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JUNE 12, 1997

Printed for the use of the

Committee on Transportation and Infrastructure


BUD SHUSTER, Pennsylvania, Chairman

THOMAS E. PETRI, Wisconsin
HOWARD COBLE, North Carolina
JOHN J. DUNCAN, Jr., Tennessee
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
JOHN L. MICA, Florida
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SUE W. KELLY, New York
RAY LaHOOD, Illinois
FRANK RIGGS, California
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
ROY BLUNT, Missouri
JOSEPH R. PITTS, Pennsylvania
JOHN R. THUNE, South Dakota
CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
JON D. FOX, Pennsylvania
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J.C. WATTS, Jr., Oklahoma

NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
ROBERT E. WISE, Jr., West Virginia
BOB CLEMENT, Tennessee
ROBERT E. (BUD) CRAMER, Jr., Alabama
ELEANOR HOLMES NORTON, District of Columbia
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
BOB FILNER, California
FRANK MASCARA, Pennsylvania
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GENE TAYLOR, Mississippi
BILL PASCRELL, Jr., New Jersey
JAY W. JOHNSON, Wisconsin
JAMES P. McGOVERN, Massachusetts
TIM HOLDEN, Pennsylvania

Subcommittee on Aviation

JOHN J. DUNCAN, Jr., Tennessee, Chairman

ROY BLUNT, Missouri Vice Chairman
RAY LaHOOD, Illinois
CHARLES F. BASS, New Hampshire
JACK METCALF, Washington
JOSEPH R. PITTS, Pennsylvania
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CHARLES W. ''CHIP'' PICKERING, Jr., Mississippi
JON D. FOX, Pennsylvania
J.C. WATTS, Jr., Oklahoma
BUD SHUSTER, Pennsylvania
(Ex Officio)

NICK J. RAHALL II, West Virginia
ROBERT E. (BUD) CRAMER, Jr., Alabama
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
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(Ex Officio)




    Baliles, Hon. Gerald L., Former Governor of Virginia, and Chairman, ACCESS U.S.-Japan

    Crandall, Robert L., Chairman and CEO, American Airlines, Inc

    Dasburg, John, CEO and President, Northwest Airlines

    Greenwald, Gerald, Chairman and CEO, United Airlines

    Loney, Mary Rose, Commissioner, City of Chicago Department of Aviation on behalf of the Midwest-Asia Aviation Coalition

    Murphy, Patrick V., Deputy Assistant Secretary for Aviation and International Affairs, U.S. Department of Transportation

    Smith, Fredrick W., Chairman and CEO, Federal Express Corporation
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    Costello, Hon. Jerry F., of Illinois

    Cramer, Hon. Bud, of Alabama

    Furse, Hon. Elizabeth, of Oregon

    Traficant, Hon. James A., of Ohio


    Baliles, Hon. Gerald L

    Crandall, Robert L

    Dasburg, John

    Greenwald, Gerald

    Hunnicutt, Charles A., submitted by Patrick V. Murphy

    Loney, Mary Rose

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    Smith, Fredrick W


Greenwald, Gerald, Chairman and CEO, United Airlines, charts:

U.S. Marketshare Correlates Directly with Cost Efficiency of U.S. Carriers, ICAO Financial Data and Japan Economic Institute

United States-Canada Aviation Passenger Market Total Scheduled Flights and Passengers Monthly Percentage Changes—1995 vs. 1994

Since 1994, 17 Additional U.S. Cities Gained Scheduled Service, U.S. Department of Transportation , April 1997

Change in Service To/From the U.S. and ''Open Skies'' Countries Since May 1996

Japanese Carrier Networks at Osaka (Japan Air Lines), Official Airlines Guide, July 1997

Japanese Carrier Networks at Osaka (All Nippon Airways), Official Airlines Guide, July 1997

U.S. Carrier Combined Networks at Osaka (Northwest Airlines and United Airlines), Official Airlines Guide, July 1997

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    Kollaer, James, President, Greater Houston Partnership, statement

    Kopp, George S., President and General Counsel, Global USA, Inc, statement of All Nippon Airways

    Seiden, Elliott M., Vice President, Law and Government Affairs, Northwest Airlines, letter , June 5, 1997

    Michael, Bob, co-Chairman, Midwest-Asia Aviation Coalition, letter, June 6, 1997

    Decker, Tom, Manager, Federal Government Relations, Port of Portland, letter, June 9, 1997

    Slater, Rodney E., Secretary, U.S Department of Transportation, letter, July 2, 1997

    Reaveley, Peter, Manager, Route Development, Metropolitan Dade County, Florida, letter, June 9, 1997

    U.S. Bilateral Civil Aviation Agreements, Open Skies, chart

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Text of H.R. 2282, to amend title 49, United States Code, to impose restrictions on the operating rights of foreign air carriers of a foreign country that has restricted United States air carrier operations



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.

Thursday, June 12, 1997

U.S. House of Representatives,

Subcommittee on Aviation,

Committee on Transportation and Infrastructure,

Washington, DC.

    The subcommittee met, pursuant to notice, at 9:34 a.m. in room 2167, Rayburn House Office Building, Hon. John J. Duncan, Jr. (chairman of the subcommittee) presiding.
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    Mr. DUNCAN. The subcommittee will come to order.

    Good morning and welcome to what was originally scheduled to be our second day of hearings on international aviation bilaterals and code sharing relationships. We had an unfortunate—and I believe unprecedented—situation which came up yesterday on the House floor which I don't believe has ever happened, but we had something like 23 consecutive votes, which kept all of the Members on the floor and away from other business.

    I'm disappointed that we didn't get to hold the hearing yesterday on our aviation relationship with the United Kingdom and particularly the proposed alliance between British Airways and American Airlines, but we will get into that again at a later point.

    I'm sure, however, that this morning's testimony regarding our aviation relationship and the ongoing negotiations with Japan will be very enlightening.

    This is the fourth hearing we have held in the past 2 years involving aviation matters relating to Japan and the United Kingdom.

    We are very pleased to have with us several distinguished guests: Mr. Patrick Murphy from the Department of Transportation, who has been with us several times, many times in the past, and we appreciate his presence today and his expertise. Mr. Hunnicutt, who was supposed to be the DOT witness, is apparently not well, and I'm sorry that he is having trouble and I hope that he recovers very quickly.

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    We have the leaders today from Federal Express, United Airlines, Northwest Airlines, and American Airlines. Certainly all of these gentlemen have been with us before and we appreciate their being here again to talk about this very important subject and to give us some additional outstanding testimony.

    We also want to welcome Government Baliles, who also has been with us before and who has recently returned from Japan; and Ms. Loney, who is from Chicago. We're pleased that you're with us also.

    I think our hearings in the past have helped, at least in part, to signal to the Japanese government that we are anxious and more than willing to move forward with negotiations that will lead to comprehensive changes for U.S. carriers and Japanese carriers, alike. I would hope that the liberalization of our Japanese aviation agreement is forthcoming, either in a direct or at least a phased-in fashion.

    It seems to me—and I know that there are many challenges, especially with Japan and the United Kingdom. The United Kingdom provides us with our third-largest international passenger market; Japan with our second-largest; Canada is first, with whom we have a very fine open skies relationship.

    I think that all of the members of this subcommittee and, indeed, the entire Congress, have a determination to become very, very tough with any countries that attempt to stand in the way of making our skies more open in the years ahead. That's a worldwide trend that has benefitted millions of people throughout this world, and I think that any country that stands in its way will be left behind.
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    We have made progress in some areas with Japan, but we have failed to resolve many of the underlying disputes about U.S. carriers' rights to provide air service beyond Japan. In fact, the chairman of the full committee, Mr. Shuster, myself, and others are working on legislation right at this time that will require the Department of Transportation to restrict Japan's sixth freedom rights if and when they deny our carriers fifth freedom rights, and I can assure you that many people will be looking very, very closely at Japan's decision in regard to the application by Federal Express to expand their service from Japan to China at the first of the year.

    I feel confident that we will focus on this and other issues today and that we can help our negotiators in this cumbersome process, so we look forward to hearing from our distinguished witnesses on this, and hopefully we can convince our Japanese counterparts that we are growing weary with the piecemeal approach to the negotiations that we have seen over these past few years.

    I now yield to the very distinguished ranking member, my good friend, Mr. Lipinski.

    Mr. LIPINSKI. Thank you, Mr. Chairman.

    First of all, I want to say I'm very happy to be here this morning, and hopefully we'll be here for a long time this morning and not like what happened yesterday. As the chairman mentioned, it certainly was unprecedented in our time here, and I'm sure when ranking member of the full committee, Congressman Oberstar, speaks, he'll tell us if it ever happened in his tenure of being here.
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    We have many very, very interesting witnesses this morning. This is an enormously interesting and important subject, not only to the American aviation industry, but I really think to all the citizens of this Nation. Our relationship with the Japanese in regard to trade issues—and I somewhat consider this a trade issue—has not been the most harmonious over the course of the years, and I hope that at some point we can get to a position with the Japanese where we can work things our harmoniously.

    But if that cannot be done, I certainly am prepared to go along with the chairman of the full committee, Chairman Shuster, and also chairman of the Aviation Committee, who mentioned earlier about some legislation dealing with Japan, Congressman Duncan. I think if we have to go that route, I'm certainly prepared to go that route.

    But right now I'm prepared to hear the witnesses, so, Mr. Chairman, I yield back the balance of my time.

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

    We are always so pleased to have with us the ranking member of the full committee, the former chairman of this subcommittee, Mr. Oberstar.

    Mr. OBERSTAR. Thank you very much, Mr. Chairman. Thank you and Mr. Lipinski for your sustained vigorous interest in aviation matters and keeping our committee and keeping the public focused on the critical issues that are so important to all of us in this vital sector.
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    It was as the end of World War II was in sight that the allies gathered for a conference to chart the post-war course for aviation trade among nations at a conference to be held in Chicago. In preparation for that conference, President Roosevelt sent to Prime Minister Churchill a telegram setting forth the U.S. position on aviation trade, in which he said, in part, ''A limitation on the number of planes between points would place a dead hand on the use of the great air trade routes.'' A dead hand on the use of the great air trade routes.

    Open skies is how that translates. The rest of the world was not prepared for open skies, though the United States made it its fundamental negotiating position in the Chicago conference. But all the rest of the world realized that the United States would emerge with its domestic economy intact, the greatest fleet of aircraft ever seen in the world, and that they, the other countries would be at a great disadvantage, and they could not agree to open skies.

    We have been fighting that battle ever since to maintain a policy and a position where America's preeminence in the field of aviation should be unfettered, cut loose, and able to compete without foreign carriers subsidized and otherwise protected by their national governments.

    Three years ago, as I opened hearings in this subcommittee on U.S.-international aviation policy for about the tenth time—we have gone through somewhat of a crisis atmosphere over U.S.-U.K. negotiations and breakdown in understanding between our two countries, and calls for renunciation of the U.S.-U.K. agreement on aviation trade. I said, ''Now that the crisis atmosphere has abated, it's time to take a calm and constructive review of our policies.''
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    I pointed out that the total international traffic carried by our carriers increased by 90 percent in the decade of the 1980s. Our overall international market share moved from 49 percent to 53 percent in the decade of the 1980s because we had pursued policies on a consistent or relatively consistent basis that benefitted inured to the benefit of our more-competitive and more-vigorous carriers.

    I said, ''The long-term goal of aviation policy should be to create the strongest possible system of international aviation—one which gives airlines of all countries a full opportunity to meet the ever-increasing demand for air transportation.''

    Unfortunately, our aviation trade has succumbed to short-term strategies—a fix here, a tuck there, a concession to this carrier, a concession over there, a bow to our foreign competition, a wink at protective policies overseas in order to accommodate one or another carrier that didn't get their fare share of the last negotiation.

    In the decade of the 1980s, U.S. carrier policies or principles were focused on our foreign competition. In the decade of the 1990s, they've been focused at each other—how much more can they compete with one another, rather than how much wider can they open the doors of competition overseas. That must be our continuing and consistent objective—to knock down the barriers erected time and again against the rights that we have traded for and paid for with access to U.S. markets for foreign carriers, particularly in the Pacific Rim, and our carriers are not allowed to exercise those rights, paid for, negotiated for, on the table.

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    And then, in particular in the case of Japan, Japan comes back and says, ''We want more concessions. We want more opportunities. We want more access for our carriers. And when we do, then we'll let you exercise the rights you already negotiated and paid for in the last round.'' That is not good for our economy, it's not good for our carriers, it's not good for the future of aviation trade.

    And a second principle that has emerged ever more vigorously in the decade of the 1990s is the extraordinary value of beyond rights for passenger and cargo service in the U.S. trade with Japan, Korea, and all the Pacific Rim countries.

    We must not trade away short-term, point-to-point, U.S.-Japan service for long-term beyond rights that are now, it should be apparent, extraordinarily valuable to U.S. carriers, particularly. We must not allow Japan to pursue a policy of being the funnel through which traffic enters the Pacific Rim and exits the Pacific Rim by limiting our access to markets beyond Japan in the Pacific Rim.

    Recently our committee made a tour of infrastructure investments in Japan, China, and Hong Kong. We had extensive discussion with officials from the Japanese Civil Aviation Bureau. I had quite an extensive discussion with Mr. Jiro Hanu, as well, from the Ministry of Transport. We urged the Japanese to remove their barriers to competition, to open their eyes to the value of an international open skies bilateral between our two countries; that the increasing service in both passenger and cargo trade would be mutually beneficial by opening the way to increased tourism travel between our two countries, business travel between our two countries, and beyond points, and airline revenues.

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    Mr. Hanu's response was, ''We are not prepared to negotiate open skies now with United States.'' His previous position had been ''never.'' I took that as a sign of encouragement, but not one that we should in any way bow to, concede for, or give up rights in order to have this illusion of this promise of some time in the future. We should continue to move toward open skies with the Japanese and be firm in our position, be resolute in our position, be patient in our policy, because that has been the practice that the Japanese have followed so successfully.

    But by persisting time and again, we have reversed the situation, Mr. Chairman, and in the early 1980s Japan had 65 percent of the passenger trade and almost 70 percent of the cargo trade between our two countries, and now those numbers are almost completely reversed.

    It is in our interest and our negotiators' interest to continue to persist and let the Japanese know we will not give in to short-term illusory opportunities for long-term benefits that will yield greater profit to both countries.

    Thank you, Mr. Chairman.

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

    Mr. Ehlers?

    Mr. EHLERS. Thank you, Mr. Chairman. I would like to make just a few points .
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    I heartily concur with a number of the comments that were made by the preceding speakers, particularly those of Mr. Oberstar, regarding open skies and the need to pursue that objective.

    I've been disappointed in the results of our Nation's negotiations in the past on this issue. Simply looking back to the impact of Bermuda II, we were far better off before the agreement was signed than we were afterwards. And we seem to have a pattern of giving things away in negotiations that we shouldn't.

    I'm very disappointed in what has happened with the Federal Express situation up to this point, and I think it's time for us to, as a Nation, play tough.

    I'm very concerned about giving away beyond rights in return for some short-term benefits of more access to Japan.

    I think the primary responsibility of this Committee and the U.S. Government, is to operate and negotiate in the best interest of the United States of America, and I don't see the airlines, when they're coming before us, as having that as their highest priority. Their highest priority is what they can gain for their company, and perhaps that's their responsibility to their shareholders.

    Nevertheless, it's our responsibility to ensure that the benefits of our Nation and its citizens are upheld and not to be swayed by the requests of particular airlines on particular short-term gains that might be found.
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    I think, as we proceed through this hearing, those will be the things I will look for, and I hope that the committee will act accordingly. I'm sure the Committee has in the past—and in the time I've been on it I have observed this—has always operated in the national interest. It's important to that this continue. But, above all, I think we have to be tough negotiators, too, and really hold out the idea of opening skies and insist it will stop all the difficulties that we are encountering with various nations and the restrictions that are imposed upon us.

    Thank you.

    Mr. DUNCAN. Thank you very much, Mr. Ehlers, for a very fine statement.

    Ms. Danner?

    Ms. DANNER. Mr. Chairman, thank you very much. I do not have a statement at this time, but I will have questions for the witnesses. Thank you.

    Mr. DUNCAN. Thank you very much.

    Mr. Bass?

    Mr. BASS. No statement, Mr. Chairman.

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    Mr. DUNCAN. Thank you.

    Mr. Cummings?

    Mr. CUMMINGS. Thank you very much, Mr. Chairman. I'd like to thank you and the ranking member for convening this hearing.

    It is my understanding that the Department of Transportation will not approve the alliance between American Airlines and British Airways unless the United Kingdom agrees to an open skies policy, although the British government will not accept open skies unless their alliance is agreed to first.

    I also understand that Japan is seeking to re-negotiate their current bilateral agreement with the United States so as to compose stricter conditions on American carriers.

    This leads me to ask what demands our arbitrators are making to protect air rights of our airlines and the pockets of our consumers.

    It is important to remember that open skies will yield dramatic increases in service by many carriers, and at much more competitive prices. Furthermore, any policy adopted now other than open skies would set an unfavorable precedent for future negotiations with countries other than the United Kingdom or Japan.

    Policy-makers should now allow themselves to be pressured into approving to propose alliances with the British and Japanese governments. Failure to impose competitive conditions on British Airways-American Airlines' alliance, alone, could cost the flying public in excess of $500 million. Losing even one competitor on a given route could raise fares by 20 to 40 percent.
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    Granted, many jobs will be saved and created if the alliance between British Airways and American Airlines is approved, but even that amount is limited. Open skies would yield a much greater return in both employment and profit.

    There's no denying the economic growth spurt the international aviation industry would enjoy if this policy were implemented. Yes, the Department of Transportation has approved other similar alliances with other countries; however, those countries consented to open skies before their respective alliances were secured.

    Not only would this policy create bigger and better business for airlines and passengers traveling to the United Kingdom, but also for those with destinations in Japan and Asia. Open skies would ultimately serve as the catalyst to our Nation's trade surge in the future. Access to Asia, in particular, holds an abundance of trade opportunities.

    Air transportation has become a vital part of our existence. No matter what happens, we will always commute, we will always export, we will always import, and we will always have international relationships. We cannot afford to pass by any opportunity that will provide our flying public with sensible choices and permit our country to capitalize on an ever-increasing industry.

    Thank you, Mr. Chairman. I yield back the balance of my time.

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

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    Mr. Ewing?

    Mr. EWING. No statement at this time, Mr. Chairman.

    Mr. DUNCAN. All right. Mr. Pease?

    Mr. PEASE. Thank you, Mr. Chairman. I find myself, as I often do here, going through my mental check list, and the points I was going to make have already been made.

    Let me just try to associate myself with the remarks of my colleague, Mr. Ehlers, and observe that, as the Chair knows, I've been a proponent of free trade, but I am tremendously concerned that what we have in our relationship, particularly with Japan, is not one of free trade. It's an interest in the United States in promoting and apparent disinterest in the Japanese government in doing so, and I'm concerned about our negotiations that are going on now, particularly when the Japanese government has shown that it's not even willing to abide by the 1952 agreement that one would expect to be honored, at least while we're negotiating for some other changes in the future.

    So I will listen with great interest to today's hearings, and would be willing, as Mr. Lipinski, to consider other options if we're not successful in the current course.

    Mr. DUNCAN. Thank you very much.
    [The prepared statements of Mr. Costello, Mr. Cramer, Ms. Furse, and Mr. Traficant follow:]
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    [Insert here.]

    Mr. DUNCAN. We'll call forward at this time our first witness, Mr. Patrick V. Murphy, who is the deputy assistant secretary for aviation and international affairs in the Department of Transportation.

    Mr. Murphy, thank you very much for being with us. You may begin your statement.


    Mr. MURPHY. Thank you, Mr. Chairman, for inviting us to this important hearing, and thank you for allowing us to send a substitute for Assistant Secretary Hunnicutt.

    I would hope that you could see that my full statement is entered into the record, and I would like to make brief comments then on our negotiations with Japan and the United Kingdom.

    Mr. DUNCAN. Your full statement will be made a part of the record.

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    Mr. MURPHY. For many years, Mr. Chairman, our aviation relations with Japan have been difficult. The causes of this strained relationship are, I believe, at least two-fold.

    One is the perception on the part of the Japanese that the existing agreement of 1952 is unfair to Japan and gives U.S. carriers more access to Japan's market than the Japanese carriers have to our market.

    The second cause of their belief is the trend evidenced since the 1980s of an increasing market share for U.S. carriers. In 1995, U.S. carriers had about 63 percent of the air passenger market and 53 percent of the cargo market to and from Japan. In our view, the agreement is not unfair or unbalanced. The agreement affords Japanese carriers opportunities to serve the United States which are comparable to the opportunities U.S. carriers have to serve Japan.

    We believe lower operating costs generated by deregulation in the United States, rather than any imbalance in opportunities, has fueled the greater market share that U.S. carriers have attained in recent years.

    I would note that, under essentially the same agreement that we have today, Japan's share of the market was roughly equivalent to the U.S. share through the 1970s and until the latter part of the 1980s.

    As a consequence of this dissatisfaction, Japan has sought to limit our rights under the agreement. Japan has refused to approve certain services proposed by U.S. carriers to points beyond Japan which are authorized by the agreement.
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    U.S.-Japan aviation relations are likely to remain strained until an agreement is reached that resolves the outstanding issues.

    Since January, we have met three times with the Japanese in exploratory talks aimed at establishing a basis for resuming formal negotiations. In general, we have been presenting the case for implementing a fully liberal open skies regime. Under such a regime, essentially all restrictions on routes, capacity, pricing, and entry would be eliminated.

    Since Japan has indicated its strong opposition to immediate implementation of open skies, we have suggested phasing in a market-oriented regime over a reasonable period of time. Under such a scheme, new opportunities for services would be made available during a transition phase which would evolve into a fully-liberal open market at a specified date.

    Japanese negotiators have proposed only some expansion of opportunities, and under Japan's proposal air services would continue to be constrained by a variety of government-imposed restrictions.

    Throughout our discussions, the Japanese have stressed the importance of equality in any agreement we reach. Equality from Japan's point of view means that the number of carriers with liberal access to the other side's market should be the same. Japan advocates that two airlines of each country should be granted a high degree of operating flexibility to serve the other country.

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    This position serves Japan's interests well, since Japan International Airline Industry consists of basically only two airlines, JAL and All Nippon Airways. This approach would essentially give Japan's International Airline Industry unrestricted access to the U.S. market, while excluding a major portion of the U.S. industry from liberal access to Japan.

    In any agreement, therefore, we would require that our currently-restricted carriers, such as American, Delta, and Continental, obtain substantial new access to Japan during any transition to a fully liberal regime.

    To this point I've focused mainly on passenger services to Japan. Of equal importance are recent developments with regard to cargo services. As I mentioned earlier, the Japanese continue to withhold approval of services proposed by Federal Express. We advised the Japanese that we must find a solution to the FedEx issue that not only resolves the immediate issues but that also ensures that issues of this nature will not continue to arise in the future.

    We will continue to seek the complete removal of restrictions on cargo services. We've also advised the Japanese that it would not be possible to reach an accommodation with respect to passenger services while important cargo issues remain unresolved.

    Given the wide divergence of views between ourselves and the Japanese, we are now in the Administration assessing the appropriate next steps.

    Turning to the United Kingdom, the U.S.-U.K. aviation agreement, Bermuda II, stands in stark contrast not only to general British economic philosophy but also to the leadership role Britain has played in internal European aviation liberalization.
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    The real-world impact of Bermuda II restrictions has meant that U.S. carriers cannot determine their capacity and price levels, U.S. cities are deprived of service to London, and the participation of U.S. carriers in the market is constrained.

    We recognize the importance of this U.K. aviation market, and the liberalization of that market has been at the forefront of our international aviation agenda.

    The disappointing news is that we have not yet achieved the liberalization that has been our goal since the beginning of the Clinton Administration. Despite in 1993 U.K. commitment to achieve aviation liberalization within a year, the British have clung tightly to the protectionist framework of Bermuda II.

    However, the encouraging news is that the commercial imperatives are again forcing the regulatory approaches to change. The proposed American Airlines-British Airways alliance for which the airlines are seeking antitrust immunity from the Department of Transportation has finally provided the British with the incentive to join with us in a fundamental restructuring of the aviation regime.

    Although the British elections and change of government have resulted in a temporary halt in negotiations, the open skies talks have made some progress. In particular, the British have accepted that in an open skies regime the ''two carrier'' rule that restricts U.S. entry to Heathrow to only two airlines must be eliminated. Moreover, in a new regime no U.S. cities would be artificially barred from securing nonstop flights to London from any U.S. or British Airlines.
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    However, important work remains to be done with the British. Pricing, fifth freedom opportunities, dispute resolution, fly America traffic, ground handling, and security are all open issues.

    We have sent a consistent and clear message to the British—that there is no possibility for antitrust immunity if all the essential open skies elements are not present. Moreover, as with the other alliances, open skies is a necessary but not sufficient precondition before antitrust immunity can be granted. I'll say that again: open skies is a necessary but not sufficient precondition before immunity can be granted.

    Competitive considerations must also be assessed by both the Justice Department and ourselves; therefore, we have also consistently linked a new agreement with a competitively effective presence of U.S. carriers at London's Heathrow Airport.

    I can assure you there has been no change in the fundamental Department position that, at a minimum, open skies must be agreed before we will issue even a tentative decision on the grant of antitrust immunity.

    In summary, Mr. Chairman, we have made significant progress in liberalizing international aviation around the world, and we are continuing to pursue that objective with two of our most important partners, Japan and the United Kingdom.

    Thank you.

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

    Let me ask you first this: there have been some reports that the U.S. has offered to limit the number of flights U.S. airlines could offer beyond Japan, even though the bilateral that is currently in effect with Japan allows unlimited flights. Has there been an offer of that type?

    Mr. MURPHY. Mr. Chairman, in Honolulu, in the context of exploratory discussions, we did make an informal proposal to Japan that we were prepared, on the basis of a 3-year phase to open skies, to cap the number of frequencies our carriers could operate in beyond services. That cap would be at a level far above the services we already provide and would be at a level that we were confident would satisfy the needs of our carriers for the next 3 years, at the end of which there would be open skies. So we did make such an offer. Clearly, it was not accepted at that time.

    Mr. DUNCAN. Well, let me ask you from another standpoint, then. I understand that prior to 1993 Federal Express had the right to operate in an unlimited fashion beyond Japan, but now that has been restricted in many ways, and Japanese are still restricting flights to the Philippines, for instance, and I mentioned earlier this proposal to fly from Japan to China. Where do we stand with all that right now in relation to the cargo side of things?

    Mr. MURPHY. You are correct, Mr. Chairman. The Japanese have had a pattern of denying Federal Express opportunities to fly beyond Japan. Last year, we reached an agreement that resolved some of those issues, but the Japanese continue to deny other services to Federal Express, and a very important new service for Federal Express is available at the first of the new year—that is service to China.
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    We are continuing to work with the Japanese on this. This is part of the review that the Administration is conducting now on how to take our next steps with Japan.

    As you may know, there will be a summit meeting coming up shortly. In addition, our Secretary will be meeting with the Minister of Transportation from Japan in the next 2 weeks. So we are moving to try to reach a position for those important meetings.

    Mr. DUNCAN. Do you feel that we've been tough enough in these negotiations with Japan? There has been some question about the fact that we've changed negotiators three times in the last 6 years, and that U.S. negotiators, while they keep changing, are negotiating with Japanese negotiators who have remained basically the same. Is that an accurate criticism that some have leveled?

    Mr. MURPHY. I don't believe that the last criticism is an accurate one, Mr. Chairman. Sitting behind me is Mr. Oppler, who has negotiated for the U.S. Department of Transportation with Japan for many years and is senior to any of the Japanese negotiators. And Mr. Joel Spiro is here today from the State Department, and he has been negotiating with the Japanese for several years. So I don't think the seniority of our negotiators is a problem with the Japanese.

    Whether we have been tough enough, we believe we have been, but, as I've said, we are reassessing our position to see how we move forward from this time.

    Mr. DUNCAN. The focus of this hearing today is primarily on Japan, but this was to be in conjunction with a hearing on our relationship with the United Kingdom, and you've mentioned that, also. In the May 26th issue of ''Aviation Week,'' a viewpoint article ran in which the author stated that, ''Data clearly shows restrictive air service policies in the U.K. and France continue to drive U.S. connecting traffic to open skies airports such as Amsterdam and Frankfurt.''
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    Is this true? And if it is, why doesn't this loss of traffic prompt the United Kingdom and France to move toward more open skies? And that raises a second question. Why has France been so resistant to the movement toward open skies?

    Mr. MURPHY. I believe those data are accurate, Mr. Chairman. As other alliances form and as Heathrow remains limited to only two U.S. airlines, our traffic share to the United Kingdom is declining as British's Air is increasing, and more U.S. traffic is going over to the continent.

    We are hopeful that the British will reach an open skies agreement with us at some time in the near future, driven by this alliance.

    As far as the French, we have met with the French this spring. We will be meeting with them again on the 9th of July. There is a proposal by the French to move to open skies in 9 years. Our proposal was to move to open skies in 3 years, and we will be continuing to work on that process to see if we can move to an open skies regime with the French and, as I said earlier, with the British.

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

    Mr. Lipinski?

    Mr. LIPINSKI. Thank you, Mr. Chairman.

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    Good morning, Mr. Murphy. How are you this morning?

    Mr. MURPHY. Good morning, Congressman.

    Mr. LIPINSKI. It's a pleasure to have you here. You weren't scheduled yesterday, were you?

    Mr. MURPHY. No, sir.

    Mr. LIPINSKI. Must be the luck of the Irish. You got the right day.

    Do you have a time table for deciding whether the B.A.-A.A. alliance should be approved? Is there any time table out there for that yet?

    Mr. MURPHY. We do not have a time table of our own, Congressman. We, at this point in the regulatory process—and I will point out there are really two processes at work here, the negotiations process with the British government and the regulatory process with the carriers. In the regulatory process, we have asked the applicants, A.A. and B.A., for information about their alliance. That material is still coming in. I think we have 15 boxes of material, with more to come.

    When we've received all of that material and we're satisfied we have a sufficient basis, we will set a procedural schedule on how to move forward. We will also at that time have to decide what kind of procedures to use.
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    With regard to the negotiations with the British, as you know, there's a new government in London as of May 1st.

    Mr. LIPINSKI. The Liberal Government, isn't it?

    Mr. MURPHY. I believe that is correct, Congressman. And we have not yet had negotiations with them. We are awaiting when they're ready to resume the negotiations. We also understand, of course, that they are dealing on this issue not just with us but with their colleagues in Brussels in the European Union who are looking at this from a competition standpoint, so they have to deal with Brussels and with Washington, and we're ready to meet with them when they're prepared to do so.

    Mr. LIPINSKI. Sounds to me like, if there is a time table, it's an extremely vague and long time table at the present time.

    Mr. MURPHY. It's certainly vague at this time, Congressman.

    Mr. LIPINSKI. You mentioned the EU. Do you have an opinion—the British maintain that they can have people buy and sell slots. The EU said that their position is that there is no buying or selling of slots. Based upon your knowledge of the situation, do you have an opinion in regards to who might be right there?

    Mr. MURPHY. Well, with regard to the A.A.-B.A. transaction, I won't comment on how slots ought to be transferred in the context of that regulatory approval, but in the United States we have been advocates of buying and selling of domestic slots.
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    Mr. LIPINSKI. I'm asking your opinion as an expert in the aviation industry on who is right. Great Britain says you can buy and sell slots there at Heathrow, and the E.U. maintains that in Europe you can't buy and sell slots. I was just wondering if you had an opinion.

    Mr. MURPHY. Well, we know that slots are bought and sold at Heathrow. Whether it's recognized as such, they are bought and sold. That's a fact.

    Mr. LIPINSKI. So then you're saying that the British are probably right, that slots can be bought and sold there?

    Mr. MURPHY. Well, they are now, sir.

    Mr. LIPINSKI. Okay. I assume that you've read the GAO report in regards to the B.A.-A.A. Heathrow-England situation, the alliance. Do you have an opinion on that report?

    Mr. MURPHY. I would just say that we were disappointed at the Department that that report came out at this time. We were in the process of attempting to conduct a regulatory review, along with the Justice Department, of the A.A.-B.A. transaction. We were also hopeful of resuming negotiations with the British government and having discussions with the E.U.

    And so for one Government agency to put out its views on what are the correct remedies at this time, we found that to be a little premature.
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    But, in any event, we will conduct our own process and make our own decisions with the guidance of the Justice Department on how to condition approval of an A.A.-B.A. transaction if we can first reach open skies.

    Mr. LIPINSKI. Then I assume you wouldn't really care to comment on the GAO report in any depth here, since you'd just as soon they had not put it out. I wanted to ask you your opinion of what they laid out would be necessary in order for the alliance to go through.

    Mr. MURPHY. I'd rather not comment on that.

    Mr. LIPINSKI. That's what I assumed, and I can understand that.

    Going over to the Pacific, there is now a carrier who is much more interested in—well, let's say getting more access to Japan, and then establishing alliances with other carriers to fly beyond Japan. It has always been the—as far as I have known, for a long time it has been the policy of the United States to not give away the beyond rights for the existing carriers that have those and to press hard to have them ultimately be implemented.

    Now that one of our main carriers has somewhat modified their position, using their words, is the United States Government and their negotiators planning on modifying any of the United States' positions in regards to the negotiations with Japan?

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    Mr. MURPHY. Well, we are, in fact, reviewing our position from top to bottom at this time, so the fact that one of our major carriers has modified its position, I think it was timely that they did so at this time before our next scheduled meeting to review our position.

    Mr. LIPINSKI. How long have you been in the aviation business?


    Mr. LIPINSKI. You don't have to answer that question. I'm not so sure you shouldn't really be working for the State Department perhaps. It might be—and I don't mean that as a criticism. I'm attempting to praise you, even though I'm not getting any answers from you that I was hoping to get.

    In light of that particular fact, at this time, Mr. Chairman, I'll yield back the balance of my time.

    Mr. DUNCAN. Thank you, Mr. Lipinski.

    Vice Chairman Blunt?

    Mr. BLUNT. Thank you, Mr. Chairman.

    Mr. Murphy, are the Japanese in violation right now of their 1952 agreement with us on air transport?
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    Mr. MURPHY. We believe they are, Congressman. They would argue they're not.

    Mr. BLUNT. How could they possibly argue that they're not?

    Mr. MURPHY. They have several arguments which they use which go to the primary purpose of what beyond rights are for, and they would argue that our carriers are using their beyond rights in an inappropriate fashion.

    We firmly reject that view. We believe they are violating the bilateral agreement.

    Mr. BLUNT. How long do we think they've been in violation?

    Mr. MURPHY. They have been denying some of our beyond rights for the last several years, starting in the early 1990s.

    Mr. BLUNT. From 1993, or earlier than that?

    Mr. MURPHY. I would say 1993 sounds about right, Congressman.

    Mr. BLUNT. Have we considered any sanctions against them if we believe them to be in violation?

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    Mr. MURPHY. We have held up certain rights that they have asked for—services, for example, from Japan to Hawaii we have denied. We have put temporary restrictions on some of their other services.

    Mr. BLUNT. Now, the services from Japan to Hawaii that we've denied, if we felt they were in compliance with the 1952 agreement, would they have been an automatic—would that have been an automatic sort of allowing of that to happen?

    Mr. MURPHY. Yes, sir. The rights that we have held back we would have approved.

    Mr. BLUNT. Is that on any kind of par with the kind of rights they're denying in terms of economic impact or potential usage?

    Mr. MURPHY. I have never done an economic analysis of that, Congressman, as to whether those services to Hawaii are more or less valuable than the beyond services that they are holding up.

    Mr. BLUNT. How many—we are in a positive position on our balance of trade on the air issue, both passenger and transport to Japan. Do you know how many areas in trade with Japan that we actually are on the winning side, the positive side of the trade?

    Mr. MURPHY. I can only say not many, Congressman.

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    Mr. BLUNT. Two or three?

    Mr. MURPHY. That might be accurate. I have not summed them up.

    Mr. BLUNT. I think that might be accurate. I'd certainly hate to see us give any ground on this issue when there are so many other issues that ought to be decided, and I would just encourage you to look at these sanction areas and question whether or not the sanctions that we're imposing are adequate, and if they were adequate, I would think at some point the Japanese would talk about this issue.

    If the sanctions are not at par with what they're doing to us, they probably have minimal reasons to want to go ahead and work this out.

    I would encourage you to look at more action in this area, to more vigorously press whether or not they're in violation of this agreement, and, if they are, to look at what we can do to bring them to the table and get back to the things that we've already negotiated for once before we get very interested in negotiating for more things in the future with the Japanese on this issue.

    Mr. MURPHY. Thank you, Congressman. We will take those comments into account.

    Let me say that we certainly agree with your perception that this is one sector, one industry, where the U.S. has a large advantage in efficiency, and we should be allowed to take advantage of that opportunity, given the large trade imbalance we've had for many years with Japan, and so we are going to press hard for our carriers to have an opportunity to serve that important market.
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    Mr. BLUNT. Okay. I think there are many issues out there in trade to be settled with the Japanese. I just think it would be a mistake for us to do much to their benefit on a trade issue where we actually are more competitive, where that competition has really proved to our advantage in transport.

    Certainly, as we look at trade, having the transport opportunities around the world are critical in the coming decades. I know you're working on that. I'd just encourage you to be more vigorous even in seeing what it takes to get them to fulfill their agreements.

    I appreciate your being here today.

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

    Mr. DUNCAN. Thank you, Mr. Blunt.

    Mr. Oberstar?

    Mr. OBERSTAR. