, is to eliminate the rights of U.S. carriers to operate hubs in Japan to serve the growing Asian market.

    Equally important, we must recognize that no U.S. carrier today operates any non-stop service to any Asian point except Japan unless that carrier also operates a hub in Japan. These non-stop and hub services are complementary, giving U.S. carriers a presence in an Asian city that is competitive with both Japanese and other Asian carriers. If we lose hub access beyond Japan, then all U.S. carriers will be in the same position that a number of U.S. carriers, most recently Delta, have been in when they tried and failed to maintain a system of service to other Asian points without a hub in Japan. It would leave Japan with the only efficient carrier networks in the Pacific.

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    Simply put, Japan intends to gain through regulation an advantage that carriers cannot win in the marketplace. What should we do about it? Just last month, Charles Hunnicutt, DOT's Assistant Secretary for Aviation and International Affairs, stressed the need for U.S. policy makers to concentrate on the long term. ''It is important to underscore that in our dealings with Japan we ought not settle for short-term gains at the cost of sacrificing long-term needs into the next century.'' His comments echoed those of Secretary Pena in conjunction with his recent extended trip throughout Asia.

    We agree completely. It has been our concern about the future consequences of any negotiations with Japan that it led us to commission Booz, Allen and Hamilton to look at what the Japanese policies would mean to the U.S. in the coming decades. We believe that no policy can be relied upon if it is not based on economic reality. That is why we took the lead in gathering these facts. The study conducted by Booz, Allen and Hamilton concluded that over the next two decades, the cumulative reduction in U.S.-Asian trade balance from restrictions on the U.S. expansion of passenger travel in Asia through Japan could exceed $100 billion. Japan, the Booz, Allen study suggests, would be the primary beneficiary.

    A subsequent independent study conducted under the supervision of Clyde, here, at the Economic Strategy Institute, reached much the same conclusion. In that analysis, as we will probably hear more from in a few minutes, U.S. job losses could reach as high as 213,000. There are real dollars and real jobs that will be lost to the U.S. economy if Japan has its way.

    And just as now it is easy to criticize the mistake we made in Bermuda II, it will be easy to recognize in 2010 to recognize in retrospect the damage done by concessions to Japan in 1996. The challenge is to recognize those downsides in advance and negotiate accordingly. In this regard, the economic analysis of Booz, Allen, as well as the Economic Strategy Institute, have armed the U.S. Government with the knowledge it requires. What is needed now is the political will to act and avoid the dominance of another successful U.S. industry by Japan.
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    In our view, and we hope in yours, the responsible course requires the U.S. first reconcile its well crafted international aviation policy with its negotiating objectives. That policy states, ''Carriers wishing to establish global networks require a higher quality and quantity of supporting route authority than they have sought in the past. Airlines will become increasingly concerned with every market that enables them to flow passengers over any part of their system network. These airlines will be looking for broad, flexible authority to operate beyond and behind hub points in addition to the hub to hub markets between two countries. At present, governments operating in a bilateral context naturally focus on opportunities for their respective carriers to serve the local market between two countries. In a bilateral context, services destined for or coming from third countries receive less consideration. In the future, governments will have to adjust their focus to bargain for the bundles of rights that will permit airlines to develop global networks.''

    We cannot continue to proceed by committing the same mistakes in the 1990s as we did in the 1980s. As the international policy recognizes, adjusting our focus should mean that integrating domestic and international hubs has to have the highest priority. Specifically, it means that undoing the damage of the 1980s must be undertaken so that those carriers that can still hub in Japan can once again have the ability to integrate those hubs with their domestic systems. Japan recognizes this need for its carriers. We can do no less for ours.

    In addition, as this chart illustrates, we should approach negotiations with the following framework in mind. First, insist that Japan honor its current agreements. Second, steadfastly refuse to fall into Japan's trap of accepting restrictions on existing rights as a way to secure other opportunities. And third, set as our negotiating goals objectives which are first determined by economic analysis to be in the best interests of the U.S. as a whole. United has committed itself to supporting the results of negotiations conducted in accordance with these principles, and we firmly believe they are an absolute prerequisite to the success of our industry and the fastest-growing and soon to be the largest international market in the world.
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    Thank you.

    Mr. DUNCAN. Thank you very much, Mr. Murphy, and we'll go now to Mr. Prestowitz.

    Mr. PRESTOWITZ. Thank you, Mr. Chairman, and thank you for inviting me this afternoon.

    As the last speaker on the last panel, it's always hard to find something new to say. I'd like to introduce my statement for the record, and just take a very few minutes here to emphasize two or three key points.

    The first point is that in an age of globalization, the aviation industry is like basic infrastructure. You can't have globalization, you can't be competitive in a global economy without a strong aviation services industry. Second point is that the U.S. has such an industry. The U.S. air service industry is far and away the world's most competitive. We are the low cost operators. And as many of these charts have shown, even in restrictive markets, our carriers gain market share which says that consumers vote with their feet and their dollars when given even half a choice.

    I like to think of the U.S. aviation industry a little bit like the Japanese electronics industry. You remember back in the 1960s and 1970s, when the Japanese became the most competitive players in making video tape recorders and television sets and a range of consumer electronics products, they came to dominate world markets, because the U.S. market was open, the European markets were relatively open. They were allowed to make acquisitions, to invest, to achieve distributors, and basically they wiped out everybody else in the business worldwide.
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    We saw a similar development in the case of the Japanese auto industry. They became the low cost producers in the 1980s. They were able to leverage that capability to gain large market shares in global markets.

    One of the problems is that despite the tremendous competitiveness of the U.S. industry, it is hampered in its ability to do what Japan did in consumer electronics by the regulatory regime of a couple of key countries, i.e., Great Britain and particularly Japan. The Japanese regulatory regime is particularly important, because as, again, these charts showed, aviation is not only a basic industry, it's a rapidly growing one. And the growth is in Asia. So we're looking at a strategic question here, as to not only what is going to be the ability of the U.S. to exploit its competitiveness in a key industry, but beyond that, what is going to be the impact on the U.S. economy of not being able to do that.

