SPEAKERS CONTENTS INSERTS
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AVIATION RELATIONS BETWEEN THE UNITED STATES AND FRANCE
PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at [http://www.house.gov/transportation]. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.
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TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
JULY 31, 1997
Printed for the use of the
Committee on Transportation and Infrastructure
COMMITTEE ON TRANSPORTATION AND INFRASTUCTURE
BUD SHUSTER, Pennsylvania, Chairman
DON YOUNG, Alaska
THOMAS E. PETRI, Wisconsin
SHERWOOD L. BOEHLERT, New York
HERBERT H. BATEMAN, Virginia
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
Page 3 PREV PAGE TOP OF DOCTHOMAS W. EWING, Illinois
WAYNE T. GILCHREST, Maryland
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
JOHN L. MICA, Florida
JACK QUINN, New York
TILLIE K. FOWLER, Florida
VERNON J. EHLERS, Michigan
SPENCER BACHUS, Alabama
STEVEN C. LaTOURETTE, Ohio
SUE W. KELLY, New York
RAY LaHOOD, Illinois
RICHARD H. BAKER, Louisiana
FRANK RIGGS, California
CHARLES F. BASS, New Hampshire
ROBERT W. NEY, Ohio
JACK METCALF, Washington
JO ANN EMERSON, Missouri
EDWARD A. PEASE, Indiana
ROY BLUNT, Missouri
JOSEPH R. PITTS, Pennsylvania
ASA HUTCHINSON, Arkansas
MERRILL COOK, Utah
JOHN COOKSEY, Louisiana
Page 4 PREV PAGE TOP OF DOCJOHN R. THUNE, South Dakota
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
KAY GRANGER, Texas
JON D. FOX, Pennsylvania
THOMAS M. DAVIS, Virginia
FRANK A. LoBIONDO, New Jersey
J.C. WATTS, Jr., Oklahoma
JERRY MORAN, Kansas
JAMES L. OBERSTAR, Minnesota
NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
WILLIAM O. LIPINSKI, Illinois
ROBERT E. WISE, Jr., West Virginia
JAMES A. TRAFICANT, Jr., Ohio
PETER A. DeFAZIO, Oregon
BOB CLEMENT, Tennessee
JERRY F. COSTELLO, Illinois
GLENN POSHARD, Illinois
ROBERT E. (BUD) CRAMER, Jr., Alabama
ELEANOR HOLMES NORTON, District of Columbia
JERROLD NADLER, New York
PAT DANNER, Missouri
ROBERT MENENDEZ, New Jersey
JAMES E. CLYBURN, South Carolina
Page 5 PREV PAGE TOP OF DOCCORRINE BROWN, Florida
JAMES A. BARCIA, Michigan
BOB FILNER, California
EDDIE BERNICE JOHNSON, Texas
FRANK MASCARA, Pennsylvania
GENE TAYLOR, Mississippi
JUANITA MILLENDER-McDONALD, California
ELIJAH E. CUMMINGS, Maryland
EARL BLUMENAUER, Oregon
MAX SANDLIN, Texas
ELLEN O. TAUSCHER, California
BILL PASCRELL, Jr., New Jersey
JAY W. JOHNSON, Wisconsin
LEONARD L. BOSWELL, Iowa
JAMES P. McGOVERN, Massachusetts
TIM HOLDEN, Pennsylvania
NICK LAMPSON, Texas
Subcommittee on Aviation
JOHN J. DUNCAN, Jr., Tennessee, Chairman
ROY BLUNT, Missouri Vice Chairman
THOMAS W. EWING, Illinois
VERNON J. EHLERS, Michigan
Page 6 PREV PAGE TOP OF DOCRAY LaHOOD, Illinois
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
EDWARD A. PEASE, Indiana
JOSEPH R. PITTS, Pennsylvania
ASA HUTCHINSON, Arkansas
MERRILL COOK, Utah
JOHN COOKSEY, Louisiana
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
KAY GRANGER, Texas
JON D. FOX, Pennsylvania
THOMAS M. DAVIS, Virginia
J.C. WATTS, Jr., Oklahoma
BUD SHUSTER, Pennsylvania
WILLIAM O. LIPINSKI, Illinois
LEONARD L. BOSWELL, Iowa
GLENN POSHARD, Illinois
NICK J. RAHALL II, West Virginia
JAMES A. TRAFICANT, Jr., Ohio
PETER A. DeFAZIO, Oregon
JERRY F. COSTELLO, Illinois
ROBERT E. (BUD) CRAMER, Jr., Alabama
PAT DANNER, Missouri
Page 7 PREV PAGE TOP OF DOCJAMES E. CLYBURN, South Carolina
CORRINE BROWN, Florida
EDDIE BERNICE JOHNSON, Texas
JUANITA MILLENDER-McDONALD, California
ELIJAH E. CUMMINGS, Maryland
JAMES L. OBERSTAR, Minnesota
Gibson, Scott C., Visiting Fellow, Economic Strategy Institute
Hunnicutt, Charles A., Assistant Secretary for Aviation and International Affairs, U.S. Department of Transportation, accompanied by Bob Mallalieu, Office of International Aviation
Kamen, Hershel I., Managing Director-International and Regulatory Affairs, Continential Airlines, Inc
Klink, Hon. Ron, a Representative in Congress from Pennsylvania
Page 8 PREV PAGE TOP OF DOC Mathison, Theodore E., Executive Director, Maryland Aviation Administration, on behalf of Airports Council International-North America
Nagin, Lawrence M., Executive Vice President-Corporate Affairs and General Counsel, US Airways
Yohe, D. Scott, Senior Vice President, Government Affairs, Delta Air Lines, Inc
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Costello, Hon. Jerry F., of Illinois
Cramer, Hon. Bud, of Alabama
Klink, Hon. Ron, of Pennsylvania
Lipinski, Hon. William O., of Illnois
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Gibson, Scott C
Hunnicutt, Charles A
Kamen, Hershel I
Mathison, Theodore E
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Nagin, Lawrence M
Yohe, D. Scott
ADDITIONS TO THE RECORD
Hunnicutt, Charles A., Assistant Secretary for Aviation and International Affairs, U.S. Department of Transportation, report, Bimonthly Summary of International Aviation Negotiations September and October 1997
All T100 Airline Passenger Traffic Between the U.S. and Other Countries for the 12 Months Ended October 31, 1996
Scheuled T100 Airline Passenger Traffic Between the U.S. and Other Countries for the 12 Months Ended October 31, 1996
AVIATION RELATIONS BETWEEN THE UNITED STATES AND FRANCE
THURSDAY, JULY 31, 1997
House of Representatives,
Subcommittee on Aviation,
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Committee on Transportation and Infrastructure,
The subcommittee met, pursuant to call, at 9:33 a.m., in Room 2167, Rayburn House Office Building, Hon. John J. Duncan, Jr. (chairman of the subcommittee) presiding.
Mr. DUNCAN. We will go ahead and call the subcommittee to order. Good morning and welcome to today's hearing regarding current status of aviation negotiations between the United States and France. We are fortunate to have some of the best minds and experts in the aviation matters here with us this morning, so let me, first of all, thank all of the witnesses for being here with us today.
U.S. efforts to achieve open skies have been successful with countries around the world, including Canada, Germany, and a few small European, Asian and Latin American countries. On the other hand, our negotiations with the United Kingdom, Mexico and France have been very difficult, to say the least.
This subcommittee has focused on our aviation relationships with the United Kingdom and Japan on at least three separate occasions over the last couple of years. I would like to think that our incremental success with Japan at least in some small way had to do with the hearings that we held in this subcommittee.
Of course, the focus in this morning's hearing is on the current status of our aviation negotiations with France. From 1978 to 1983, U.S. passenger airlines had about a 50 percent market share in the U.S.-France market. However, beginning in 1984, U.S. airlines began to add more flights between the two countries. As a result between 1984 and 1992, the airline passenger market between the U.S. and France increased from 1.5 million passengers to about 3.5 million passengers and the market share of U.S. airlines increased to 70 percent.
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This increased capacity resulted in lower airfares, something I think that all of us support. Of course, U.S. airlines were better able to handle this than Air France because they had become more efficient as a result of domestic airline deregulation in this country, while Air France was and remains a government-owned and operated entity.
As a result of the dwindling market share of Air France, the French Government decided to renounce its bilateral aviation agreement with the U.S. in 1992, and I understand that that renunciation took effect in May 1993, certainly, not a good development.
As a result of this action by the French, U.S. airlines have not been able to add flights in the U.S.-France market and the market share for U.S. carriers has been slowly dwindling and has now declined from the 70 percent figure that I mentioned to 56 percent. And there is concern about that and I hope that we do not see that dwindle even further.
Today, eight U.S. airlines and Air France fly between the U.S. and France and they carry 4.2 million passengers each year. This makes France the sixth largest international market for passenger travel from the United States. The French market is behind Canada, Japan, the United Kingdom, Japan and Germany and just ahead of the Netherlands, South Korea and Brazil.
Over the last year, the U.S. has met three times with the French to negotiate a new aviation bilateral agreement. It is my understanding that the administration has stuck to its policy of promoting an open skies agreement in these negotiations, phasing in open skies over 3 years. The French are reluctant to open skies and have responded by offering to phase in a somewhat liberalized regime over 9 years.
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The French apparently would allow unlimited third and fourth freedom flights; that is, flights between the U.S. and France. However, the French want limits on the U.S. carriers' ability to fly beyond flights. These beyond flights are commonly referred to as fifth freedom flights.
This sounds very similar to our negotiations with Japan. I also understand that negotiations between the U.S. and France were to take place earlier this month, but the recent elections in France resulted in the rescheduling of these meetings to later in the year, possibly this fall. There were discussions by the preceding French Government to develop a plan to privatize Air France and apparently the new socialist-led government is reconsidering this issue as well.
In speaking to several aviation experts about our relationship with France in this regard, I am left with the impression that we were possibly heading in the right direction. However, now there is some uncertainty. But we are here today not to criticize anyone or any government. I think we will want simply to learn a lot from thoseor as much as possible from those who have been directly involved in these negotiations. So we look forward to hearing from our expert witnesses about this very important aviation relationship and I now yield to my good friend, the very distinguished Ranking Member of the subcommittee, Mr. Lipinski.
Mr. LIPINSKI. I thank the Chairman. I have to say in all candor, I think the Chairman has covered everything that needs to be covered, so I am going to yield the balance of my time to Congressman Oberstar, the Ranking Member of the full committee.
Page 13 PREV PAGE TOP OF DOC Mr. OBERSTAR. [Speaking in French.]
Mr. LIPINSKI. I failed to mention I meant to yield to him in English, not in French. Excuse me.
Mr. OBERSTAR. I just want to say thank you very much, Mr. Ranking Member and Mr. Chairman, for calling this hearing and for yielding to me. Parenthetically, I always enjoyed meeting with French delegations when I was Chairman of the subcommittee because the title for your position in French is ''Le President,'' the President. It was always nice to be called President, if only in French.
The U.S. bilateral relationship with France is both exciting and disappointing, stormy, one of vastly unrealized potential, but a market that should be a natural one for us and one that should have great growth opportunities and does have, but those opportunities have largely gone unfulfilled.
More than a decade ago our market began to grow very substantially, partly as a result of U.S. carriers' increasing capacity. That should have been a good thing. The French should have responded with open arms. However, with more people traveling, more airline tickets being sold, more tourism dollars being spent, more people being exposed to the excitement of France, at the very time that EuroDisney was opening its doors and Americans were excited about the prospect of traveling to Europe to engage in a new adventure, the French Government began to cut back.
The French Government did not see the benefits of increased passenger traffic. Instead it focused on a very narrow spectrum of concern, its carrier, its carrier's market share in percentages, not in dollar amounts, not in increased numbers of passengers traveling between the two countries.
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France's share had fallen from 50 percent in 1983 to 30 percent in 1992. The French explained that we had several U.S. carriers coming and their poor, unfortunate, pitiful one carrier was so isolated against this assault from many U.S. carriers. It didn't matter that their one carrier had more market share than any one of our carriers, but collectively that market share was less. It didn't matter that the total dollar amount for U.S. and French carriers was increasing, not decreasing. What mattered to them, what they cared about was market share.
And there was good reason for the disparity. In the aftermath of deregulation, U.S. carriers became more competitive, cut their costs, competed domestically and internationally against each other and against foreign carriers and became much more efficient. Meanwhile the French Government, owner of Air France, continued to treat its employees under French law as State government employees. That meant too many people held on staff at inflated salaries with dictated benefits and a better labor protective provision than anybody in the U.S. labor market today. It wasand still is the rule, that if you lay offgive notice of layoffs to employees of Air France, they have a year at full salary and benefits. Nobody in the U.S. has that kind of deal.
And rather than privatize, rather than relax its stranglehold on the carrier and rather than expand aviation trade opportunities, the French Government continued to hold on to Air France as a national flag carrier. It would have been comparable to us holding on to Pan Am as the U.S. flag carrier at a time when Pan Am was deteriorating.
At the very time that the UK Government was privatizing British Air, the German Government began the privatization of Lufthansa, the Dutch Government began the privatization of KLM, the French were holding on to Air France as a national treasure equivalent to the Mona Lisa.
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Since that time market growth has stagnated. In April 1992, Mr. Chairman, I was in France visiting my daughter who happened to be working there at the time and had a visit with Pierre Henri Gujon, the man in charge of aviation trade, and I learned at that luncheon meeting that the French were seriously considering renouncing the bilateral. And I pointed out what a serious mistake this would be right at the time when EuroDisney was opening, right at the time when European trade was expanding at the beginning of the summer trade season.
And I said, ''Just think of tourism.'' And his response was, ''Tourism doesn't sit at this table. Aviation does. We are concerned about aviation. We are concerned about our carrier. We have determined that the growththat the total market capacity be no more than 325,000 passengers.''
So they announced their intention to renounce and set a limit of passenger traffic at 325,000. A year later, I met again with Mr. Gujon and he said, ''See, what did I tell you. The market turned out to be 325,000.'' I said, of course, it is a self-fulfilling prophecy. You set the level. You didn't allow any increase and that is the market that you got.
I called Jeff Shane from France and told him of the impending disaster and there was not much that our side could do. Jeff was our Assistant Secretary for International Affairs and Aviation Trade at the time.
So what has resulted from that fateful decision 5 years ago? Air France now has 44 percent of market share. They have achieved their objective. They have increased their market share, but they haven't increased total dollars. They haven't grown and they haven't fulfilled the potential that awaits both U.S. and French carriers. They are now seeking code-sharing alliance with Delta and Continental. They would like the government to negotiate with the United States to negotiate an open bilateral, but by no means open skies or privatization, and the new French Government has slowed down all previous efforts at privatization until they have absorbed their new mandate.
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Well, maybe the French Government is now arriving at an understanding that Air France management has understood in its heart for a very long time: that you need to privatize, you need to open up the trade agreement between the United States and France, that our market pair opportunities, city pair opportunitiesfor example, there is great desire on the part of the French to have expanded service with New Orleans and with the State of Louisiana, all of which is frustrated by the current policy.
So this is an opportunity, but an opportunity for us to proceed cautiously, to hold up open skies as the objective, but in the short term, to arrange an incremental increase in traffic to get the bilateral reinstated and proceed on a more orderly basis. Comity and reciprocity are not a basis for expansion of aviation trade between our two countries. I look forward to the hearing today.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much, Mr. Oberstar, and certainly you have great insight and knowledge about this very special relationship, and I appreciate your contributions here this morning.
Do any other Members wish to make an opening statement before we proceed with the witnesses? If not, if you wish to place any written statements into the record, certainly that is acceptable at any time.
[The prepared statements of Mr. Lipinski, Mr. Costello, and Mr. Cramer follow:]
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Mr. DUNCAN. We will go ahead and proceed with the testimony first by the Honorable Ron Klink.
Mr. COOKSEY. Mr. Chairman, I would like to go over the agenda. There seems to be an absence of anyone here from France. Is it by any chance someone in the audience from France?
Mr. DUNCAN. Well, they were invited, but they did not wish to participate. And we will be meeting with some of the French aviation officials when we go to France in a couple of weeks and discuss some of these issues, but we will be hearing from others at this hearing. They were given the opportunity.
Mr. COOKSEY. Some people consider Louisiana a French colony still, and if there is anyone from France, I think it would be nice to have them there.
Mr. OBERSTAR. Will the gentleman yield?
Mr. COOKSEY. Yes.
Mr. OBERSTAR. It has been an historic policy of the State Department to discourage foreign governments and foreign representatives from testifying at hearings. We have experienced that under both Democratic and Republican administrations. And that has always been an impediment. There could be other voices heard on behalf of the French, but it would not be the authoritative voice of the French Government. I think what the Chairman said, informal discussions have long been the policy of the committee.
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Mr. COOKSEY. Very good, thank you.
Mr. DUNCAN. Thank you very much. We are pleased this morning to have on a Member's forum the Honorable Ron Klink from Pennsylvania, a good friend of all of us on this subcommittee. And Ron, thank you for being here this morning and you may begin your testimony.
TESTIMONY OF HON. RON KLINK, A REPRESENTATIVE IN CONGRESS FROM PENNSYLVANIA
Mr. KLINK. Mr. Chairman, it is always a pleasure to testify before you and your subcommittee. And I thank my other friends on the panel for showing up today to listen to the testimony.
First of all, I apologize because Tuesday night I was yelling at the congressional baseball game to no avail. It did not help our team to win. But I am a little weak in the voice this morning, so I will try to enunciate the best I can.
I want to thank you for the opportunity to appear today to discuss the U.S.-France bilateral aviation agreement. This hearing we in Western Pennsylvania think comes at a very critical time. As you mentioned, since 1992 when France renounced the bilateral aviation agreement, there has really been a freeze on growth in air service between our two countries and this has prevented cities like Pittsburgh from obtaining direct air service to France. It has also prevented carriers like U.S. Airways from expanding transatlantic service to respond to the increased demand from the traveling public.
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Today, the world aviation marketplace is undergoing radical transformation. The administration has successfully negotiated ''open skies'' agreements that is, they reintroduced competitive markets with many of our trading partners. Global alliances among international carriers are proliferating and we think that there is a unique opportunity to negotiate a new bilateral aviation relationship with France that we hope will open new service opportunities and provide for consumers the benefits of vigorous price and service competition.
The U.S. and French negotiators have exchanged proposals for a transition period leading to a liberalized aviation relationship. And while the proposals currently are very far apart; the U.S. Government, we think, has a very unique opportunity to duplicate the kind of competitive market structure that has worked with other countries, other trading partners like Germany and the Netherlands.
While a transition period may be necessary to enable Air France to adapt to the changing market structure, the U.S. Government must keep its sights fixed on the ultimate goal of free and open competition. It must ensure that each step of the transition represents a new opportunity and more competition for the traveling public.
In practical terms, this means permitting U.S. carriers to provide nonstop service to Paris from major U.S. gateways like Pittsburgh where currently there is no service. For over a year, US Airways has been prepared to offer such a service, but the bilateral relationship has not allowed it. Under the open skies agreement with Germany, US Airways provides successful and profitable service from both Pittsburgh and Philadelphia to Frankfurt.
Page 20 PREV PAGE TOP OF DOC Paris-bound passengers should not be denied those same choices and benefits. Under open skies not only would Pittsburgh to Paris passengers receive their first nonstop or single plane service, but US Airways is able to offer convenient on-line connecting flights to over a hundred communities located throughout this great country.
US Airways currently operates over 500 daily flights and employs 11,000 people at its Pittsburgh hub, the largest on their system. Some 9 million passengers enplaned at Pittsburgh last year.
Indeed, US Airways would offer connections to Paris from over 40 cities on its system that do not currently have nonstop connections on the Philadelphia-to-Paris service. Nonstop service to Paris would enhance Pittsburgh as an international gateway, fill an important gap in its trans-Atlantic destinations and create new jobs and promote economic development and international trade. And those are very large issues for us as we begin to rebuild the economy of our region. US Airways alone expends $1.4 billion a year in Pittsburgh.
There is another important reason why U.S. negotiators must ensure that the transition to open skies from day one provides new service opportunities for cities like Pittsburgh. The French Government will insist that the U.S. approve a code-share partnership between Air France and two U.S. air carriers, Delta and Continental, as a condition of agreeing to a more liberalized aviation relationship. This is fine and we wish all three carriers well. However, it is important to realize that to ensure meaningful competition under open skies it is absolutely critical that other U.S. carriers be able to compete effectively with Air France and its new U.S. partners in the U.S. French market during the transition. If we are really going to have competition for passengers and price, other carriers must be given the opportunity to come up to bat.
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The people of Pittsburgh and those in the communities served through the Pittsburgh hub are prepared to support fully nonstop service between Pittsburgh and Paris. This would be an important first step beginning the transition to a competitive marketplace. I ask you to join me in urging the U.S. Government to stand firm in its resolve to seek full and complete open skies and to ensure that the transition to open skies provides ample opportunity for new competitive air service to France. I thank you for your attention.
Mr. DUNCAN. Ron, thank you very much. Because we know that Members are so busy and because we have opportunities to discuss matters with them on the floor and at other times and also because we have a large number of other witnesses, we generally follow the policy on this subcommittee of not asking Members any questions at this point. However, if any other Members have any comments or questions about Ron's testimony, I certainly would be pleased to allow them to make any comments at this time. If not, thank you very much for being with us and thank you for participating.
Mr. KLINK. Thank you it is always a pleasure.
Mr. DUNCAN. We will go ahead and proceed, then, with the witnesses as scheduled in the notice of the hearing. And the first panel is a single-member panel. And we are pleased to have the man who is in charge of all these matters, Mr. Charles Hunnicutt, who is Assistant Secretary for Aviation and International Affairs for the Department of Transportation. Mr. Hunnicutt, thank you for being with us and you may begin your testimony.
TESTIMONY OF CHARLES A. HUNNICUTT, ASSISTANT SECRETARY FOR AVIATION AND INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF TRANSPORTATION, ACCOMPANIED BY BOB MALLALIEU, OFFICE OF INTERNATIONAL AVIATION
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Mr. HUNNICUTT. Thank you, Mr. Chairman, and members of the subcommittee. Good morning.
As you mentioned in your opening remarks, Mr. Chairman, the hearings before this subcommittee on UK and Japan in the past have been important events in developing the U.S. Government positions with regard to our aviation relations with those countries, and therefore I am pleased to be here with you today to discuss our relationship with France and the status of our negotiations for a new bilateral with the French Government.
As you pointed out, the French market is very important. You gave several statistics. After Germany and UK, it is the third largest market in Europe for the United States. It is also one of our largest air cargo markets and therefore very important to develop a more stable relationship. It has become an even more important air cargo issue since the establishment of Federal Express' European hub in Paris last year. As you pointed out, eight U.S. scheduled air carriers provide combination service to France and several U.S. all-cargo carriers also participate in that market.
Since France renounced the relatively liberal U.S.-France air transport agreement, U.S. scheduled passenger airlines have operated under a very restrictive regime that has severely limited operational flexibility and precluded expansion or even modification of services leading to the declines that you mentioned and others mentioned in their opening statements.
Following serious disputes over capacity in the 1996 summer and 199697 winter seasons precipitated by Air France's unilateral request for expansion of capacity, both countries have concluded that the current comity and reciprocity regime should be replaced by a structured and more certain aviation environment for U.S. and French airline services.
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During virtually all of our previous discussions, the French have steadfastly held to strict market share control mechanisms. Their goal was clear: To protect a weak Air France from the rigors of competition. Its goes without saying that such an approach had no appeal to us and no progress was made. Significally, however, the French have indicated a willingness to pursue a more forward-looking approach.
Since December, the United States and France have held two rounds of aviation negotiations looking toward concluding a liberal bilateral aviation agreement. The U.S. objective is to conclude an open skies aviation agreement. We have offered a 3-year transition period. The French have maintained, however, that they seek an agreement that would lead to an open trans-Atlantic regime phased in over 9 years. We believe that a 3-year period is sufficient to allow French airlines time to adjust to an open skies aviation regime.
The French desire to move toward a more liberal aviation regime is driven by Air France's interest in forming alliance partnerships with U.S. airlines. Delta and Continental have entered into separate alliance partnerships with Air France that involve interline connections initially and a desire to codeshare in the near future. Air France says that it is not interested in antitrust immunity at this stage and it does not have any plans for requesting immunity.
Because the United States has made clear in other contexts that it will not grant immunity absent open skies, France contends that it does not need an open skies agreement on the mistaken view that open skies is necessary only in conjunction with antitrust immunity. However, until an acceptable bilateral agreement is in place we are not prepared to approve codesharing relationships or strategic alliances from French carriers or allow them to have significant capacity increases.
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As the French decide what the future of Air France will be, they must do so in a rapidly changing European aviation environment. We believe that the European Union's recent steps to liberalize aviation have enhanced airline competition in Europe. This freer market environment, coupled with the open skies agreements that we have concluded with 12 European countries, have created new global aviation opportunities for the airlines and consumers of the open skies countries.
Currently, there are three major U.S. airline alliances operating: Delta-Austrian Air, Sabena, SwissAir; Northwest-KLM and United-Lufthansa-SAS. These alliances have in a couple of years demonstrated the wisdom of forming such partnerships to compete on a global basis.
The bottom line is that the synergies of such alliances provide substantial economic benefits for both the U.S. and European partners while at the same time providing substantial economic value to the U.S. and European economies.
As these alliances continue to expand and flourish, airlines such as Air France will find it increasingly difficult to compete in a world environment that they can no longer effectively control. Thus, to ignore the economic reality of the changing industry is to assure mediocrity at best. To its credit, I believe that Air France has begun to take a number of steps to respond and prepare for the new competitive aviation environment. Nevertheless, I must express our disappointment that to date we have made little progress with France in negotiating a new open aviation agreement.
Page 25 PREV PAGE TOP OF DOC Just two weeks ago we were prepared to send a U.S. delegation to Paris for the third round of aviation negotiations. We had hoped that significant progress would be achieved during those talks. However, the French side notified us that it was necessary to postpone the negotiations until this fall stating that new officials needed to be briefed on the issues.
It remains unfortunate that two major economic powers do not have a stable aviation relationship that guarantees the efficient flow of passengers' cargo and mail, but instead, must rely on comity and reciprocity, a regime that condemns both sides to stagnation and endless disputes.
We hope that as the new French Government assesses its economic interests, it will conclude as we have, that aviation services are a critical component of economic expansion.
A policy of placing restrictions on passenger and cargo air services is counterproductive to economic growth and the creation of jobs. Those countries in Europe with which we have open skies aviation agreements have already reached this conclusion and are enjoying the benefits that open skies agreements provide for their citizens, industries, and airlines, an important idea that was raised by Congressman Klink in his opening statement.
I believe that the coming together of commercial forces and enlightened governments has fueled the movement to open skies. Forward-thinking airlines and governments that wish to be significant players in shaping the next decade of international air transport have embraced broad-based aviation liberalization. I hope that the French will also soon conclude that this is the right way to go based on their independent judgment that open skies is not a threat to Air France, but is essential to its survival and future prosperity.
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In conclusion, the United States has made a commitment to all European Nations to enter into open aviation relationships. Twelve European countries have joined us and several more have indicated interest. As a result of aviation deregulation, and the movement toward a global open skies environment that has occurred in the past few years, air carriers have used the freedom to create a greater variety of consumer responsive travel products at lower costs than has ever been available. Open skies has proven its value by stimulating economic prosperity at all levels, not just in aviation. And that is why we have been aggressively expanding the open skies initiative beyond Europe to Asia, Latin America, and other regions where appropriate.
Thank you, Mr. Chairman. I appreciate the opportunity to be here this morning.
Mr. DUNCAN. Thank you very much, Mr. Hunnicutt, for being with us.
Let me ask you, I know that the French GovernmentI have one report that says the French Government has put $3.4 billion in subsidies into Air France since 1994. What is the financial condition of Air France at this time? Are they in good shape? Are they getting better? Are they getting weaker? What is the story there?
Mr. HUNNICUTT. Air France has been adhering to its restructuring plan and reformulating both its route structure and its operating procedures in conformity with the agreement they reached with the European Commission for the infusion of, additional capitol. We agree with your figure of $3.4 billion since 1994. And of course, there were previous infusions of government capital into Air France. They are still a high-cost carrier. And that is why we made the decision that we were willing to accept a transition phase to open skies to give them the ability to have the opportunity, if they are able to adjust to the competitive environment on a global scale.
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If we had felt that Air France was a cost competitive, already globally competitive air carrier, we would have been much less interested in agreeing to a transition period to open skies with the French Government as we negotiate our bilateral agreement.
Mr. DUNCAN. When you say a high-cost carrier, they are not globally competitive at this time. How high are their costs? I mean, in relation to, say, U.S. airlines.
Mr. HUNNICUTT. If I might, I am going to turn to Mr. Bob Mallalieu, who is our expert on France. Mr. Chairman, I will have Mr. Bob Mallalieu from our Office of International Aviation come up to the table. I may give you inaccurate figures.
Mr. DUNCAN. That is fine. Go ahead.
Mr. MALLALIEU. Thank you. I don't have a specific figure on what their costs are, but we can get those figures for you. I can tell you that Air France has been sort of an arm of the Government of France in terms of employment opportunities. And, therefore, over the years it has been used as a vehicle for providing French citizens employment.
Consequently, they have far more employees than they need and they, the Air France Management, are in the process of trying to restructure their operations. But of course, they have to consult with the government on that. And I think they have made some progress in lowering their costs, but they are still too high and there are a number of things that they need to do which, as I indicated, require further government approval.
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Mr. HUNNICUTT. Mr. Chairman, to be a little more specific, I believe their costs could be as much as 50 percent higher than U.S. carriers, but we will get you a specific.
Mr. DUNCAN. As much as 50 percent higher? So they have a long ways to go, then?
Mr. HUNNICUTT. Yes, they are a high cost carrier.
Mr. DUNCAN. What has been the effect of the renunciation of this bilateral agreement? I mentioned the decline in the percentage share that U.S. airlines have. Have there been other effects? What has been the effect on Air France, and what would you predict would havethere is a new socialist government there and new minister of transport who describes himself, I think, as a communist.
What would be the effect if the French decide to head in the opposite direction and stop the movement to privatize Air France and just really went in the opposite direction of the open skies and free markets for both the U.S. and France?
Mr. HUNNICUTT. Thank you, Mr. Chairman. Let me start, I think, if I could parse that into two or three questions, the first being the effect of the renunciation over time. Obviously, I think it has been pointed out by the opening remarks of yourself and Mr. Oberstar, the declining market share that we have faced since the time of renunciation. But I think that it is a much more complex set of impacts than that.
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It is also the effect on service from particular markets in the United States to France because what has happened is the French have not taken down any existing U.S. service, but they have refused to allow U.S. carriers to change service, to move service, and abandoned service has not been allowed to be replaced.
So we have seen this continual decline. As U.S. carriers have tried to adjust to changing market conditions, they can only reduce service. They are unable to make those changes that are necessary to put the capacity back in where market demand is saying it should go as the relationship changes.
So it has been a serious problem for our carriers and for service to the business communities and the tourists and pleasure passengers between the U.S. and France, having a relationship that is not responsive to market demands. So we have got capacity not being responsive to where it ought to be to provide the most service.
For Air France, I think it has been a terrible disservice. It has postponed the day when their management has had to reckon with the fact that they will, some day, have to be globally competitive or these passengers will simply move on other networks from North America to Europe and not on Air France. And I think that in fact, while they have had the benefit of a protected market and the revenue that is generated by having high load factors and a higher percentage of the market over the North Atlantic, it has been a disservice in that that has led them to not make the changes that KLM, Lufthansa and others have made in Europe to modernize their national air service.
Page 30 PREV PAGE TOP OF DOC The second question, I think, was perhaps the effect of the change in government. I can be very specific on that. Up until the week before the negotiating team was to go to Paris, we assumed that we were going because we had received no word from the French that anything had changed. It is not, of course, unreasonable for a government that has had a significant change to want to brief the new political leadership in the transportation ministry before they reengage in important negotiations, so it wasn't a shock that this occurred. We haven't received any indications from the French that their aviation policy will change in any way. Now, of course, this is possible, but we have received no indication that this is occurring.
There have been some statements by the government generally regarding privatization that would indicate that they are less interested in privatizing State enterprises, not just transport enterprises, but some indication that that did not necessarily include Air France. So I have to be somewhat circumspect, and in fact, would be very interested in discerning from the members of this committee who are able to go to France, what information you are able to acquire while you are there.
Mr. DUNCAN. My time is up. I may ask some other questions depending on what we hear from other Members. But we will go now to Mr. Lipinski.
Mr. LIPINSKI. Thank you, Mr. Chairman. Good morning gentlemen. The American share of the market has come down with France, and I can understand that because the French, once we take something out, we can't put it back in and we can't adjust based upon market forces. But has the French share gone up specifically because of areas that our carriers have abandoned or have they been able to move their flights around, their departures around, their time schedule around to accommodate people because of market forces at all?
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Mr. HUNNICUTT. Thank you, Mr. Lipinski. No, the comity and reciprocity has not given Air France great flexibility either. I mean there have been some equipment changes minor adjustments over the years as some minor U.S. adjustments have been made. And that was why when Air France made the unilateral request for significant capacity increase for the summer season of 1996, that it led to a serious confrontation when we said essentially, no, that you cannot seriously be asking for unilateral increases in Air France capacity without giving us the opportunity to increase U.S. capacity at the same time. And that really began the discussions that eventually led to our reengaging in negotiations, but that was the first time that there had been a request for a significant capacity increase on the French side.
Mr. LIPINSKI. And so have they gained a greater market share simply because of us abandoning a number of routes over there? Or has there actually been a real overall increase of traffic, of passengers, rather, that they have been able to take better advantage of for some reason or other?
Mr. HUNNICUTT. There has been some increase in traffic, a significant increase in traffic, and they are carrying a larger percent of that increase, if I understand your question.
Mr. LIPINSKI. That was my question, yes, you understood my question correctly.
They want to negotiate a liberalization that will be implemented over the course of 9 years; correct?
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Mr. HUNNICUTT. Yes, sir.
Mr. LIPINSKI. And we want to go for 3 years. Is our position that at the end of 3 years we have open skies?
Mr. HUNNICUTT. Our position is that at the end of 3 years we will have open skies. The position presented by the French Government was a 9-year transition to an open transatlantic relationship. In other words, thirds and fourths, there would be unrestricted designations, routes, frequencies between France and the United States, but there would be no beyond rights or very limited beyond rights included in that package. And safeguards on the increases in the transatlantic capacity as well.
Mr. LIPINSKI. Well, based upon their history in regards to aviation, and based upon their recent change in government, do you think that our position of trying to get to open skies in 3 years is really that realistic? It seems to me that based upon their history and what happened in the recent election and who is handling most of their transport issues, it is going to be nigh on to impossible to get them to an open skies agreement in 3 years.
It would seem to me that we could use that certainly in the beginning as our opening position, but it would seem to me to be much more practical and realistic to maybe try to work out something with them, maybe not only 9 years, but chop it down to 6 years if possible so we couldbecause you have a couple of carriers who are obviously very anxious to get into a full code-sharing arrangement here and the longer we try to deal with open skies on 3 years, it seems like the longer they are going to have to wait to set up what they would like to.
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Mr. HUNNICUTT. Mr. Lipinski, I guess I have two answerstwo aspects of an answer to that particular question. The first is, of course, this is a negotiation, and we have our position and we will try to work out an agreement that is in the best interest of our carriers and the United States, generally.
Do I think that it is unreasonable for us to expect that looking at the condition of Air France and how the aviation relationship should be organized between our governments that an open skies agreement is an unreasonable position for us to take or cannot be achieved? No, I think it is a very reasonable position for us to take.
Mr. LIPINSKI. I am not saying that it is an unreasonable position for us to take.
Mr. HUNNICUTT. But I think it can be achieved depending on the ability of Air France to discern the future of the global relationship and to participate in it in a way that is market-oriented that will drive the French Government to a position where they should find it acceptable to have a fully liberalized market-oriented open skies regime.
Now, I can't guarantee that we are going to reach that result. Would we prefer to stay in comity and reciprocity if they to rejecting 3 years to open skies? That depends we will have to see what we get presented with as we go through the negotiations.
Mr. LIPINSKI. I think this is a splendid answer because in case anyone is here from Air France, we wouldn't want them to know what your negotiating strategy is going to be in regard to this matter and since we now have a fellow who came back who speaks French fluently, and I have my doubts whether he is an American citizen or a French citizen we have to be much more candid about what we say here. He also speaks Spanish and Serb-Croation also.
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Do we also have any negotiations with any place in Croatia going on in aviation. Slovenia?
Mr. HUNNICUTT. Not yet.
Mr. LIPINSKI. Not yet. Now that I went down that road I have to try to recoup. I don't have any time left, so I will go back to the Chairman. Thank you.
Mr. DUNCAN. Thank you very much, Mr. Lipinski.
Mr. COOKSEY. I appreciate your testimony, Mr. Hunnicutt. Just an observation in defense of the French and our ancestors from Louisiana, I am struck by the fact that there are a lot of similarities between the problems of Air France and Amtrak. I am glad to see that everyone on this committee today has a unanimous opinion that we need to apply market forces to Air France. And maybe those same forces will be applied to Amtrak and we can solve both of those problems. Thank you very much.
Mr. DUNCAN. Thank you. Mr. Oberstar.
Mr. OBERSTAR. Thank you very much, Mr. Chairman. On the other hand, I would say to the gentleman from Louisiana, that Air France's competition with its rail counterpart to Amtrak is far more serious. The French TGV system travels at 176 to 185 miles an hour and carries millions more passengers in a year than does Air France.
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Mr. COOKSEY. Is it privatized?
Mr. OBERSTAR. It is State-owned, but it is turning a profit and is paying back the investment that the French Government has made in the high-speed rail system.
Mr. COOKSEY. Good. Maybe we can learn from them.
Mr. OBERSTAR. The gentleman's comparison is quite interesting, however.
Mr. Hunnicutt, do you think there is a genuine movement on the part of the French Government toward reinstating the U.S.-France bilateral?
Mr. HUNNICUTT. Mr. Oberstar, yes, that's our assessment, and as I indicated earlier, since the change in government we have not had any indications to the contrary. But we still remain sensitive to making sure that is the case. We have formed the opinion within the U.S. Government that the French Government seriously was interested in restoring a liberal bilateral aviation agreement.
Mr. OBERSTAR. But if you press what I believe must remain the centerpiece of American international aviation trade policy, movement toward open skies agreements, if you press that as the immediate goal, I think the French Government will resist and will not proceed. Is that your assessment?
Page 36 PREV PAGE TOP OF DOC Mr. HUNNICUTT. I think that we have already seen the French Government table a proposal which is not a transition to open skies and we had engaged in some discussions with them that led to an understanding that were certain aspects of open skies that they are going to resist, but this is a negotiation, and France is a developed economy with a major international air carrier that can be a major international player even on a competitive basis, which leads us to believe it is in their interest to reach an open skies agreement and that we should be able to achieve that.
Mr. OBERSTAR. My assessment of the situation is that we should as an immediate objective get the bilateral reinstated, that we should, within that context of that bilateral, move away from capacity limitations such as now exist, the comity and reciprocity or limitations on numbers of operations or frequencies or number of passengers or any other such capacity-limiting factors in the bilateral. Do you think that is a realistic and achievable objective?
Mr. HUNNICUTT. Well, Congressman, in fact, what you have described is very close to the transitional arrangement that we have proposed leading to open skies, although we were willing to accept some capacity constraints in the terms of an overall limit, but within that limit, no constraints as to routes or designations or artificial constraint of where that capacity would go.
Mr. OBERSTAR. Are they willing to reinstate city pair arrangements that were initiated in the era of one of your predecessors, Jeff Shane?
Mr. HUNNICUTT. We, in our transition proposal, insisted that all the existing 1992 city pair arrangements would be immediately available in the transition period and I think that is achievable.
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Mr. OBERSTAR. You think that is achievable?
Mr. HUNNICUTT. I think that is achievable.
Mr. OBERSTAR. Very good. I would think that the absorption by Air France of Air Inter, and movement to a hub and spoke concept of competition by establishing a hub at Charles DeGaulle would strengthen Air France and put them on at least a basis of thinking similar to U.S. carriers and that would give them a level of confidence that they can compete in a more open environment. What is your assessment?
Mr. HUNNICUTT. I would agree with you, Mr. Oberstar. I think the reason that we are seeing the willingness to even pursue discussions and consider reinstituting a liberal aviation bilateral agreement is based on the fact that Air France has completed somewhat a restructuring of its operations and modernization of how it operates as a hub and spoke airline and other areas of its operations that makes it now see the future as one in which it can participate on a global basis again.
Mr. OBERSTAR. I don't know the current DGAC, the Director of Civil Aviation in France. I have known and met with and visited with all the previous ones in the last 10 years, 15 years, so I don't know what their current thinking is, and unfortunately they change DGACs as often as one changes shirts in this environment. That has created a great deal of instability. But certainty the leadership of Air France is very business-minded, it seems to me, and understands the need to move to a new environment.
Page 38 PREV PAGE TOP OF DOC And Mr. Bernard Atelier, who was the President of Air France at the time of the rupture of our bilateral, understood full well the need to privatize, to cut costs, to operate as a private enterprise, even within the State-owned environment. But when he tried to move in that direction, cut excess employees and cut costs, you recall they burned tires on the airport tarmac and shut down Charles DeGaulle for a couple of days.
So, we have to recognize those forces within the French structure, governmental structure and civil service structure and not push them too hard, give them a little room to breathe easily, and reestablish the bilateral and move in the direction of more openness, strengthen the hand of the current management, give them to understand that it is not the percentage of the trade that is important, but the total dollar amounts that are exchanged between our two countries and as that rises, Air France benefits from it.
I would have just one parting piece of advice and that is these matters between the U.S. and France and between other countries are cultural as well as economic and at the time of the discussions, the time of the breakdown of the discussions in 1992, in a very candid conversation with Monsieur Gujon. He said after going through all the economics, ''The United States is treating France like a Third World country. We are not a Third World country. Treat us with respect.''
Culture is vitally important in treating them with that kind of respect. I know you understand much of this, but that is as important as anything else.
Mr. HUNNICUTT. Thank you, Mr. Oberstar, I take all of that as sage advice for the conduct of these negotiations.
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Mr. DUNCAN. Thank you very much, Mr. Oberstar.
Mr. BASS. Thank you very much, Mr. Chairman. I can only follow on to Mr. Oberstar's concluding statement two ways. First of all, I spent some time in France as a student. I went to the Universite de Toulouse, and studied there for a while, and in the course of my 3 years now in Congress and the other committees as well as this one on which I serve, it is pretty apparent to me that France is still trying to win World War II one way or another. And they still suffer from this terribleI don't want to use a clinical or psychiatric term, but they are schizophrenic to some extent about the rest of the world. They are embarrassed about what happened and they still can't seem to get over it and move into the 21st century and nothing seems to have changed since the seventies when I lived over there and they were struggling with it then and they struggle with it in military issues and nuclear and everything else. They struggle with it in transportation now and they are just sure that we have never been willing to give them the kind of credit that they may or may not deserve for what happened, in my opinion, over 50 years ago.
Let me just say that I am not really an expert yet at least in the issues of air agreements that we have between various countries involving air transportation. One that comes to mind is do we have any mechanisms or do we discuss limiting in any way Air France's ability to fly into the U.S. as a negotiating tool in order to get them to allow us or for us to negotiate some fair bilateral agreement?
Page 40 PREV PAGE TOP OF DOC Mr. HUNNICUTT. Thank you, Mr. Bass. Yes, let me back up a minute before I answer your specific question because now with your comments and Mr. Oberstar's comments, I would like to make one comment that while obviously we are not in our negotiations trying to solve underlying psychological issues, we certainly want to be sensitive to the cultural aspects of the parties on the other side. One, as a matter of respect, and two, as a matter of being good negotiators in order to get the best deal for our side of the table as we can requires us to be sensitive to where they are coming from from a cultural perspective.
Mr. BASS. I love the French people. I love their language. It is one of the most beautiful languages in the world. If we had been conquered by another country, we might have a different attitude about our own cultural heritage and so forth that we would have to overcome and it would take a long time. So continue.
Mr. HUNNICUTT. Thank you. In specific answer to your question, yes, we have the ability to take sanctions against the air carriers of other countries, who are in violation of a bilateral agreement. And two, in the case of a country like France, which has renounced the agreement where we are under comity and reciprocity, they have no rights to enter the United States just as our carriers have no rights to enter France it is purely a matter of comity of the two governments allowing the operations to continue.
And as we entered the dispute over the Air France-filed schedules for the summer of 1996 and the winter of 199697, when it looked as if we might really be in a serious dispute, we did consider options of taking specific sanctions against Air France.
Mr. BASS. Is France picking on us or do they have the same problem with other European nations, the United Kingdom and so forth, in their negotiations?
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Mr. HUNNICUTT. Within the EU, they now have a fully liberalized aviation market.
Mr. BASS. With other countries?
Mr. HUNNICUTT. With other countries France has tended to have restrictive agreementsI am not familiar with but one or two of them and they are restrictive agreements. My presumption would be that they have generally restrictive bilateral agreements.
Mr. BASS. So we are not receiving in a perverse fashion preferential treatment here. It is basically Air Francethere are problems with other countries outside of the European Union?
Mr. HUNNICUTT. The predisposition of the government is toward a restricted regulated international aviation environment and their other agreements reflect that. However, I should point out that the transatlantic market is a tremendous amountis a very important market for France, just as the French market is an important market for us.
Mr. BASS. Is Air France the only airline in France or are there other airlines that compete with Air France domestically or internationally?
Mr. HUNNICUTT. There are some small domestic carriers.
Mr. BASS. I remember going on
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Mr. HUNNICUTT. Air Liberte and Air Maritime.
Mr. BASS. Are there any other international carriers besides Air France or not?
Mr. HUNNICUTT. French?
Mr. BASS. Yes.
Mr. HUNNICUTT. There may be some within Europe, but no major carriers. Air France is the major carrier.
Mr. BASS. Thank you very much, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Bass.
Mr. BOSWELL. Thank you, Mr. Chairman. I wasn't going to participate particularly. I wanted to listen and learn. We got into this discussion about culture and maybe even attitudes perhaps, I don't know. I am just curious, reflecting back on one of my previous life. A few years ago I used to fly in and out of France quite a bit myself. And I always had some apprehension when I had to deal with Orly Tower, for example. That I was kind of getting treated like a second-class citizen as I would try to communicate and do what you had to do, and I am wondering if any of that exists today.
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What is it like to deal with the French versus some other countries that you have to deal with? Is it difficult, particularly different? What can you share with us?
Mr. HUNNICUTT. Mr. Boswell, I guess if you are asking the question, what in dealing with the civil aviation authorities at an operational level, do our carriers have particular problems with, dealing with air traffic control or air traffic management at the airports? I have not heard in my tenure any complaints about our treatment in that regard.
Mr. BOSWELL. Well, that is good to hear, I am pleased to hear that.
Mr. HUNNICUTT. But it is not necessarily that that would have come to my attention. It may have been an issue raised with the FAA, and I can pursue that to see if the FAA has had complaints in that regard. In terms of dealing with the French Government in terms of negotiating a bilateral agreement or resolving disputes, every government that we deal with is different, and I think that they may be more or less difficult depending on how closely their current policy formulation in the aviation arena matches our own rather than their particular cultural differences that lead to difficulties. It is usually more a function of the policy differences are wider and, therefore, the negotiations are more difficult in order to bridge the differences in the policies.
Mr. BOSWELL. That is an excellent and cautious statement. Thank you. I understand. Thank you,
Page 44 PREV PAGE TOP OF DOC Mr. Chairman.
Mr. DUNCAN. Thank you very much, Mr. Boswell. Mr. Watts?
Mr. WATTS. Thank you, Mr. Chairman. Mr. Hunnicutt, the Boeing merger, there was some discussion or some talk of retaliating against Air France's service if the Europeans blocked the Boeing merger. Has there been any dispute or has the dispute over the Boeing merger had any effect on the aviations relations with France?
Mr. HUNNICUTT. No, I don't think it has in terms of air services. You are correct in discussing potential retaliatory lists should there have been a dispute over the action of the commission with that merger. Air services were considered. And France was a particular potential target because they don't have a bilateral agreement. Therefore, they have no rights to the air services that they were currently exercising in the United States, whereas other countries would have had protective rights under our agreements. But I don't think it has had any permanent impact on our air services relationship.
Mr. WATTS. I know this is not the subject of this hearing, and I know that the negotiations with Japan will resume next week. What are the prospects for an open skies deal with the Japanese?
Mr. HUNNICUTT. That is a difficult question since we are starting negotiations on Monday. The position that we will take is a transition agreement to open skies. And, again like with France, we believe that is a reasonable and achievable position, but we have had from the Japanese side resistance to that idea, and like with the French, that is why we have negotiations.
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Mr. WATTS. Thank you. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much, Mr. Watts.
Mr. PEASE. Thank you, Mr. Chairman. Mr. Hunnicutt, I apologize that I have been running back and forth to another committee hearing and if the things that I am going to ask you have already been addressed, I will get them from the record. Can you comment on the recent French elections and whether that has had or you anticipate will have an effect on our negotiating with the French in this area?
Mr. HUNNICUTT. Yes, sir, Mr. Pease. Actually, that was asked earlier, but let me just briefly respond to you. We have not had any indications from the French that their position in the air services area will change at all with the change in government. On the other hand, they postponed the last round of negotiations because they needed time to brief their new political directors in the agency.
So, we are interested in knowing ourselves and are cautious because of that, but we have had no indication that there will be a change.
Mr. PEASE. Thank you. Since the French renunciation of the bilateral agreement in 1992, 1993
Page 46 PREV PAGE TOP OF DOC Mr. HUNNICUTT. They renounced in 1992; it became effective in 1993.
Mr. PEASE. Has there been an impact on the share of U.S.-French travel held by U.S. carriers vis-a-vis the French carriers and if so, can you attribute that to any particular set of facts or circumstances?
Mr. HUNNICUTT. Yes, sir, and again, I will cover it briefly because we have gone a little bit into this. That is okay, but I want you to understand. The share of the market held by U.S. carriers declined from almost 70 percent to about 56 percent since renunciation. We do see the factors that have led to that decline over time as being the inability of U.S. carriers to replace service or change service.
And you had a second part to your question.
Mr. PEASE. Well, I guess I don't understand. Have we allowed the French to replace service, I mean to adapt to that changing circumstance and, therefore, change
Mr. HUNNICUTT. Both sides have made some modest changes, but what has happened is the French have maintained their city pairs, their markets, whereas U.S. carriers for various reasons pulled out of certain markets and we were unable to replace them. So that we lost capacity that the French did not lose.
Mr. PEASE. Okay. Thank you very much.
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Mr. DUNCAN. Thank you, Mr. Pease.
Mr. Hunnicutt, let me ask you this. I have seen the list before, but I don't think I have ever counted how many countries are there that we presently have full open skies agreements with now?
Mr. HUNNICUTT. I think it is 23, and I could try to name them from memory.
Mr. DUNCAN. That is all right.
Mr. HUNNICUTT. We no longer do it on one hand. We now talk about dozens.
Mr. DUNCAN. I don't need the names, but what I am wondering about is there any country that you can think of that we have entered into open skies agreements with so far that have been hurt by those open skies agreements? Is there any thathas aviation travel continued to go up? In other words, has this basically been a win-win situation for most of the countries that have entered into these agreements?
Mr. HUNNICUTT. Heck, yes. It has been an incredible win-win situation and it goes back to something that Mr. Oberstar had said earlier, Mr. Chairman, and that is regarding the market share versus the bottom line. You know, a lot of these commercial entities have recognized that historically they have been looking for measuring their effectiveness and their success by their market share. But in reality, if the pie is growing fast enough, the market share doesn't really matter.
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There is plenty of money to be made and plenty of ability to develop companies within a growing pie that gives more revenue for everyone and that is what, in fact, is happening in our open skies relationships. Not only is the price competition, the service competition, the new service options generating new demand, it is generating increases in demand for services and therefore the ability to supply. It is allowing carriers to operate more efficiently and lower their costs, which is leading to greater operating profits for them.
We have with almost every open skies partner at least one U.S. carrier operating in that market that is larger than any of the foreign carriers in that market and in no instance have the foreign carriers been driven out the market, and quite to the contrary, they are all doing quite well. So we feel very confident in indicating to even those countries whose carriers, because of their current structure and costs concerns about opening them up to immediate competition, a real impetus to explain to those governments, you, in fact, will do your carrier a favor by giving them a date certain by which they will have to reenter the international marketplace as a real competitor without government protection. By giving them that deadline you give the management the incentive to actually go ahead and take those actions that are necessary to get the carrier ready to participate as a globally competitive carrier.
And one of the things that we have found isand again going back to Mr. Oberstar's advice to us on these negotiationsthe carriers, the commercial entities seem to recognize this much more quickly than the government regulators do. And we find that often the U.S. position is more closely reflected by the commercial entity in the foreign country than it is by the foreign government because it takes the foreign government's career bureaucracy time to adjust and they are not adjusting as quickly as the commercial entities are adjusting.
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So often it is not just with France that we see a potential dichotomy between the recognition of the commercial interests that it is time to move and the willingness of the government to move as quickly as we need to to accomplish an efficient modern aviation regime.
Mr. DUNCAN. Well, I thought that was basically what your report would be, but to describe it as an eligible win-win situation for everyone involved I think is a good thing to point out not only to the French, but to other countries throughout the world.
And, also, I think the French might consider the fact that there are many other countries in the the world where there have been government-owned monopoly airlines that have changed. And I think in almost every instance that change has been much for the better, both for the airline, the customers, the country involved.
Would you also say that that is fairly accurate?
Mr. HUNNICUTT. Yes, sir, we would agree with that statement.
Mr. DUNCAN. All right. Well, thank you very much. You have given us very helpful and informative testimony.
Mr. LIPINSKI. Thank you, Mr. Chairman.
Page 50 PREV PAGE TOP OF DOC Mr. Hunnicutt, from what I understand, one of our principal cargo carriers, Federal Express, has an excellent relationship in France. Is that because of the fact that the French don't really have any cargo carrier of their own, or is it because of Mr. Smith's very persuasive talents?
Mr. HUNNICUTT. I am sure Mr. Smith's persuasive talents had a great deal to do with it. But Air France is a major cargo carrier; they carry 60 percent of the cargo. In the U.S.-French relationship, they really dominate that market.
But I think that that is a good example. That was done privately by Federal Express with the French Government without the participation of the U.S. Government, because at the time it was negotiated, of course, we not only had no agreement, we were having serious disputes over winter and summer schedules, and so Federal Express decided they were better off for their commercial interests to arrange this deal.
But it does show the French Government's understanding of what job opportunities and commercial development can be adoptedcan be encouraged by adopting a liberal aviation regime. Even if it is only for one particular part and for one particular carrier, I think it does show an understanding within the French Government and an appreciation of what can be accomplished by liberalizing their services.
Mr. LIPINSKI. Well, Fred Smith is a very erudite man; maybe we could employ him to try to negotiate an open skies agreement with the French in regard to our passenger carriers?
Page 51 PREV PAGE TOP OF DOC Mr. HUNNICUTT. I am not sure what the Federal rules are on that. But he used to be a dollar-a-day man. Perhaps we could bring him in for a dollar-a-day.
Mr. LIPINSKI. What Mr. Smith is making, I don't think it would make any difference.
Mr. OBERSTAR. Mr. Chairman?
Mr. DUNCAN. Mr. Oberstar.
Mr. OBERSTAR. Thank you. I might make a few parting observations. First, yes, I concur with my Ranking Member that Mr. Smith does have great skill in managing a company and working deals, but I think that his astuteness was in moving Federal Express's hub from Brussels to Paris after being rebuffed by the Netherlands. They didn't want a hub in Amsterdam, and the French saw the merit of having a major cargo operation and the jobs that it provided locally in Paris. And that probably had much more to do with their success than anything else.
I want to compliment you, Mr. Hunnicutt, on the success you have achieved and the skill that you have demonstrated managing our aviation trade policy, the various negotiations that you have entered into. Coming into this position with little formal background and practical experience in aviation trade negotiations, you have demonstrated a very ready grasp of the issues, and patience in negotiating and a sensitivity to the concerns of other countries; and I am very pleased with the progress that you have made on behalf of international aviation and trade for the United States.
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Last year, inbound tourism brought $80 billion into the United States and a $26 billion surplus balance of payments in travel tourism, and most of that came by air. That is a very significant achievement. And you follow in the steps of the policy toward open skies initiated by Jeff Shane in the Bush administration. The Clinton administration has pursued the policy with great success and vigor, and I just urge to you stay on course.
Mr. HUNNICUTT. Thank you, Mr. Oberstar. If I might just say, I want to thank you for that compliment, but I take it as a real compliment to the staff at the U.S. Department of Transportation in terms the negotiating skills, and our colleagues at the Department of State who lead the negotiations and work with us as a team.
And I also would like to comment on the bipartisan nature of aviation policy, the support of this committee andthe subcommittee, the committee, and the equivalent committees in the Senatewho have given us tremendous bipartisan support, which has led to our ability to accomplish greater things than we could have.
Mr. OBERSTAR. I am sure the steady hand of Pat Murphy at the Department has been a great asset.
Mr. DUNCAN. Thank you very much, Mr. Hunnicutt.
Mr. DUNCAN. We will now call up the final panel and this is the major panel that we have today with five witnesses. And we are very privileged to have Mr. D. Scott Yohe, Senior Vice President, Government Affairs of Delta Airlines; Mr. Hershel I. Kamen, who is Managing Director, International Regulatory Affairs for Continental Airlines; Mr. Theodore Mathison, who is the Executive Director for the Maryland Aviation Administration on behalf of Airports Council International; Mr. Scott C. Gibson, who is a Visiting Fellow at the Economic Strategy Institute; and Mr. Lawrence M. Nagin, who is Executive Vice President for Corporate Affairs and General Counsel for US Airways.
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TESTIMONY OF D. SCOTT YOHE, SENIOR VICE PRESIDENT, GOVERNMENT AFFAIRS, DELTA AIR LINES, INC.; HERSHEL I. KAMEN, MANAGING DIRECTOR-INTERNATIONAL AND REGULATORY AFFAIRS, CONTINENTIAL AIRLINES, INC.; THEODORE E. MATHISON, EXECUTIVE DIRECTOR, MARYLAND AVIATION ADMINISTRATION, ON BEHALF OF AIRPORTS COUNCIL INTERNATIONAL-NORTH AMERICA; SCOTT C. GIBSON, VISITING FELLOW, ECONOMIC STRATEGY INSTITUTE; AND LAWRENCE M. NAGIN, EXECUTIVE VICE PRESIDENT-CORPORATE AFFAIRS AND GENERAL COUNSEL, US AIRWAYS
Mr. DUNCAN. It is certainly a very distinguished panel of witnesses. And we will, as is the custom of this subcommittee, proceed in the order in which the witnesses are listed on the official notice of the hearing, and that means, Mr. Yohe, you will proceed first and you may begin your testimony.
Mr. YOHE. Thank you, Mr. Chairman, members of the subcommittee. It is a real privilege for me to appear here today to provide Delta's views on the U.S.-France aviation relationship.
Delta is a very active player in the U.S.-France market, and currently we have four daily nonstops from three separate gateways. That schedule accounts for about 12.5 percent of our total transatlantic capacity. As the largest U.S. transatlantic operator, France remains a critical market for Delta in our overall European strategy.
The absence of a bilateral agreement has caused France to lag behind other Western European markets. In fact, the International Air Transport Association has predicted a growth rate in the next 4 years for France and the U.S.-French market of only 5.6 percent as compared to 6.6 percent for the U.S.-European market. We believe that prediction is directly attributable to the tightly controlled U.S.-France regulatory environment.
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We believe that this type of regime has caused a stagnation in the market and has led to loss of opportunities for carriers as well as denying benefits to consumers.
The importance of certitude in planning is very critical to airlines; indeed, for our strategic planning, buying airplanes, planning our future operations, we need a stable regulatory environment to ensure that the investments and decisions we make can be realized.
The absence of an agreement with France is certainly a very negative impediment in that regard. As I mentioned, in terms of future growth, the lack of an agreement has also led to stagnation of the market.
In looking back since 1992 at the growth in the French market, what you find is the market has been at a virtual standstill with only a 2.9 percent growth during the 1992-to-1996 period, as compared to 3.7 percent for the U.S.-European market.
A third effect of the lack of agreement has been the prevention of the formation of alliances between U.S. and French carriers that seek to form partnerships to expand their presence in the market and offer greater efficiencies and benefits. Delta and Air France entered into an agreement last fall to form a cooperative marketing arrangement. We believe that that decision was a major catalyst for the French decision to resume negotiations and try to conclude a new agreement with the United States. Delta has made a commitment to its relationship with Air France by moving our Paris operation to Charles DeGaulle after operating at Paris Orly for 12 years. We would like to further expand our cooperative efforts and code-sharing between the United States and France.
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It is important for the subcommittee to recognize that the Delta-Air France partnership is distinctly and fundamentally different from our Atlantic Excellence Alliance with Sabena, SwissAir, and Austrian Airlines. The Air France alliance doesn't contemplate the grant of any antitrust immunity and a fuller integration of our operations that would involve capacity pooling, revenue sharing and other coordinated joint commercial undertakings.
Accordingly, the French are not seeking open skies but rather a more gradual, phased approach to liberalization. The Delta alliance with Air France does not need open skies under current U.S. regulatory and trade policy to offer the more traditional procompetitive code-share arrangement envisioned in our agreement.
Let me now turn to the U.S.-French negotiations. As you have heard here this morning, the French have made it very clear that they are not prepared to embrace an open skies agreement at this time. They believe that such an arrangement should be concluded on a multilateral basis with the European Union. The French further believe that the marketplace continues to need some capacity limits for a period of years.
While we disagree philosophically with the French viewpoint and have been and continue to be an ardent supporter of open skies, we believe, in this circumstance, the U.S. Government must respect that position and negotiate accordingly.
If we are to attain a successful conclusion to the negotiations which have begun last year, we must be willing to address the French concerns regarding open skies. We have urged the United States Government to accommodate reasonable French requests for a period of transition to a more liberal, market-oriented regime. The current comity and reciprocity regime penalizes U.S. carriers like Delta, and any attempt to expand or enhance our presence in France is subjected to unilateral dictates of the French civil aviation authorities. We would like to change that situation.
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Mr. Chairman, the U.S. wants open skies and the French do not. We believe that a dogmatic insistence on open skies as the only course of action is not likely to yield any success and will continue to result in a stalemate of this very important relationship. We believe that the U.S. should be pragmatic and should futher adopt a more practical approach in its relationship with the French. While we applaud the success that they have had in obtaining open skies elsewhere, we think that the French desire to have a more phased relationship is one that should be accommodated.
We certainly urge the subcommittee to take an active role in these negotiations. You can be instrumental in helping to shape the policy toward a more pragmatic and practical solution, one that will result in substantial new operations and growth, producing greater benefits for carriers and consumers alike.
Thank you, Mr. Chairman. I look forward to answering any questions you may have.
Mr. DUNCAN. Thank you very much, Mr. Yohe.
And the next witness will be Mr. Hershel Kamen with Continental Airlines.
Mr. KAMEN. Thank you, Mr. Chairman. I am Hershel Kamen, Managing Director of International and Regulatory Affairs for Continental Airlines. On behalf of my 38,700 colleagues at Continental, I thank you for holding this hearing on the status of U.S.-France bilateral negotiations. These negotiations can benefit consumers and competition across the Atlantic if the new agreement strikes the right balance between U.S. and French interests. Without a U.S.-France bilateral agreement, competition cannot increase and passengers, U.S. cities and U.S. airlines will not receive the benefits a new agreement would bring.
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In the last 2 years, under the leadership of Christian Blanc, Air France has improved its financial prospects greatly and as a result of these improvements, the previous French Government was prepared to privatize Air France and support Mr. Blanc's initiatives to revitalize Air France. As part of this, Air France began looking for a U.S. partner and ultimately settled on two, Continental and Delta, as part of its plan to stabilize its financial position.
The Continental-Air France alliance clearly will expand competition. Both carriers will buy blocked-space on each other's flights, which will allow each of us to offer passengers more flight departures and service options in the U.S.-France markets. Also both carriers will independently set prices and determine their own schedules.
Just as importantly, the alliance will allow Continental to serve points in France, other European countries, Africa and Asia, via Paris, reaching customers Continental could not otherwise reach without this Air France agreement. All of these benefits can be achieved without securing antitrust immunity because Continental and Air France will continue to compete with one another. In sharp constrast, United, Lufthansa, and SAS; Northwest and KLM; and American and British Air all seek to collude on pricing, immune from antitrust law.
Air France's prospects for alliances with Continental and Delta have set the stage for new U.S.-France aviation negotiations. Although negotiations began with the U.S. seeking open skies and France seeking continued restrictions on new services, the U.S. must recognize that European governments have generally rejected open skies proposals unless their flag carriers were seeking antitrust immunity to consolidate with U.S. carriers. Although we at Continental remain hopeful that a new agreement will be reached soon, the new government in France is assessing its options. The most recent negotiations scheduled for just 3 weeks ago have been postponed for several months.
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Before making my recommendations for the next round of U.S.-France negotiations, I would like to spend a few moments explaining the current state of the U.S.-France market. The U.S.-France market has grown by over 16 percent since the renunciation of the bilateral in 1993, but none of that traffic has been on U.S. carriers. French carrier traffic in contrast has grown by 58 percent since the termination of the bilateral agreement, and French market share has grown to 42 percent.
Without a significant positive incentive to enter into a new bilateral air transport agreement with the United States, France has no reason to enter into an agreement which permits expansion of U.S. flag services. Although the Air France agreements with Continental and Delta provide that incentive, a U.S. insistence on ''open skies'' in the near future could result in a continuation of the current regime rather than an expansion of service between the U.S. and France. Thus, the U.S. negotiators must seek an agreement which will open the U.S.-France markets to new competition without asking for so much that the French would prefer the status quo.
Negotiating a new air transport bilateral agreement is important. The question is: What should this new agreement include?
France is not seeking antitrust immunity for any alliance by its carriers, and so the U.S. shouldn't expect to achieve an open skies agreement now. A legal agreement that includes important rights like code-sharing, along with a commitment by French negotiators to discuss even more liberalization in the future, will benefit U.S. interests far more than having no agreement at all.
Page 59 PREV PAGE TOP OF DOC An agreement increasing frequencies and code-sharing opportunities is within reach if the U.S. doesn't insist on rights which no U.S. carrier requires, such as expansive fifth freedom rights. The course of action I am proposing here is like the negotiating path currently taken by our government with other countries: increase competition, expand U.S. opportunities, and continue to work towards more opportunities.
Mr. Chairman, your subcommittee has a long history of working with the administration for the benefit of the airline industry on a broad range of issues including international bilaterals. Continental sincerely hopes that you will provide this administration with the advice and support needed to move these negotiations toward an outcome that is good for consumers, that is good for France, that is good for the United States and that is good for U.S. airlines.
This Administration has been successful in creating opportunities for increased international service for U.S. carriers around the world. We hope the Administration will pursue the path that will produce a libralized agreement in France in the short term, and we are depending on you to urge them to do so.
Mr. Chairman, thank you for your attention, I would be pleased to answer any questions you may have.
Mr. DUNCAN. Thank you.
The next witness is Mr. Theodore Mathison. Mr. Mathison, thank you very much for being here on behalf of Airports Council International.
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Mr. MATHISON. Good morning, Mr. Chairman. I am Executive Director of the Maryland Aviation Administration, which operates Baltimore-Washington International Airport, and I am pleased to be here to represent the Airports Council International of North America in its interest in international service and, in particular, relations with France.
The Airports Council International represents local, State, and regional governing bodies that own and operate commercial airports in the United States. Its program is extremely active on behalf of the 53 participating U.S. airports.
International air service is an essential element of U.S. communities' ability to compete in international tourism, business, and investment. U.S. business interests and the exporters depend on the mobility provided by frequent air service between countries. According to the Department of Commerce, international visitors spent between $80 billion and $90 billion in the U.S. during 1996, creating nearly 1 million jobs.
Mr. Chairman, it is for these reasons airport operators have consistently urged the U.S. Government to keep its eye on the real prize of international air service: the economic stimulation that results from meeting local regional and national market demand through increased air service.
We have been very pleased, thanks to the efforts of the administration and Congress, that the U.S. Government has liberalized its approach to international aviation, and has concluded open skies agreements with in excess of 25 countries over the last 2 years. Since the U.S.-Canadian open transborder agreement was signed, passenger traffic has increased 28 percent and 17 additional U.S. cities have received nonstop service.
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As has been noted earlier by other testimony, France represents one of the places where a cloud remains. Since France renounced the agreement in 1992, the aviation relationship has undergone far too many disputes. The net loser in all this posturing is the traveling public. It is economically vital to airports and airlines alike that an agreement is reached to place the aviation relationship on a sure footing.
We realize that France's regulatory approach to aviation will not change easily or quickly, and that a transition to open skies is necessary. Nevertheless, the U.S. should maintain the goal of open skies in as short a period of time as is possible.
During the transition stage of limited additional frequencies, we believe the U.S. should propose open route rights between the two countries for the carriers of both countries. An open route description would provide an opportunity for French carriers to either mount services to new U.S. points or start code-sharing with its partners in the U.S. to a limited degree so that hopefully it will become more vested and confident in the U.S. market. The U.S. would still be able to control the extent to which France would enjoy the benefits of code-sharing because of the frequency limits.
An open route between the two countries would provide U.S. cities and communities the opportunity to market their individual strengths to French and U.S. carriers, within the additional frequency limits of the transition period.
For the previously noted reasons, we urge you to encourage U.S. negotiations to propose the exchange of open routes between the two countries during the transition to an open skies agreement and to take as much account of U.S. airport and community interest as they do U.S. airline interests.
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While in Paris recently, I had the pleasure of meeting with both French carrier representatives and regional airport officials. There is clearly a high level of civic party interest among the regional airports to conclude negotiations on an agreement which responds to the needs of French communities and their regional economies.
The French carriers were hopeful bilateral considerations would not continue to frustrate the commercial aspirations, as they saw attractive opportunities for both additional frequencies to the U.S. gateways, and new entry as well.
In sum, I see evidence in France, as with Canada, that momentum and marketplace forces are now at work which will yet allow civil aviation negotiators to frame an agreement allowing airports and communities on both sides of the Atlantic to realize their fullest air service potential.
Mr. Chairman, I appreciate the opportunity to represent the Airports Council International this morning, and I would be pleased to take any questions.
Mr. DUNCAN. Mr. Mathison, thank you very much.
And next we will hear from Mr. Scott C. Gibson, who is visiting fellow with the Economic Strategy Institute.
Mr. GIBSON. Good morning, Mr. Chairman, members of the subcommittee. Thank you for inviting me to testify today.
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As you know, the Economic Strategy Institute has been active in the dialogue of America's economic relationships with Europe and since 1993 has been concerned about America's aviation industry, particularly in regard to the international marketplace, where superior American airline economics combined with innovative markets have resulted in a profitable and growing export industry.
I myself have been involved with U.S.-France bilateral relations since 1979 for Pan Am, later for Continental, and lastly as an executive with TWA when, in 1994, it decided to shut down its Paris mini-hub operation.
A little over 5 years ago, in May 1992, the French Government renounced its aviation agreement with the United States. The reason cited by the French was a gross imbalance in the structure of the agreement that made it unfair to French airlines. The reality was that Air France was losing money and market share in competition with a vibrant U.S. industry.
The agreement that the French renounced had been in place since 1946, and it allowed equal opportunity for both sides. In fact, the French airlines historically had carried the largest share of passengers between our two Nations, served more U.S. cities nonstop from Paris than U.S. airlines, and well into the 1970s operated an extensive network of flights beyond U.S. cities to Mexico and the Caribbean. Rather than adapt to a changing airline economic regime, Air France sought protection from U.S. airlines.
During these past 5 years, the U.S. market share in the French market has declined as French restrictions blocked new capacity or changes in operations. One result is that TWA and United, which were operating hubs in Paris, have dismantled them. During the same period, Air France received a massive 3.8 or 3.4 billion-dollardepending how you count the francsbailout from the French Government. Had it not received this money, Air France would have joined the ranks of Eastern and Pan Am in liquidation.
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Interestingly, the EU attached several restrictions to the state aid package. Among the restrictions was the prohibition on the use of the state aid to subsidize any routes in competition with other EU carriers. In other words, the EU allowed the French Government to subsidize transatlantic operations of Air France against U.S. airlines who need to earn a profit.
To Air France's credit, it has used the past 5 years to restructure its operations. Air France has lowered its costsalthough I believe they are still 50 percent higher than U.S. carrier costsand rescheduled its Paris hub to achieve rapid connections between cities throughout Europe, the Middle East, and Africa on the one hand, and North America on the other. These actions have restored the profitability of Air France and allowed it to be a viable competitor against other U.S. airlines, despite the fact of its higher costs.
The EU has been actively moving towards an integrated and deregulated market, the final step of which was taken this year, and with this open market, Air France faces new competition on many of its domestic and inter-European routes. This is forcing further changes, primarily within their labor cost structure, that are painful and resulting in labor unrest very similar to what the U.S. industry went through in the 1980s and in some cases is still going through today.
Rather than make painful choices, Air France seeks protection. Since it cannot get it at home, it wants it on its transatlantic routes against U.S. airlines.
In early 1996, Air France sought to add capacity in the U.S. market and subsequently negotiated alliances with Continental and Delta that would allow it to penetrate the U.S. heartland. These alliances will shift passengers and revenues from the transatlantic flights to other U.S. carriers and their alliance partners. Since the French had refused similar U.S. airline requests for years, both to add capacity and to code-share, the U.S. Government sought a quid pro quo, which was the French Government's commitment to rapidly negotiate a formal aviation regime.
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Rather than continue protectionism in this new regime, France should be seizing the opportunity to join the majority of their European peers in opening the skies. European airlines, despite higher costs across the board than U.S. competitors, have found that they have prospered in such a free marketplace, and I believe Air France can as well.
Certainly, Air France will need to maintain the momentum of adaptation to the market, and while some of this will be painful, it is essential in order to compete and assure long-term viability. The makings of a deal with the French exist. Air France should get its alliances approved if U.S. carriers and their alliance partners are granted simultaneous equal access to the French market without restrictions. I point out that the alliances proposed by Air France are both more valuable to it than are those alliances probably to the U.S. carriers, and to some degree there is some leverage in negotiating at this juncture.
While a short phase-in period may be a necessary compromise, it should be structured in a way that assures reciprocal access on a parallel path; for example, that allows French carriers to get their code-sharing while at the same time allowing U.S. carriers equal benefits.
Any new agreements should also address nation state subsidies. Many nations in Europe have a history of providing state aid to bail out ailing airlines, and despite assurance of ''one time'' or ''last time'' payments, they tend to reappear. The United States Government should ensure that any new agreement prohibits such payments.
With the French Government changing hands earlier this year, none of us know currently where aviation relations with France are truly headed. But this month presents a test case of French sincerity to liberalize. U.S. airlines are, in fact, today filing requests with the French Government for winter capacity. Three U.S. airlines are asking for modest capacity additions, and if the French are serious about moving forward, they will approve these requests quickly. If not, we will know that we have a long dark winter ahead and should consider whether we should take back some of the capacity growth allowed Air France with the explicit commitment towards liberalization.
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Mr. Chairman, I am prepared to answer any questions that you may have. Thank you for the opportunity to speak here today.
Mr. DUNCAN. Thank you very much, Mr. Gibson.
The final witness on this panel is Mr. Lawrence M. Nagin, who is executive vice president and general counsel for US Airways.
Mr. NAGIN. Good morning. It is a pleasure to appear before you today on behalf of US Airways.
The subcommittee's consideration of the current bilateral aviation relationship between the United States and France is timely and it is important. I thank you for the opportunity to appear here today to describe US Airway's strong interest in this subject and our views on how that relationship can be improved so that we can better serve the traveling public.
Clearly, France is one of the most important aviation markets for the United States. France, however, is the only major trading partner with which the United States has no bilateral aviation agreement today. As a result, air service has been essentially frozen for the past 5 years and our U.S. airlines actually fly fewer flights to France today than they did 5 years ago in the summer of 1992.
With pent-up demand for more flights, the traveling public deserves a maximum effort to take off the restraints imposed on new service, especially in our major cities like Pittsburgh that do not have nonstop flights today.
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As Secretary Hunnicutt has described for you in his testimony, the United States and France are now in the process of negotiating a new bilateral aviation agreement. Urgent efforts by both our Government and France are needed to forge an agreement opening up new opportunities to expand air services.
We at US Airways strongly support the effort to achieve a new aviation agreement with France, just as we are keenly interested in the administration efforts with this Congress and this committee's support to open up our air service markets with the United Kingdom, with Japan, and with many others.
The impetus for these negotiations with France comes from Air France's proposed alliances with two U.S. airlines now competing in the market, and we have heard from them this morning, both Continental and Delta.
We at US Airways do not object to their plan if an aviation agreement that is reached also provides opportunities for other air carriers like US Airways to offer new competitive service on its own. I can assure this subcommittee that US Airways is ready, willing, and able to use such new opportunities to compete.
Our number one priority is to start Pittsburgh-Paris nonstop service. We already operate a very successful service to Frankfurt, Germany, from our hub in Pittsburgh. We have over 500 flights a day and enplane over 9 million passengers a year. With our connecting service at Pittsburgh, US Airways could provide a new gateway to Paris for over 100 communities on our network around the United States.
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Government and business leaders from the Pittsburgh area and the Commonwealth of Pennsylvania strongly support our plan to start this new service. Congressman Ron Klink, whom you heard this morning and with whom we are pleased to be working on this effort, has joined with other Members of Congress from the Pittsburgh area such as William Cohen, Mike Doyle, Frank Mascara, and John Murtha in urging Department of Transportation Secretary Slater to urge a bilateral with France that will authorize this new service. Similar enthusiastic support has come from both U.S. Senators Specter and Santorum, Pennsylvania Governor Tom Ridge, Pittsburgh Mayor Tom Murphy, the Allegheny County commissioners, and other numerous government and business leaders in the Pittsburgh area.
Our Pittsburgh-Paris plan is a prime example of the benefits that consumers, employees, and the economy will reap from a new bilateral aviation agreement. But the ability to compete and offer new services must be assured. An agreement which blesses the alliance that you have heard about this morning with Delta and Continental will serve the public interest only if it guarantees new route opportunities for independent airlines like US Airways.
In sum, we recognize the interests of our competitors in obtaining code-sharing rights. But to ensure meaningful competition during the transition to open skies, it is critical that our Government place its primary emphasis on securing fully adequate opportunities up front for U.S. carriers seeking to operate their own services directly to France.
The current U.S. negotiating position recognizes this principle and would provide opportunities for independent airlines like US Airways to compete. Only firm adherence to this position, however, will assure US Airways and other air carriers the ability to compete effectively and to meet our consumers' demands for new service.
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To reach this goal will require the support and efforts of all of us pulling together. That is why, Mr. Chairman, this subcommittee's attention to this issue is most encouraging and helpful. Your support for the process is greatly appreciated.
Mr. DUNCAN. Well, thank you very much, Mr. Nagin, and I thank all of the panelas I said earlier, a very distinguished panel and very helpful testimony.
Because I asked so many questions on the first panel and made an opening statement in addition to that, I am going to go for the first round of questioning to the vice chairman of the subcommittee, my good friend, Mr. Blunt.
Mr. BLUNT. Thank you, Mr. Duncan, and thank you for holding this hearing.
I have four questions to ask, and you have to answer them in 5 minutes, and so the shorter the answers the better. If you need to submit any additional information, you can do it that way.
Mr. Nagin, if the code-sharing discussed here this morning is allowed to go out without anything happening but that, does that pretty well box you out of the market?
Mr. NAGIN. Absolutely, it does, because if that is the lever to open up this new ability for other air carriers to compete, all we have to do is look at other countries when something is wanted by the home carrier, if you will, British Airways in their proposed alliance with American, that would be the linchpin to open the door to Heathrow Airport, if you will, and to allow new competition.
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Whereas the proposal by Air France and Continental and Delta is different from the British Airways-American proposal, there are lessons to be learned from it.
This is an opportunity and a situation where there has been no bilateral with France for 5 years, where there are market constraints, where the U.S. has not been able to add capacity without jumping through too many hoops in order to get it done, and then only on a limited basis. So this is something for the home company. Air France wants something. Two U.S. carriers want something. And I am sure it works for them, and it should work for them. I am supportive of it. But a company like US Airways just wants to compete, and we want to get into the marketplace from our hub to offer services.
So it is a great opportunity, and if you allow the code-share to proceed without additional competition from other U.S. carriers, there will be no incentive for anything to be done in the future.
Mr. BLUNT. I understand why you think that those three parties would benefit from code-sharing. What you would like to see is a granting of some additional routes as a part of that negotiation?
Mr. NAGIN. I think they go hand in hand.
Mr. BLUNT. Mr. Gibson, from an economic strategy point of view, should we be holding out for open skies? Should that be the end result here that we want? Or are there some interim strategies that really make more sense for us?
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Mr. GIBSON. Mr. Blunt, certainly our history as we look at other aviation regimes have shown that open skies produces the maximum benefit, usually to airlines on both sides of the table, and I believe that certainly would be the case here with the French. A transition, it could provide great economic benefit to a whole host of airlines, but you only get so many bites at the apple.
Always when one is negotiating it, open skies has a wide definition as to what that may be. Beyond rights are probably less valuable to U.S. airlines to operate with their own aircraft but may be extremely valuable to operate on a code-sharing basis. There are many ways to skin the cat here. But I think what most of us define as true open skies, which is no restrictions on the regime between the United States and France, I think is absolutely essential, and I think that is a leverage point that may not repeat itself for some time going forward.
Mr. BLUNT. Your thought is that Air France needs something now, would like to have something happen now, and now is the time to negotiate?
Mr. GIBSON. That is right, that these alliances give it access to the interior U.S. market. Once it has that, it really doesn't need much more from the United States.
Mr. BLUNT. Mr. Yohe and Mr. Kamen, both, I am assuming that there is understanding that open skies or even further entry of your airlines into France is economically very good for France and tourism. But is there understanding there of that? Are there folks in France who are encouraging the French Government to open up the tourism industry more by moving toward these kinds of things and let our airlines in, Mr. Yohe?
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Mr. YOHE. We certainly are encouraging the French to move toward open skies. And I want to offer an observation here in response to your last question.
It is our belief that liberalization will accelerate movement toward open skies, that when carriers begin to compete as would be envisioned in a new agreement with France where code-sharing would be allowed, that the benefits and value of competition would accelerate the movement toward open skies.
In looking at Germany, you have a very good case in point. Initially, Germany felt that they needed an agreement that protected their carrier, gave them some breathing space so that they could privatize and stand on their own 2 feet in a global environment. What they learned after a couple of years was that really needed to go to open skies and further enhance their commercial position in the market.
So we think very strongly that by concluding the agreement now that introduces and injects competition in the market, that that will hopefully persuade the French that they need to move faster toward open skies.
Mr. BLUNT. If either you or Mr. Kamen want to provide anything additional for the record that would advance that theory in the negotiation, that would be great.
Mr. Kamen, on the narrower question, are there groups, Continental and other airlines, making any efforts in France to get some support and some encouragement there for the French Government to go around Air France and open this system up?
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Mr. KAMEN. Certainly with our partner, Air Francewe are trying to get Air France to get the Government back to the table and to negotiate and to get an agreement done. We ourselves, from my understanding, are not doing any otherhave no other relationships in France, pushing the Government to an open skies agreement. We are working with Air France in order to get that done since they do have something invested at the table, that is to get an agreement signed.
Mr. BLUNT. It would just seem to me that even the railroad system, the folks who run hotels, and restaurants and other places would have a different interest here than Air France does. And I will find out soon, I am certain, if there are people there encouraging that.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you.
Mr. LIPINSKI. Thank you, Mr. Chairman.
Mr. Yohe, you know, your statement, the French believe that the marketplace needs some capacity restraintswhile Delta philosophically is opposed, you believe you must respect France's position. What sort of balance should we strike in this regard, and how do you think that we can achieve that?
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Mr. YOHE. Well, I think there are really three elements here. Number one is, how long of an agreement should we have?what those phases look like. Next, what should be the ultimate disposition at the end of that period? And, finally, how fast should we increase market orientation and liberalization?
The two positions that have been outlined here this morning reflect pretty stark and distinct positions in terms of all of those questions, and what we see as an opportunity here to move fairly quickly within a year or two toward greater liberalization in the transatlantic marketplace with some code-sharing, and then gradually to move toward liberalization and third-country markets and freer opportunities. We think we can get very close in negotiations with France within a 3- or 4- or 5-year period and coming up with an agreement that looks pretty close to what open skies' model represents today.
I think the key here is that we have to, as a U.S. Government, accept the fact that at this point in time that the French are not going to accept open skies as the ultimate result. But hopefully, as I said earlier, after a couple of years of greater competition, the French will be persuaded by ourselves or perhaps Continental or someone else that they need to make that final step, make that transition to a private company, and seek antitrust immunity and a full integration so that they can compete with the other systems that have developed.
Air France has a terrific asset today at Charles DeGaulle, and they run a very large and a very efficient hub operation there. They have enormous traffic-generating capabilities, and we think that ultimately that system will compete with the United system, with the Delta system, as well as KLM-Northwest.
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So we think that if we move now and begin to open up the market, have more competition, that we will ultimately get to a more faster end result even though we may not be able to negotiate it right now.
Mr. LIPINSKI. Mr. Kamen, do you have anything to add to that overall strategic plan of Delta, since you are involved in the same type of hopeful agreement with Air France?
Mr. KAMEN. All I would say is that Secretary Hunnicutt this morning already indicated that the French are open to a proposal that, in the end, opens third and fourth freedom rights. They have had some hesitancy in the fifth freedom area where an open skies agreement would be different from what the French are proposing.
We have an alliance with Alitalia which provides us access to a market that would otherwise be closed to us. We have no transatlantic alliance which provides us with the opportunity to serve points in Europe, points in Africa, points in Asia.
So from our standpoint, in order for us to compete with the alliances out there, one of which is the Delta-Swiss Air alliance, we need to get an agreement signed so that we can have our code-share be approved.
Mr. LIPINSKI. US Airways, do you have any access to France at all?
Page 76 PREV PAGE TOP OF DOC Mr. NAGIN. Yes, we currently fly from Philadelphia to Paris. We have flown that route for 5 years and have done it very successfully, and we have a second daily frequency during the summer that we want to run year round. And I think all of that is indicative of the untapped potential for this marketplace.
There is demand there. France is a glorious country. We have heard about the railroad system, the road system. It is a commercial center there. It is a very significant airport in Charles DeGaulle. It is a wonderful airport that has room to expand. The TGV goes right into the terminals there. It is an excellent operation, and thus it is a point of entry of choice for American businesspeople and clearly American tourists who obviously, and for a very good reason, have a love affair with France.
So we see untold market moving there, and that is why we want to expand to Pittsburgh. We want to provide competitive balance. At US Airways, we have been able to launch service to Frankfurt from Pittsburgh and Philadelphia.
Mr. LIPINSKI. Do you have code-sharing?
Mr. NAGIN. No, we have no code-sharing. At one time we had an agreement with British Airlines. We are operating independently, and our operations to Europe are doing quite well. We have a very strong service pattern, and we think we can do a job for the traveling public. That is why we think it is important to get to an agreement with France.
And if I might add on one thing, the German situation is an important template and this committee as you further study the issues as to a sequential process that may be an appropriate way to go, and all we are saying at US Airways is that we want to be on page one of that sequential process with additional service.
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Mr. LIPINSKI. Who has the most of the American customers? Who has the most frequency into Paris now?
Mr. YOHE. I think I have that. American has the most frequencies today, followed by Delta and then United.
Mr. LIPINSKI. And where does American come out of?
Mr. YOHE. According to the August schedule, they had daily service Boston to Paris, DFW daily service to Paris, daily JFK service to Paris, and a daily Miami service to Paris and a daily Chicago service to Charles DeGaulle. The other services are into Orly. So if my math is any good, that is about 35 weekly flights.
Mr. NAGIN. American is totally, Congressman, into Orly, not Charles DeGaulle.
Mr. LIPINSKI. If we were to somehow put together an arrangement with France, Delta's concerns would get Delta what they want and Continental what they want and US Airways what they want and wrap this all up in a nice package.
Just between you and me, who else is out there that is looking for something at the present time that we either would have to include in this wonderful package or, if we didn't include them, they would not be too upset? Anybody want to take that one?
Page 78 PREV PAGE TOP OF DOC Mr. GIBSON. Mr. Lipinski, I think the issue is not so much that people want today as you need the freedom to shift as the market shifts.
Mr. Nagin has talked about Pittsburgh. Five years ago, US Airways wasn't thinking about Pittsburgh. It didn't make sense. Tomorrow Charlotte may make sense. In an interim deal where there are specific restrictions in there, it prevents us from doing things downstream as the market dictates, and then you have to go back to the table and negotiate, which would take who knows how long.
As we look at European bilaterals, there are two extremes. There is the U.K., which is very restrictive and basically, despite how much movement towards liberalization there is elsewhere on the continent and despite British Airways' great success in penetrating the U.S. market, they have not seen fit to liberalize. You take the other extreme, which is Germany, where there was a phase-in period which resulted in true open skies and you have an extremely competitive framework where airlines are free to come and go and add service or delete serve as they see fit responding to the marketplace.
And I think that tells us a lot about the negotiating posture that we need to take. The model that we had with the U.K., where we gave them everything they wanted in the past, there is no incentive for them to move, despite the fact that the whole rest of the world is moving that way. They had everything they needed; why not keep everyone else out?
Mr. LIPINSKI. If we were to wrap it up in a nice package, US Airways and Continental and Delta got this agreement with Air France, and the United States accepted it, there isn't anybody else out there that immediately would be upset about this and saying that we should include their wishes and desires in this package also?
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There may be a year from now or 2 years from now or 3 years from now American, United, et cetera, coming in wanting to increase frequencies.
I am trying to see if there are any other players that are interested at the present time, so that when we go over to negotiate, we know the entire picture and we know whom we are talking on behalf of.
Mr. YOHE. Mr. Lipinski, to my knowledge, and I don't want to speak for my competitors or other carriers
Mr. LIPINSKI. I understand.
Mr. YOHE. I certainlyI think the other carriers who are not represented here, those who have alliances with other partnerships, would want code-sharing rights into France, and I think that is an important element of the overall package so that if Northwest-KLM, for example, wanted to expand their presence in the French market over Amsterdam, they would have the opportunity to do that.
Mr. LIPINSKI. Thank you very much, gentlemen.
Mr. DUNCAN. Thank you very much.
Page 80 PREV PAGE TOP OF DOC Mr. COOKSEY. Thank you, Mr. Chairman.
For all of those frequent flyers in the audience that did not get to France, I would like to invite you to my district on to New Orleans, where you can experience the culinary delights of the French and the cultural delights of the Cajuns. So that is an option.
Let me ask you, is there great disparity in airline fares, between, say, a hub like Frankfurt and Paris?
Mr. KAMEN. If you are talking about the fares for U.S. passengers from the United States to points beyond, say, Paris or Frankfurt, market conditions would really impose that no matter which of the hubs you are flying over, the fares would be in a relatively close range, because your starting point and your ending point are the same. So market conditions would force those fares to be at least very close in proximity.
Mr. COOKSEY. Another question: How do the people from France get to the States? Do they fly American carriers or French carriers?
Mr. NAGIN. Air France has a terrific presence. They fly the most modern aircraft. They have a great reservoir of strength not only in their home country but in points behind their gateways. And there are vocal sales efforts by all of us in France where we sell traffic.
The problem is that there are capacity constraints on the market. From US Airways' perspective, that is why we have a second daily frequency from Philadelphia that we want to run year round. There is demand, and it is not only demand in the United States but demand from people in the France and other markets who want to go to points not only beyond Philadelphia and Pittsburgh to New Orleans or whatever they want to go to do business and for holidays.
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The United States is a great destination for the French. French people love the United States, and they delight in what we have to offer here. So there is a strong market. We just need the capacity and the ability to sell it here.
Mr. COOKSEY. Now that you mentioned capacity, do the FrenchMr. Yohe mentioned DeGaulle. Do the French have the airport capacity to handle an open skies arrangement? Let's say we have a total open skies arrangement. Do they have the airport capacity?
Mr. YOHE. As I mentioned earlier, one of the real assets of Paris is that they do have additional capacity available. In addition to DeGaulle, which does have additional capacity, right now you have also got Orly. So you have got two airports there, and neither one is capacity constrained. And that is fairly unusual for Europe and one of the real benefits and values that we see in terms of opening up the French market, because there is an opportunity to increase capacity in that market.
Mr. KAMEN. Congressman, it is unlike London Heathrow, where even if you were to achieve an open skies agreement with the U.K., the airport would still be restricted. There is availability of airport space in Paris.
Mr. COOKSEY. Not only in Paris but perhaps Marseilles, too?
Mr. KAMEN. Yes, definitely.
Page 82 PREV PAGE TOP OF DOC Mr. COOKSEY. Mr. Chairman, if I could take thisanother comment?
Mr. MATHISON. Yes, Mr. Cooksey, in talking to the civic parties, I think the point has to be made here that we do not neglect, as we craft a negotiating position, the cities and other airports away from Paris that not only have the capacity but the strong desire. And there are other airlines besides Air France that want to provide service to those cities across the pond to the U.S., and I think that has to be taken into the equation as well.
I am talking again in France, you mentioned Lyon. That is a region that desperately wants additional service and is looking for carriers to provide that service. And we talked to a carrier that is interested in service, not necessarily to that city, but providing service in addition to Air France.
Mr. COOKSEY. I see. That is encouraging news.
Mr. Chairman, if I could take a point of personal privilege, I would like to recognize a group of airport people from our airport in Alexandria, Louisiana, which is the gateway to the Cajun country. These men have taken a military airport, which, incidentally, held all the A-10s that knocked out the tanks in Iraq. It is now an airport facility that you will hear about if you come to Louisiana. If you can't get to France, come to Louisiana and visit their airport, and they will take good care of you.
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Well, in closing, it is my impression that free market forces have prevailed for the last 3,000 years, and command economies and socialistic controlled economies have been stumbling along for about 150 years. I feel that probably again free market forces are going to solve this flap we are addressing today. And when they do, as usual, the politicianwell, it will happen because the French taxpayers will get tired of subsidizing them. And when it does, I have confidence that the French politicians who did not have the courage enough to do the right thing this time will end up on the junk heap of history, as will the people that advocate command economies. So there is hope in the future.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much, Dr. Cooksey. And let me say that the Alexandria airport officials are certainly welcome.
In the last Congress, we had many dealings with various local airport officials from around the country when we were dealing with the airport improvement program and other programs. So Dr. Cooksey has become a very active member of this subcommittee, and we appreciate his participation and his leadership.
Mr. OBERSTAR. Thank you, Mr. Chairman.
It was our committee that provided authorization for conversion of military airports to civilian use, and we have done that on a bipartisan basis, beginning several years ago.
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Mr. Mathison, I appreciate very much your testimony on behalf of ACI, particularly on advocacy for aviation data funding. It is very important work. This is the appropriate context in which to bring that up. Without the data that is collected by the U.S. Government, weairports, airlines, and our own Government negotiatorscannot pursue negotiations on the basis of solid factual information. So we need to continue that funding.
And your comments on aviation negotiating process, I have long been an advocate of opening the process up to the carrier representatives and airport representatives to negotiatenot necessarily negotiating but at the negotiating table to provide advice to our negotiators on community and airline basis to U.S. principals. And there are so many subtleties to these negotiations that it is important for a full range of representation to be present.
And it is not always that carriers' interest coincides with that of the airport. The airport represents the community and has a broader interest and can make arguments from another perspective. And I very much encourage our administration to continue the policy that they have initiated on inclusion and inclusiveness of the process.
You reference airport proprietary rights, and I am not clear, because you don't spell it out, what you are concerned about.
Mr. MATHISON. Thank you, Mr. Oberstar, for your continuing support on the other issues, the data collection and so forth.
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One of the principal rights is the question of who handles who at the airport. And it is traditionally the airlines will work out an agreement, whether handling it themselves or will ask authority from the airport to handle other carriers. And it is a process of keeping an orderly organization on the airport so that you have quality service. And in some instances there have been cases where there has been efforts to try to create that into the bilateral process and that that right for the airport to control it is taken away from the airport.
Mr. OBERSTAR. Mr. Nagin, from his earlier incarnation, can understand that issue, when he was with the Flying Tigers and we were trying to negotiate with the Japanese and the Koreans self-handling authority for the Flying Tigers at a time when JAL and KAL were able to negotiate self-handling authority. But in Japan, the Government said, this is who will you negotiate with.
Is that right, Mr. Nagin?
Mr. NAGIN. That is very right, Mr. Congressman.
Sitting here today brought back many fond memories of the efforts of this subcommittee in addressing international nontariff barriers to competition, and the importance of this subcommittee's leadership in articulating its concerns with respect to those issues certainly led to some very fundamental changes.
But it was a painful lesson for some foreign governments to learn in proceeding through that process, and it took a couple of field visits, in fact, by this subcommittee both in Japan and in Korea to shake a few trees. And that goes back to some very strong sentiments that were voiced at this very table and under the leadership of Congressman Oberstar and others on this committee in those days on a very bipartisan basis.
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So when we heard of this hearing today with respect to France, quite frankly, a light went off in the sense of, it works. And when I said in my remarks about all of us working together, that is important because, as you learned about these issues and learned about the need to compete, there is a real message that you bring, especially on somebody's home turf, and certainly that was the case with respect to Korea and with respect to Japan. And Mr. Mathison, representing a very important airport constituency, understands that full well too, because there is a disparity in treatment.
Mr. OBERSTAR. Thank you, Mr. Nagin.
The question I intended but neglected to ask Mr. Hunnicutt, but I think it is appropriate for this panel to respond to, is whether the evolution of aviation trade in the direction of code-sharing has changed the way competition takes place.
Now, US Air, asking for the Pittsburgh-France service, says we will go head to head. You do no appear to be suggesting a code-sharing alliance. Continental and Delta are pursuing code-sharing arrangements.
Given the nature of alliances that rest on code-sharing, what is the consequence for our traditional position of asking for beyond rights? Does code-sharing minimize the value of and the importance of arguing for beyond rights in an era of code-sharing?
Page 87 PREV PAGE TOP OF DOC Mr. YOHE. I think it reflects the changes that we have seen in terms of competition on a global basis. Carriers today look at how they can maximize the efficiencies of their systems in serving different countries and regions of the world.
What we have found is that code-sharing and alliance relationships where we integrate our networks is a much more efficient way of putting our product on the shelf in those third countries than to fly our airplanes through another country to that third country point.
So I think that to some extent it has diminished somewhat the importance of fifth freedom rights, but I also think that it reflects the reality that we see today in terms of how the aviation system is evolving. And I think the importance here is that carriers are very anxious to be participants in all the different regions of the world. Code-sharing and alliance relationships is a much more effective way of getting that kind of coverage than flying one's own airplanes.
We tried, as you know, Mr. Chairman, to operate a hub operation from Frankfurt, Germany, to eight countries that we inherited from Pan Am, and what we found was that, given the regulatory realities that existed, flying an airplane one time a day to a third country was a losing proposition, because you are getting very poor utilization of that asset. So we found out in that case, despite a lot of effort on our part, that if we wanted access to Eastern Europe to the growing markets in CIS, that a better way to do that was through code-sharing alliance relationships.
Mr. OBERSTAR. Thank you.
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Mr. Kamen, is that Continental's view as well?
Mr. KAMEN. Yes, we would agree.
The alliance with Air France would give us access to many cities and many areas of the world that we would not be able to have access to if it meant that we had to put our own aircraft there. It is not cost-effective for us, and we believe that there is a need to change the negotiating stance a little bit, because the reality is that in many areas of the world carriers are not asking for fifth freedom rights anymore. What they need is that code-sharing relationship.
Mr. OBERSTAR. Now, Mr. Nagin, if that is the case, Air France is only one carrier and code-sharing with two suitors here and not likely to code-share with a third airline. What does that do competitively to carriers such as US Airways, which is proposing to go it alone and would prefer to have beyond rights?
Are the French not likely to negotiate beyond rights if Air France has code-share arrangements with other carriers that give those carriers and Air France a leg up? Do you see it that way?
Mr. NAGIN. Well, it is difficult, it is thorny, and it is tricky. The reason that it is thorny and trickyand if you will allow me to circle back to your first questionis, the answer depends on to whom you are asking the question. If you are dealing with a carrier that is an incumbent with beyond rights, those beyond rights become the holy grail as we are seeing the debate evolve in Japan, obviously.
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If we are looking at carriers that want to expand their presence and become a global competitor, probably today it is a clear answer, you are not going to be able to serve every market that you want to serve, the most important and those that you can mount the most effective marketing campaign for, and you also need the equipment to be able to do it to have this pervasive net around the world.
So carriers that want a global presence have seen the efficiencies of having code-sharing.
When I had the privilege of working at United, we had great efforts with respect to Lufthansa that resulted in that agreement there. So we understand that it does work, and as Continental and Delta have appropriately described here, it clearly works for them.
If you deal with a carrier now like US Airways that clearly has a presence here in the eastern third of the United States, where it is the preeminent carrier, if you will, in terms of the service network, passengers carried in the eastern third of the United States with a new catchment area, where do you go from there? We only have 12 aircraft that are able to fly that mission across the transatlantic, so we are somewhat limited.
We have hoped, though, to become a global carrier if we can get our costs down. And that is the internal debate that is going on at the carrier today with our employee groups, and I might add that our employee groups here in the audience today, because they understand the importance of global expansion and the benefits it brings, as Continental has enjoyed and clearly Delta has enjoyed.
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Can we go it alone? That remains to be seen, but today we are operating efficiently and profitably around the Atlantic from Philadelphia with now service out of Pittsburgh to Frankfurt, and we are doing quite well. We can mount that service and mount it successfully in order to be a global competitor going in the future. If we are able to achieve that goal that we all share, it remains to be seen, and those are issues that we are going to have to address.
We have great affinity for Air France. Our chairman, Steve Wolf, was an advisor to Christian Blanc. Our president was executive vice president of marketing there. And if you will allow me, both of those gentlemen were given great credit for moving Air France along with Mr. Blanc's leadership
Mr. OBERSTAR. I think there is no question about that.
Mr. NAGIN. And having said that, we understand the importance of those relationships, and we are hopeful that US Airways will be in a position to benefit from our improved state in being an attractive candidate for an alliance in the future. But right now we are going to do it alone, and that iswe are going to do it and hopefully going to do it successfully.
Mr. OBERSTAR. That, I think, underscores the delicacy of the negotiations under way.
Mr. Yohe, do you see any inconsistency in advocacy of code-sharing and the advocacy of beyond rights in the same trade negotiation?
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Mr. YOHE. Absolutely not. I think that for those carriers who want beyond rights, that ought to be a fundamental part of the negotiation.
As I have said earlier, it doesn't appear that there are a lot of carrier interests right now in serving markets beyond Paris. Of course, TWA for many years had a very strong operation out of Paris to third countries but has dismantled most of that because it was not profitable for them.
But clearly, it is an important right. And I didn't mean in my answer to diminish the importance of the right. My answer was intended to suggest that, as my colleague Mr. Maloney keeps telling me, code-sharing is now the standard of trade whereas before it was fifth freedom rights.
Mr. OBERSTAR. In conclusionI appreciate your indulgence, Mr. Chairmanthe French are surely going to seek some constraints on U.S.-France trade as a condition of reestablishing the bilateral, and there are many ways in which those constraints can take effect. It could be equipment limitations. There are very few carriers who operate 747s in the transatlantic trade, but they might have limitations on size of aircraft, 767s rather than 777s; DC-10s, for example; or a limitation on frequencies, but other limitations that result in capacity constraints.
What I think would be more important is, will there be room for growth in that arrangement? That is what I think our negotiators have to be sensitive to. France is concerned about its carrier. If we want to grow that marketplace, we have to allow the French to grow. But we should have an agreement that provides for future expansion rather than limitation at current levels of service. That serves neither country well.
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And if we have to have some such limitations, all right, so long as they provide for orderly, sustained growth, and in the end, 2-year, 3-year, 4-year period of timenot 9 years, as the French are suggestingwe move the restraints. I think that would serve our interests best.
I almost felt that US Air should have won the Rome service rather than United. Now that you are wearing another hat, you probably agree with me.
Mr. NAGIN. I agree with you today, sir.
Mr. OBERSTAR. Thank you.
Mr. DUNCAN. Thank you very much Mr. Oberstar.
As the ranking member of the full committee, I know that tremendous demands are placed upon by all subcommittees of this committee, and I want you to know that I think I speak for Mr. Lipinski and I: We both really appreciate your active participation and your leadership and your insight and your guidance that you provide for us on this subcommittee.
Mr. EHLERS. Thank you, Mr. Chairman.
It seems to me that all the good questions have been asked. And rather than add to the list of bad questions being asked, I will forgo the opportunity to continue this.
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I do, however, want to thank Mr. Cooksey for the invitation to visit New Orleans, and I may take advantage of that sometime next winter or spring. But in the meantime, I would like to invite him and all of those in New Orleans and Washington wishing to escape heat to visit the cool beaches of Michigan during the month of August, the premier vacation destination of the upper Midwest. Even Minnesotans come to our beaches.
And so with that, I would yield my comments. Thank you, very much.
Mr. DUNCAN. Thank you very much.
Let me just conclude with a couple of maybe very brief questions. I would just like to ask the panel, as I am sure most of you know, in some negotiations on these bilateral agreements, it seems that perhaps we are our own worst enemies, because some of the U.S. airlines seem to fight with each other. Do you think that that is going to be a problem or is a problem in regard to our bilateral relationship with France?
Mr. NAGIN. Thank you, Mr. Chairman.
To the contrary, we are supportive of what our colleagues want to accomplish, and we have no problem whatsoever. All we want to do at US Airways is compete. And I do not hear anything from my colleagues at the table saying that we should not compete. My sense is, it is welcomed.
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I think we are beginning to realize, and certainly it is our view at US Airways, that our battle is out in the marketplace. Let's duke it out with respect to the consumer in terms of offering an appropriate level of service and attractive prices at a safe, high level of service. That is where our battles should be. And that is in an open market. And we certainly at US Airways see the benefit of that.
So all we want to do, not be precluded from the opportunity to compete, and that indeed is why we are here, and that is what we hope the end result will be, that we will be able to enter that market unfettered by delay while others get a leg up. All we want to do is start day one. In fact, today we would like to start. We are ready.
Mr. DUNCAN. Mr. Yohe?
Mr. YOHE. I would wholeheartedly agree. I think this is one instance, a very unique instance, where we don't see a lot of differences of opinion between the carriers in terms of their interests and what policy the U.S. Government should pursue.
Certainly the interests of Mr. Nagin and my colleague from Continental as well as all the other carriers need to be accommodated in whatever agreement you reach with France. I think my earlier comments reflected that. And essentially, we would not advocate an agreement that did not accommodate all of the competitive interests of the U.S. industry.
Page 95 PREV PAGE TOP OF DOC Mr. DUNCAN. All right. I understand that U.S. airlines who are interested are now filing new winter schedules with France. If some of your requests are turned down, what do you think we should do? How do you think we should react?
Mr. Nagin, you are requesting service for Pittsburgh to Paris?
Mr. NAGIN. Well, the winter schedule that we are seeking approval for is the second frequency to continue in Philadelphia. We are seeking new service from Pittsburgh to Paris.
I think the United States should have a long hard talk with the French Government indicating that certainly they want to accomplish things, and they have wanted to accomplish things in the past that have been accommodated, and it is time to take a fresh look at moving. Nothing is gained by saying no, and a lot is gained by saying yes.
Mr. DUNCAN. Mr. Gibson, the 3.4 or 3.8 billion in subsidies to Air France, we have heard testimony that the European Community puts some conditions on that, that none of that money be used to compete with other European airlines. Do you think that that means that most of that money or all of that money has been used to compete with American airlines?
Mr. GIBSON. Not necessarily. Clearly, the bulk of the money was there to restructure Air France and to give it, well, an essential capital infusion. What it does mean, though, is that the EC watches Air France's behavior carefully when it comes to the European markets in terms of the capacity they add, in terms of the prices they charge to try and make sure thatI am trying to remember the exact words they usethat Air France doesn't engage in destructive or uneconomic competition.
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I am not trying to necessarily put governments back in the regulatory hat. There are times when many airlines use those kinds of funds to go do things that don't make good economic sense, try and further their best efforts. And I think there have been times when Air France has done that in the past. That has been to the detriment of U.S. airlines, who have to earn a profit out there. So it is a worrisome problem.
Certainly Air France got its money. It is not planning to get more money tomorrow. So it is water under the bridge, but it is something that continuously crops up when we look at Europe.
Alitalia is currently up at plate, and it is a problem for U.S. airlines, who are seeking to compete on their own. It distorts the playing field.
Mr. DUNCAN. I think an interesting commentary on free markets and capitalism, when we hear that the monopoly, government-owned Air France, has costs that are 50 percent higher than airlines that are having to compete in the open market. And it is also, I think, interesting, and I think very good how few people in the world today seem to believe in a socialized direction for airlines or anything else.
But everybody seems to bealmost everybody seems to be unified, airlines and other industries, that want to survive and have good futures that they have to come in the direction of a deregulated, free market, capitalist-oriented way. So I think that is good.
But I want to thank each of you for being with us here today. As some of you, we have a delegation of about 13 Members who are going to Europe, and, among other things, we are going to meet with the French officials, and we will be discussing some of the things that were raised in this hearing. That will be in about 3 weeks' time. And I know that all of us who have participated in this hearing have learned a great deal here today, and I thank you very much for your testimony.
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That will conclude the hearing.
[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]