    And what we've done in our recent study, Turbulence Over The Pacific, is to model a few scenarios, looking at what would happen to employment in the United States, what would happen to U.S. carrier revenue, what would happen to economic GDP activity in the U.S., and finally to U.S. trade receipts. And the answer is, overwhelmingly, an open sky scenario is the preferred scenario. Under an open sky scenario, by the year 2010, the U.S. would add 700,000 jobs to the present trend line, $30 billion in GDP and roughly $18 billion in trade receipts. Any other scenario is inferior to that.

    But most importantly, any scenario which restricts the rights of U.S. carriers beyond where they are now, any scenario which would further restrict fifth freedoms, any scenario that would add any restrictions to what we have now, comes out a poor third and fourth best.
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    Now, the significance of this to me is that we have with Japan about a $55 billion trade deficit. We had just in the past week two carrier task forces sitting off the coast of Taiwan to provide stability and peace in the Pacific. And of course, that's important to us. But if it's important to us, the last time I looked at the map, Japan is closer to instability in Asia than we are. Japan is a member of APEC, and the APEC countries have committed themselves to free trade by the year 2010 for developed countries, and 2020 for developing countries.

    So to me, it just seems inconceivable that the U.S. could accept a negotiating agenda that was anything less than an agenda committed to achieving open skies. Of course, there can be transitional periods. But it seems to me that the U.S. has the justification, the economic, the moral justification and the cards in this case to insist on that kind of a negotiating agenda, in particular because one of the really striking results we found in our study was that an open skies scenario would actually increase Japanese GNP by a half a percentage point.

    We're talking about an economy that has had no growth in 5 years, a half a percentage point in GDP just by liberalizing their aviation, almost one full percentage point in increased GDP for most of the other countries in Asia because of the benefits they would achieve from gaining greater aviation service in the Pacific. Japanese travelers would pay lower fares. They would have more flight frequencies. The only people who win out of restrictions in Japan are Japan airlines and the bureaucrats at MOT.

    So there is every reason for Japanese consumers, Japanese political leaders, Japanese academic and business leaders, to support a U.S. position dedicated to open skies. It seems to me that's where we should go.
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    Thank you.

    Mr. DUNCAN. Thank you very much, Mr. Prestowitz.

    On this round of questioning, I'm going to go last. I'm going to go first to Mr. Oberstar and then to Mr. Ehlers. And we're always pleased to have the ranking member of the full committee, Mr. Oberstar, here with us. And Mr. Oberstar, you may make any comments or ask any questions.

    Mr. OBERSTAR. Thank you very much, Mr. Chairman. I apologize for not being here at the outset of the hearing. We had rail safety hearings at the same time and I was trying to cover both bases. I therefore ask unanimous consent to include my statement in the record, especially since it is a commendation of you for initiating these hearings and Mr. Lipinski for participation in shaping them. And I think this is a very important time, and we couldn't have timed it any better, coming right on the heels of the agreement reached with Japan on cargo service.

    And in the context of this hearing, without exploring any of the details of that cargo agreement, what I would like to ask our panel, what are its implications for passenger service? Frankly, it's an agreement I never thought would be reached so readily with Japan, given their protection of domestic carriers, protection of their market, protection of their beyond rights, their policy of resisting change. But they seem to have had a very significant change of heart and embarked on a policy that certainly I concur in. But what are its implications, if any, for the passenger side? Mr. Hirst?
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    Mr. HIRST. Thank you, Mr. Oberstar. I think one should be cautious in drawing implications for the passenger side on the basis of this agreement. In our experience, Japan views the cargo environment as distinct from the passenger environment. And in fact, these talks began on the premise that both sides agreed that there needed to be liberalization in cargo and both sides, particularly the Japanese side, was very clear that it did not treat and did not want these talks to be regarded as a precedent of any kind on the passenger side.

    Having said that, it seems significant to us that for the first time within my memory, since 1952, Japan has agreed that a new U.S. carrier should have fifth freedom rights, which UPS has accomplished. And that's important.

    But I guess in summary, in looking toward passenger talks, we think it is very important, as I said, that they should be sequenced, if there are passenger talks, to be held, they should not be held with any pending fifth freedom issues on the table. We believe they would be used under those circumstances as leverage in a way that would not be in the U.S. interests.

    Mr. OBERSTAR. Well, I won't ask the other members of the panel to respond, because we really have limited time here. But it has long been U.S. policy, enunciated first by this committee through hearings in the Investigations and Oversight Subcommittee, through hearings at a time when Mr. Gingrich and I were working together on this issue, that we separate cargo issues from passenger issues. We do not trade cargo rights for passenger rights or vice versa.
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    So this agreement ought to be as it is, a separate agreement, and should not be a precondition to anything in the passenger arena. And certainly, the implication is that Japan is willing to look at fifth and sixth freedom rights given by a reading of this agreement. But as you rightly say, we've got to wait and see. They are a separate set of issues.

    Everybody that I have talked with, both recently and in my memory, about aviation issues with Japan, says that existing rights, especially beyond rights, should not be negotiated away to get more access for U.S. carriers, whose access now is limited. That is, the MOU carriers. Everybody else says more access for more U.S. carriers to Japan is in U.S. overall interest. How do we get to both of those goals, keeping what we have and the rights to serve Japan and serving beyond Japan, of gaining better access for those MOU carriers?

    Mr. Murphy, I'll let you respond to that one.

    Mr. MURPHY. Thank you, Mr. Oberstar.

    I guess if I could maybe kind of combine your two questions, I would say first of all, we're throwing cautions to the wind. We're very disappointed with the cargo agreement. Because we'd like to kind of measure ourselves against our goals and not simply against our results. And frankly, if our goal is and was, as it was announced, to achieve liberalization in cargo, then this agreement fails by all accounts.

    What we've gotten in this cargo agreement is a few spokes. And it's an illusion to believe that those few spokes are going to have any significant impact on the nature of competition or the marketplace on the cargo side.
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    And I think that is, in effect, the same problem with our goals and ambitions on the passenger side. If we go into the passenger negotiations with nothing more than the ambition, as we seem to have had in the cargo negotiations, to pick up a few spokes, and let the Japanese continue to enhance their hub access to the United States, then I suspect we're going to be disappointed once again.

    In fact, I would say that when it comes to the U.S. international aviation policy, the Japanese are doing a much better job of being faithful to that policy than we are. We seem to be mired in the approach of the 1970s, where getting a few more carriers into a marketplace was considered an accomplishment.

    But I would point out to you that if in 1978, when we deregulated the domestic marketplace, and the tremendous effort that went into that, if the net result had been we got a few more spokes for a few more carriers, I don't think we would have considered it to have been much of an achievement.

    Thank you.

    Mr. OBERSTAR. So you don't have an observation on how we can leverage more access for MOU carriers while retaining the rights of the 1952 treaty rights carriers?

    Mr. HIRST. I do, Mr. Oberstar, if I could take a crack at it.

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    Mr. OBERSTAR. Yes.

    Mr. HIRST. I think that it's, as discussed earlier, the U.S. has to first and foremost protect its access to Asia. And that means the fifth freedom rights that the U.S. has. The U.S. has a responsibility to do that, and it's very fundamental. If we don't do that, we're going to be very sorry we didn't in 10 and 15 years, as that market grows dramatically.

    And so I think that in order to do that, the fifth freedom issues must be separated from the third and fourth freedom issues. And the fifth freedom issues that are pending should be addressed first. And that includes the applications that United has on file, and the two applications that Northwest has on file, which by the way, we don't believe present serious problems for Japan.

    Japan has certain issues regarding traffic composition under Article 12, and it has requested consultations under Article 12 to address those issues. And we believe the U.S. has a responsibility. Once pending applications have been granted to agree to those consultations and let them be held, then I believe those issues can be resolved.

    Once they're resolved, then there are no pending fifth freedom issues that should prevent negotiations from going forward on an agreed agenda in which both sides would say, we're going to discuss the expansion of opportunities for our carriers to serve the Japan-U.S. market. If it is possible in the context of those negotiations for rights to be further expanded to include additional fifth freedom rights for U.S. carriers, then we would applaud the U.S. negotiators in that regard. We think they have the freedom to seek that.
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    But that's the sequence that should be followed in our view. Otherwise, the risk is that pending fifth freedom issues will become chips in the third and fourth freedom negotiations. And that shouldn't be. The U.S. shouldn't be put in that position. It's not in the U.S. interest to let itself be put in that position.

    Mr. OBERSTAR. Frankly, I must say, I'm somewhat ambivalent about hearings about negotiating policy, Mr. Chairman. On one hand, we do all this in open forum, we've done it for years. And even with the Japanese television and press in attendance recording our comments while their discussions all take place in camera, in chambers, and they don't let it all out. However, that's the nature of our society, and I think it's important to send a message to our trading partners that we are united on a viewpoint and that is that we do not sacrifice one set of rights for another. We don't advance the total cause of aviation in that regard.

    May I ask one further question, Mr. Chairman?

    Mr. Prestowitz, you are the preeminent Japan trade observer in this country. Your book, Trading Partners, your current document, Turbulence Over The Pacific, give you a particular insight into these issues. Do just a thumbnail sketch of your analysis of how capping beyond rights will actually result in less third and fourth freedom service.

    Mr. PRESTOWITZ. Sure. U.S. carriers, United, Northwest, are now carrying on, the traffic that goes between say, Bangkok and Tokyo, or Hong Kong and Tokyo, whatever point it is in Asia, roughly half of that traffic is originating at some point in Asia, transiting Tokyo and coming to the U.S., or originating in the U.S., transiting Tokyo and going on to Asia.
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    So that means that for every two of those beyond flights, they're supporting one trans-Pacific flight. So if you cap those beyond flights and the carriers are not able to grow with that market, that means that they will then not be able to grow in the trans-Pacific market either.

    Now, by trading those beyond rights for further access to Japan, you could argue that you would pick up that trans-Pacific traffic with other carriers. And you will pick up some of it with other carriers. The problem is that you can't pick up enough of it. You would do it by code sharing, but the ratio on code sharing is about 10 to 1. That is, it takes 10 beyond code share flights to make trans-Pacific flight.

    So you just can't be efficient enough in picking up that lost beyond traffic with new code sharing arrangements. And the result is that you actually wind up, even though you try to get more access to Japan, you actually wind up with fewer frequencies U.S. to Japan than you had under the old arrangement.

    Mr. OBERSTAR. Thank you, Mr. Prestowitz.

    Thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you, Mr. Oberstar.

    Mr. Ehlers.

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    Mr. EHLERS. Thank you, Mr. Chairman. I appreciate the questions and comments of the ranking member. I find myself certainly in agreement with them.

    It strikes me in hearing the testimony in the first half of this hearing, before the first panel, it seems very clear that we made a very serious mistake with Bermuda II in giving up the beyond rights or the fifth freedom and getting very little in return. And yet it appears that there is a proposal to do much the same thing now. I am curious about one item, perhaps this panel can clarify.

    I asked Mr. Smith about the ACCESS U.S.-Japan position of being willing to give up fifth freedom in exchange for additional routes to Japan. He stated that he had been informed unequivocally that they definitely did not want to do that. If they were here, I would ask them that. But since you're the panel, I wonder if you could verify whether that's true, or whether that's not your impression at all. Because it seems to me that's the crux of whether or not we go down the wrong path and create, not an other Bermuda II, but perhaps Hawaii II or wherever the conference might be.

    Mr. GIBSON. Mr. Ehlers, I was happy to hear Mr. Smith's comment. But we have seen nothing to indicate that there has been a change in position. In the ACCESS materials that were presented publicly on February 21, ACCESS indicated that from its perspective, it believed that Japan would welcome a trade in which there would be a cap on U.S. fifth freedom rights in exchange for additional third and fourth freedom operations. And it certainly implied by saying that that it supported such a cap, or such an exchange. And a principal supporter of ACCESS, a founding member of ACCESS, is American Airlines.

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    And last October, the Chairman of American Airlines, in a speech in Washington, said the following: ''In our view, a U.S.-Japan agreement premised on limiting the expansion of beyond operations would be good for consumers, good for competition within the U.S. and across the north Pacific, good for the U.S. trade balance with Asia overall, and fully consistent with the DOT's international aviation policy statement.''

    So that's the position, stated position of American Airlines, which is a member of ACCESS. And we have heard nothing to indicate that ACCESS is—

    Mr. LIPINSKI. Would the gentleman yield to me for a moment?

    Mr. EHLERS. Yes, as long as I don't lose too much time.

    Mr. LIPINSKI. You won't lose too much time. I simply want to say, I've heard this statement made a number of times by this panel. And I want to go on record, I want to inform you that I have talked to former Governor Baliles, who heads this ACCESS to Japan. And he maintains that it's not his position nor the position of ACCESS to Japan committee that any beyond rights be given up.

    And in regards to the President or Chairman of the Board of American Airlines, I've spoken to him as recently as Monday. And he has said that he has no interest in the United States negotiating away any of the beyond rights of United Airlines, Northwest Airlines, or Federal Express. He does want access to Japan and he wants beyond rights for Japan.

    But that is his position, that's the commission's position. So I'd like to put that in the record, because I believe that is truly the position.
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    Thank you.

    Mr. EHLERS. Thank you, Mr. Lipinski. I certainly appreciate that clarification and I hope that it's accurately recorded. I think this committee should go on record as being opposed to giving up any of the current fifth freedom rights, and perhaps expanding them. There can be a matter of semantics here, I presume, and one says that we don't want to give away any fifth freedom rights, and one might mean we won't give any of the fifth freedom flights we have right now, but we're going to give away any expansion of them. So I think that's something that has to be clarified and put on the record as well at some point.

    Question for this panel is then, if the hope is to get additional routes and we're not exchanging any fifth freedom rights, what negotiating leverage do we have, what position can we take as a Nation to increase the number of routes available? I certainly believe in that. In fact, I get a little confused about third freedom, fourth freedom, sixth freedom. As an American, I guess I'd like full freedom. And that's what I believe you call open skies.

    But if the other nations don't agree to that, what can we do? Mr. Prestowitz, looks like you're ready to—

    Mr. PRESTOWITZ. Well, I think there are several things. First of all, Japan has carriers who want more access as well. So that should give us some allies in Japan for further opening or liberalizing the agreement. Second, I think the point I made earlier, that maybe we shouldn't look at this strictly in terms of the airline situation, but we after all have had a long running trade deficit with Japan at the same time that we perform a number of important politico, diplomatic, military services for Japan.
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    It's kind of bizarre when you think about it, that a country that provides still the market for about a third of Japan's output and that provides Japan's security and that somehow, and we're dealing with a country which has in the WTO and in the APEC agreements, has reaffirmed time and again its commitment to free trade. And in the case of APEC, to free trade in aviation services.

    It seems to me it's kind of bizarre that we would even consider talking to them about anything other than the mechanisms, the steps and the timetable by which we get to open skies. I think that, you know, if you step back and look at this, you know, if you were the negotiator and looked at this broadly, I think you feel that you had pretty significant leverage.

    Mr. EHLERS. I would certainly hope so. But I happen to be a resident of Michigan. And I'm familiar with several decades of negotiations about automobile imports and so forth. And I just remain somewhat skeptical about any success in negotiations we might enter into without being very, very tough in our negotiating position. And I certainly hope that the DOT and the entire Administration would show considerable backbone in these and make it abundantly clear we're not going to give up any fifth freedom rights. And that we are wiling to negotiate exchanges of routes or an increase in the number of routes on their part in conjunction with the increase in number of routes on our part, and that's all we will talk about. I take it that's the position of this panel as well.

    Mr. PRESTOWITZ. Absolutely.

    Mr. EHLERS. Mr. Gibson.
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    Mr. GIBSON. Mr. Ehlers, let me say that having had some experience myself with Japan, I would agree with Mr. Prestowitz that you can effectively shame them into such a mode with the U.S. We are in full agreement with Governor Baliles that you do not need to trade beyond rights and in fact can improve upon beyond rights if the U.S. industry stays firm and united on that issues, in return, and at the same time get expanded third and fourth freedom rights in Japan. In this one industrial sector the Japanese are so entirely inconsistent with their policy across the board that in a sense, linkage on this issue is probably the best way to shame the Japanese. And shaming them works quite well into expanding U.S. rights.

    Mr. EHLERS. You're more optimistic than I am.

    That's all I have, Mr. Chairman. Thank you.

    Mr. DUNCAN. Thank you very much, Mr. Ehlers.

    Mr. Geren.

    Mr. GEREN. Thank you, Mr. Chairman.

    Mr. Chairman, I represent an area where the Texas Rangers baseball team resides. And for the 22 years they've been there, we've always said, gosh, if we just had pitching. And when I got to know people from around the country, almost no matter who you talk to, wherever they're from, whatever baseball team may be in their area, they say, well, you know, if we just had pitching.
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    And it seems to be the same with the international routes. That's looking at it from the perspective of a north Texan. We keep thinking, gosh, if we could just have access to some of these international markets, if American and Delta just had more access to international markets. And you sit down with folks from Michigan, folks from almost anywhere and it's the same story over and over and over.

    It seems that every part of our country, there aren't enough pitchers to go around, there are not enough international routes to go around. And I just wonder if we're going about it the right way. And perhaps Mr. Prestowitz would be the best to comment on it, I'd like to hear the observations of the rest of the panel, in looking at how the, this is more of a big picture question, how the other countries do it, compare it to how we do it. And Mr. Oberstar talked about how the Japanese do it in camera, we do it in front of the world's television audiences.

    It's always seemed to me that we don't play as hard ball as some of our competitors do in pushing our interests, particularly in this area. I think it's going to become increasingly important with the globalization of trade, whether it's NAFTA and expanding aviation routes into Canada, or as Asian countries open up more and more, if it's easier for a company in Great Britain to get to an expanding market than it is for a company in Fort Worth or Chicago, those companies are just going to have that little bit of an advantage in penetrating that market.

    So we have the USTR open up some markets. But if it's easier for some company in Great Britain to get to that market, not only are we losing out on the international route and the trade, but we're not going to penetrate that market as we should. And I'd like to just hear the panel's thoughts on what we could do as a country to restructure the way we go about this to do a better job of ensuring that American interests are advanced in this area. Because it's so tied to every other aspect of globalization of the economy.
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    Mr. PRESTOWITZ. Well, that's a really good question, and it's applicable beyond just the airline situation. And I think that the first thing is really a change of psychology, which means putting, a change of priorities, and putting a greater emphasis on the questions like access through Japan and aviation services and other industries equivalent to the priority that we put on other issues.

    Let me give you an example. I had a call this morning from a friend of mine in Tokyo, a former U.S. trade negotiator, who recounted to me an incident that occurred this week at the ACCJ, the American Chamber of Commerce in Japan. One of our present State Department negotiators was addressing a breakfast meeting of the chamber. And he was asked, well, how are things going for the President's trip. And he said, oh, things are going terrific, fine. And then he apparently realized that he was talking to a bunch of businessmen and caught himself, and said, oh, of course, there's not much progress on trade.

    Well, I think you have it right there. Too often in these and other negotiations, our negotiators' top priority is a vote in the U.N., a donation of aid money to Rwanda, an assurance of bases.

    I mean, right now, the President's preparing to go to Japan for a summit meeting. And the top priority for the U.S. in the summit meeting is to assure base rights at Okinawa and to conclude a satisfactory security arrangement with Japan. And because the Japanese know that that is our top priority, they feel perfectly at ease in telling our trade negotiators to take a hike.

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    Because in the end, they know that we want the bases worse than we want the airline rights, or worse than we want access on semiconductors, whatever it is. And we then, our trade negotiators wind up in a very difficult negotiating position.

    So I could go through a lot of detail about who should do the negotiation, should it be DOT, should it be USTR and things like that. But I think that the heart of the matter is that until we adopt the view that our ability to realize the benefits of our competitiveness is as or more important to our national security as base rights and exercise rights and so forth, we will always be at a disadvantage.

    Mr. GEREN. Another point, I think we need to expand our notion of the significance of it, just be specific. You're seeing tremendous opportunities for natural resource companies to develop mineral resources in the Far East. And if somebody from, if it's hard to get there from Houston, it's likely that that Houston company is not going to be a competitor.

    So it isn't just the hundreds of millions or billions we lose in the transportation sector. It really limits our domestic industries' ability to cross over there. I don't think the big picture is—yes, sir?

    Mr. MURPHY. If I could add, I agree with Mr. Prestowitz completely on the question of attitude. And you can see this in many instances. Our chairman, Mr. Greenwall, likes to tell a story about his experience in automobiles as well, where he was formerly the Vice Chairman of Chrysler. And he talks about his experience in the international arena. And to him, it comes down to one thing. Most of the foreign countries that he had to deal with were interested in only one thing in the economic arena, and that was leverage. It was a constant search for leverage to try and achieve their economic goals.
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    When we go into a situation, leverage is not our number one priority. It's a fair outcome, a balanced outcome, it's fair trade, free trade, whatever. But it is not leverage. And as an example, yesterday, we haven't discussed this, but yesterday there was an agreement with France. Now, from our standpoint, why did we have an agreement with France yesterday? Yesterday, what we offered the French was 500 new frequencies that are going to be subsidized to enter the United States. In return, we got something that we already had a right to, and that is to replace a carrier that had pulled out of Boston.

    So we gave them 500 new frequencies in spite of their subsidies to Air France and then in return, we got them to talk to us. And it seems as if the main rationalization, the main thing we looked for, was a conversation. That is no leverage.

    Mr. GEREN. Mr. Hirst.

    Mr. HIRST. Just a brief observation. It may be that some of our trading partners believe that the best thing that they can do to advance their interests with the U.S. is to get the U.S. to make a really bad agreement like we did with the U.K. in 1977. But I think Mr. Prestowitz' work shows that certainly the next best thing they can do is agree to open skies. And in the case of Japan, the economy in Japan would benefit significantly, and the economy's link to Japan would also benefit.

    And I've been impressed with the progress that the Administration has made in developing that theme and developing open skies agreements in Europe. And in time, I believe that those agreements will put pressure on the British to liberalize their relationship with us, and that that's the best way of doing that, as traffic basically moves from the U.K. as a gateway to other markets such as Amsterdam and Frankfurt.
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    So I believe that the U.S. is on the right track, but we have to be very careful not to put ourselves in a position where leverage can be used against us and force us into making a bad deal, rather, keep moving toward the open skies goal. Which by the way, I'm not saying this altruistically, from our standpoint, Northwest Airlines would benefit from open skies in Japan, as again, Mr. Prestowitz' study showed, as compared with an extension of the current agreement. In 2010, we would have more flights under an open skies environment, so would United.

    Thank you.

    Mr. GEREN. Thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you very much, Mr. Geren. Mr. Lipinski and I have agreed to go last on this round, so that means that Mr. DeFazio is next.

    Mr. DEFAZIO. Thank you, Mr. Chairman. I thank the senior members of the committee for deferring.

    I have a concern that I direct to Northwest and United, and particularly some statements made by United, and that is, there's another strategy which the Japanese, and other competitors can pursue. One is to distract us into our highest priority as begging the Japanese to allow us to continue to spend $70 billion a year defending their interests in the Pacific Rim, which has worked for a long time. And we're having trouble getting beyond that.

    But the other is to divide the industry. Because they know in part our regulators and our policy makers are responsive to our own domestic industries and their concerns. And I'm concerned that they're having some success there. Rather than going forward and saying, okay, let's all come together, those who are 52 carriers, those who are MOU carriers, and agree that our highest priority is that the United States Government should go into these talks saying, look, open skies is where this is headed.
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    We're into this, well, we want to get our 52 rights first, and then we want to get this, and then, you know, we can go on to open skies. And the derogatory comments about the MOUs, the concern, particularly, to United I have expressed is, United does not serve parochially Orient to the Orient. It serves Seattle to the Orient. Now, from Chicago, maybe it all looks the same. It isn't, we're competitive. And Delta serves Japan.

    And to say that the MOU carriers are a failure, which is an assertion made by United, I don't believe is supportable. I mean, they're not doing that out of the goodness of their heart. We're making money so far as I know, we're so much more competitive than Japanese airlines. We'll beat the heck out of them if we have open skies.

    So I guess I'd just like to ask if that's a viable strategy. Why not take the optimal strategy, have all of the competitors agree to push our Government to do that, and go in using Mr. Prestowitz' work to show, look, you may think that we're doing this just to advantage our industry. We're not, your country's going to benefit, too. Obviously maybe their individual carriers are going to feel threatened, but they would benefit as a people as a whole.

    Is that a possibility?

    Mr. MURPHY. If I could respond.

    Mr. DEFAZIO. Certainly.

    Mr. MURPHY. About a month before United Airlines made the filing that you refer to, in referring to the MOU carriers as failures, Delta Airlines went to Japan and held meetings with Japanese government officials, with Japanese press officials, and asked a Japanese government to intervene on their behalf against the interests of other U.S. firms. Now, when we see a company do that, deal directly against our commercial interests, we are going to respond.
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    Mr. DEFAZIO. Sure—

    Mr. MURPHY. We will respond with an argument that we think is a valid argument, and that is, we do not believe that the idea of simply adding more carriers from more points is necessarily a successful strategy in terms of enhancing consumer choices in the marketplace. This is the old point to point strategy that we abandoned with the new international aviation policy and yet, in spite of the fact that at least in theory we've abandoned that approach, we continue to pursue it.

    And specifically with respect to Portland, Portland could have had rights, in the original 1952 agreement, the United States had the ability to operate from any point in the United States to points in Japan and beyond. It was carriers such as the MOU carriers, American and Delta, that were supportive of giving up those rights in 1985 because they found it in their parochial interests to do so.

    So if you were to ask what you asked earlier to Mr. Smith, what do we keep doing wrong, well, part of what we keep doing wrong is we never really sit down and examine in depth what we're doing. We look at our immediate parochial interests and we pursue that without a further examination of what does this mean to the country and what is this going to mean over the long term.

    I think Senator Pressler has been very articulate on the principle that this division between U.S. carriers is a major impediment to us making progress. But the answer to that is not trying to prove one right or wrong. The answer to that is, do an economic analysis, determine what is the best course for the United States, and then pursue that.
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    Mr. DeFazio. Okay. And is the best course the open skies policy?

    Mr. MURPHY. Absolutely. And United will take second fiddle to no one in open skies. We were the only major carrier that supported domestic deregulation when Delta was saying it was going to be a disaster.

    Mr. DEFAZIO. Okay, but today, if we had all of the major competitors at the table, couldn't we get consensus that, in this case, in the negotiations with Japan, would disadvantage no one, and would be in the best interests of us as a Nation?

    Mr. MURPHY. If I could just maybe, Mr. Hirst wants to respond as well. But if I could just respond.

    First of all, I think one of the things that you might sit down and come to a determination of if you were to do an economic calculus, is that in some instances it might be the wisest thing to do to defer certain interests. That you cannot pursue all things simultaneously. And you have to work towards these goals in a step by step way. I think we are doing that in Europe. We have just signed an open skies agreement with Germany which I think is going to be a critical change in that marketplace and is going to commercially derive that marketplace in the open skies.

    But at least in Europe, we had a strategy, we pursued it, we were successful, now we're the second largest country, I think we've changed the nature of the marketplace. Unfortunately in Japan, we haven't got a willing partner yet.
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    Mr. DEFAZIO. But if I could just, if you were here for my earlier question, and it was certainly restated by Mr. Prestowitz, you know, we've got the clout here, I mean, if we decided to play hard ball with Japan, we're going to be less disadvantaged than the Japanese. Our carriers are less at risk than theirs in terms of, you know, any difficult negotiations we might get into, or threats of curtailment.

    Mr. MURPHY. I can tell you, up until yesterday, we had tremendous leverage with the French. I mean, every good argument you want, we had available to us with the French.

    Mr. DEFAZIO. But we gave it away.

    Mr. MURPHY. And we gave it away. That's why I say, the problem—

    Mr. DEFAZIO. And that's inexplicable.

    Mr. MURPHY. The problem is not simply the question of who's negotiating or something. I think Mr. Prestowitz had that exactly right. It's the attitude with which you approach these things. Even in a situation where we had leverage by any standard, we gave it away.

    Mr. DEFAZIO. Well, maybe it's this problem that he's also pointed to where we get all these 29 year old kids negotiating these things who have never negotiated anything before, and they're looking at their next job, which is going to be as foreign agents, where most of them go. But that's another issue to deal with.
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    Mr. HIRST. Mr. DeFazio, if I could, a couple of observations. One is, my experience with the U.S. negotiators in this area is that they, the people who are doing this now are mature individuals. And I think they're doing a good job.

    I think we don't have the leverage in this sector that we might in other sectors, because we have a huge surplus with Japan. And that's at risk in any negotiation. Other sectors where we are at a deficit and don't have a surplus, we have less to lose. So we have to be somewhat careful about how we approach the negotiation with Japan.

    So I think that if it is true that the ACCESS group does not advocate capping fifth freedom rights in exchange for additional thirds and fourths, if that is true and if that is Delta's position, as well as American's position now, then it seems to me that the ACCESS group, as well as those carriers, should welcome the kind of sequence that United and Northwest are advising. Because I believe it's the best way to get to an open skies agreement, or to an agreement that truly expands the market between the U.S. and Japan.

    And the reason is that if Japan believes when it goes into passenger negotiations that it can in fact negotiate some limits on fifth freedom operations, they will seek those. They will seek those instead of seeking to liberalize the market. We have to take away from Japan the objective of capping beyonds, or limiting beyonds by addressing those issues first.

    I don't believe that is a huge problem. I believe that can be done successfully. And then we can move into a negotiation that addresses directly the concerns you're raising and the concerns that Delta and others have. And it's conceivable in that context that they could get rights beyond Japan, it seems to me, on the basis of this cargo negotiation.
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    So that's what I would suggest. And I think perhaps in light of what's happened in cargo, other carriers will take a second look at their position and perhaps we will have a united group.

    Mr. DEFAZIO. I thank the Chairman for the time.

    Mr. DUNCAN. Thank you very much, Mr. DeFazio.

    Ms. Brown.

    Ms. BROWN. Thank you, Mr. Chairman.

    I guess I'll ask Mr. Gibson a question. Mr. Gibson, how would you compare air service between the United States and Japan and say, the United States and the United Kingdom?

    Mr. GIBSON. Well, the United States and Japan, believe it or not, the U.S. carriers today are winning, which is not the case with the United Kingdom. And I think earlier, I can't remember whether it was Northwest or United, put some charts up to say that we actually do have more flights than the Japanese carriers and do have a better market share. It is at risk if the U.S. does not follow through and continue to be strong with the Japanese.

    But the U.K. has been the clear beneficiary of the 1977 agreement and has taken great advantage of it. And we see it in declining U.S. market shares and increases in British carrier frequencies and their market shares.
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    Ms. BROWN. Mr. Prestowitz, given the air fares between the United States and Japan, on a revenue per passenger mile basis, averaged 29 percent more than theirs between the same cities and principal cities of Europe, and that this substantial difference in fares can be attributed significantly to the inadequate access of U.S. airlines to Japan, isn't it time for the United States to address the issue of additional assets for the passenger airlines not included in the 1952 bilateral agreement with Japan?

    Mr. PRESTOWITZ. Well, certainly, the U.S. should be exerting every effort to achieve greater access for all of our carriers to Japan. I think that the so-called MOU carriers have a legitimate right and complaint. They should have more access to Japan. And our negotiators should be attempting to get that.

    I think the first part of your statement, where you talked about differences in air fares across the Pacific and the Atlantic, I'm not sure that I would agree with that. We've just looked into that very carefully in this study that we did. We've looked at comparison of air fares at all levels across the Pacific and the Atlantic, and we've found that they're pretty much the same.

    Where there is a big difference, there's a huge difference in fares in the beyond markets, between Tokyo and points in Asia, fares are two, even three times higher than they are trans-Pacific or trans-Atlantic. But trans-Atlantic, trans-Pacific, we found the fares are very comparable.

    Ms. BROWN. Do I have time for one more question? Thank you, Mr. Chairman, I yield back the balance of my time.
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    Mr. DUNCAN. All right, thank you very much, Ms. Brown.

    Mr. Lipinski.

    Mr. LIPINSKI. Thank you, Mr. Chairman. I promise the Chairman that the Democratic side would be finished by 5:00 o'clock, so I have very little opportunity here to ask anybody any questions.


    Mr. LIPINSKI. And I had a ton of them to ask you.

    But I want to say while I have an opportunity that, Mr. Murphy, I have a solution to our negotiations with Japan. And I'm going to recommend this to the ACCESS U.S.-Japan Coalition, that they persuade, because I like your attitude very much. You're not even happy with the cargo agreement that was negotiated within the last 24 hours. And I like your aggressive attitude.

    But I'm going to recommend to them that they persuade you to leave United Airlines—


    Mr. LIPINSKI.—and you become the principal negotiator for ACCESS U.S.-Japan for American, Delta, and UPS and anybody else that's in that coalition. But that's just an observation on my part. But I am going to make that recommendation very strongly.
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    I asked a member to yield a little bit earlier to express myself in regards to a situation pertaining to the Chairman of the Board of American, and also to the head of the ACCESS to Japan Coalition, former Governor Baliles. I also what to say for my part that I certainly do not advocate in any way curtailing your beyond rights, or any of your future beyond rights. I think that would be a terrible mistake.

    But by the same token, as I've told Mr. Murphy individually, I am a very strong proponent of getting additional rights into Japan for other carriers. I am also a strong proponent of beyond rights for them, because I think that the Asian market, as has been stated here on a number of occasions, is going to be a fantastic market in the future. And I'm very happy that Northwest is in a position to cash in on it. I'm very happy that United is, and that Federal Express is. But I'd like to see the other American carriers have the same opportunity.

    Now, Mr. Hirst, you mentioned that you have two applications pending at the present time? What are they?

    Mr. HIRST. Yes, sir, there are two. Indonesia, we've just had very successful talks with the Indonesians who have maintained closure on that market. And in conjunction with the U.S. Government down there, they have now indicated a willingness to accept our flights via Japan. And so we filed an application with the Japanese for authority to do that.

    And we have also filed an application to transfer a flight that we're operating from Tokyo to Shanghai to Tokyo to Guangzhou in southern China, which doesn't have any service from Tokyo right now. And as I said, I'm reasonably optimistic that Japan will not object to those.
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    Mr. LIPINSKI. What about United?

    Mr. HIRST. I'm always open to offers, by the way.

    Mr. LIPINSKI. Yes, he said you had a couple of routes that were pending.

    Mr. MURPHY. Yes, we have, actually in our business plan we have filed actually three different things. We are commencing freighter operations this fall, so I'm not totally opposed to what was done yesterday. I mean, it will at least, it allows us to exercise the rights that we had to fly freighters. And we're going to do that this fall.

    We also had pending applications to fly beyond Osaka to Seoul, that's the application that has been denied for over a year now. And we also have a pending business plan application with the Japanese for Osaka-Bangkok.

    Mr. LIPINSKI. Thank you. I have 30 seconds left, according to my watch. And I simply want to recommend to the gentleman from TWA over there, Mr. Gibson, that instead of maybe flying from New York to Heathrow, why don't you try to fly from your big hub in St. Louis to Heathrow. You might have a better opportunity to get into that. Go ahead if you want to respond. But you only get about 10 seconds, because the Chairman's going to cut you and me off.

    Mr. GIBSON. Mr. Lipinski, we'd be delighted to do both.
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    Mr. LIPINSKI. Thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you, Mr. Lipinski.

    We have other legislation we're supposed to mark up here in just a few minutes. But Mr. Gibson, let me ask you, since you haven't been asked any questions here today, a few years ago TWA sold its access to Heathrow to American Airlines. What would you say to somebody who might say that you're now asking the Government to negotiate back something that you sold a few years ago?

    Mr. GIBSON. Mr. Chairman, many people may remember at the time TWA was owned by someone named Carl Icon, which I think would be familiar to most people in this room. And Mr. Icon was effectively pursuing a strategy of liquidating the company. If Carl Icon had sold every route to London except those two from our hub, we might be a little more stable than we were over the subsequent years. But he did sell those routes. He did it over the objections of Congress, over the objections of TWA employees, and over the objections of a lot of the management that was in place at that time.

    The management that has come into TWA, of which I am a part, in 1994, decided that to rebuild the company it's absolutely essential that you have to fly from your major east coast hubs, which happen to be your trans-Atlantic gateway to London. Mr. Icon, I suspect, had a little understanding of the airline business, didn't feel this was important, and besides which, he thought he wasn't going to have an airline, he was going to have lots of pieces that he was going to dismember. So he was not thinking in a way of running a business.
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    We have to worry about running a business. And I think most people, when they look at that era of the 1980s can possibly forgive a company who was owned by a financial raider.

    Mr. DUNCAN. Let me ask you this. If the British refuse to give this country additional, and its airlines additional access to Heathrow, what do you think would be the effect of this Nation restricting British access to our slot controlled airports, such as Kennedy and O'Hare?

    Mr. GIBSON. That's certainly one possibility. We've suggested, in my written testimony, that possibly a more effective mechanism may be limiting the sixth freedom rights. British Airways now is a major participant in sixth freedom traffic. And we see it from cities we serve, such as Barcelona, Milan and Athens.

    British Airways today carries more traffic from Barcelona to the U.S. than either TWA or Iberia combined. And if we find ways to restrict that as a tactic, not as a permanent measure, but as a tactic to bring them to the table, I think BA would find it very, very painful economically. And I think it would cause the British government to move quite quickly to try and deal with the United States. And we have those rights under the current bilateral.

    Mr. DUNCAN. Mr. Hirst, or Mr. Murphy, you know that in the past, the Japanese have sometimes said that their airport capacity is limited. And they now have a new airport in Osaka, the Kansai Airport. And they are already saying that it's full. Do you believe that there is airport capacity in Japan, both to expand your beyond rights and to expand the number of fights coming from the United States for other airlines such as American and Delta?
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    Mr. HIRST. Mr. Chairman, I think there's additional capacity in a couple of respects. My understanding is there is some additional capacity at Kansai that is not totally capped out at this point.

    But more significantly, the second runway that's been constructed in Narita, or largely constructed, there are half a dozen landowners who own plots of ground on the runway. Japanese authorities, for the first time this year, have become quite optimistic about being able to complete their land acquisition program and complete construction of that second runway. And they're projecting that that will be done in 1997. It will double the capacity of Narita. So I think that's a very significant development.

    Mr. DUNCAN. Mr. Murphy, anything you wish to add?

    Mr. MURPHY. Yes. We believe that any airport, especially one that's used as a hub, quickly develops peaking problems. And that is essentially what's happened at Kansai Airport. Kansai is actually under-utilized as an airport, probably by about 30 percent. But in certain time frames, certain peaks, essentially about a 3 hour time frame in the afternoon, it is quickly approaching saturation.

    On point to point services, that's of little concern. It's of much more concern to carriers that are operating hubs or at least attempting to operate hubs, such as United and Northwest. You might say we're fortunate at this point that we haven't been allowed to do so. Because we haven't run into this problem.

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    But our total collection of beyond operations from Osaka today, by virtue of Japanese regulation, is one, which was operated by Northwest to Manila. So we think there is plenty of capacity there, and before too much longer, I would agree with Mr. Hirst, we expect to see additional capacity coming on and on-line.

    But again I would stress that this is a Japanese decision. They are responsible for building an infrastructure. And the Japanese have chosen to limit that infrastructure in a way that maximizes their control over air transportation. So we think that is just part and parcel of the Japanese approach to controlling the marketplace.

    Mr. DUNCAN. All right, thank you very much.

    Mr. Prestowitz, I understand that there is a Coopers and Lybrand study financed by American or Delta or by ACCESS, the ACCESS group or somebody, that claims that much of the value that Northwest and United receive from their current beyond rights derives from their monopoly status or a semi-monopoly status, earned on capacity restricted routes. What do you think about that? I understand that Mr. Murphy and Mr. Hirst might question that. What do you say about that?

    Mr. PRESTOWITZ. Well, I think that's pretty much the same question as the pricing question. And we looked at that in our study. What we found was first of all that load factors across the Atlantic are actually higher than they are across the Pacific. And nobody claims that there's a monopoly across the Atlantic. So if the load factors are higher there than they are across the Pacific, that would suggest that there's not a great deal of restriction trans-Pacific in terms of traveler choice.
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    And then we looked at air fares. We looked at the lowest advertised fares in the first calendar quarter. And what we found was, for example, we're using city fares with Tokyo as an index. So Chicago-Tokyo is $100, Chicago-Paris is $140, Chicago-Frankfurt $137, Chicago-London $135. That would suggest that fares trans-Pacific Chicago are better than fares trans-Atlantic Chicago. And that kind of suggests that if there's a monopoly, it's not very good.

    Mr. HIRST. Mr. Duncan, if I could make one or two observations?

    Mr. DUNCAN. Sure.

    Mr. HIRST. That is essentially one of the claims that we respond to in this pamphlet that we're releasing today. There are 13 major factual assertions made by the ACCESS group which we believe are either serious distortions or flatly wrong. In this case—

    Mr. DUNCAN. We would like for you to give that to the Aviation staff, and I'm sure you would be glad to do that.

    Mr. HIRST. We plan to do that. In this case, one of the principal problems with the Coopers and Lybrand study appears to be that they focused on published fares versus the fares that actually sell in the market. And there's a huge differential in the Japan market. It's much larger than in other markets, including the U.S.-U.K. market, although in every market the published fare is often generally higher than the discount fare, the fares that actually sell.
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    What Mr. Prestowitz did was to take a look at the actual fares, the ones that are actually sold to consumers, and found that there was essentially no difference on a cost per mile basis between the U.S.-U.K. market and the U.S.-Japan market. There are not monophonic profits in that market.

    Mr. MURPHY. If I could add something to that.

    Mr. DUNCAN. Yes, sir.

    Mr. MURPHY. We have had a study done, too, which we would be glad to provide for the committee, which looked at the question of the beyond routes and the impact of U.S. carriers in terms of prices beyond Japan. And basically it showed that the impact of U.S. carriers in the beyond Japan market, the intra-Asia markets, was anywhere from about 16 percent to 43 percent a decrease in fares in those markets, compared to the intra-Asia markets where U.S. carriers did not participate.

    And since this is largely United and Northwest, I think it's an illustration that in effect, we use price quite effectively to compete with Japanese and other Asian carriers.

    Mr. DUNCAN. Well, thank you very much. We've got to mark up some NTSB legislation. I might say that we have very important aviation relationships with many countries throughout the world, most countries. Canada, of course, is one of the most important. But certainly our relationships with Japan and the United Kingdom are among the most important of those aviation relationships.
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    And so we set up 2 days of hearings. But I understand, or I'm told that we have so many people who want to testify that we may have to go to a third day. Mr. Lipinski mentioned the CEO of American Airlines and the Chairman, Mr. Crandall, will be testifying at our next hearing on this issue, along with some other witnesses. And we'll get into that shortly after we come back in April.

    But your testimony has been very helpful and very informative. And we thank you very, very much for being here with us today.

    Mr. DUNCAN. And that concludes this hearing.

    [Whereupon, at 5:13 p.m., the subcommittee proceeded to other business.]

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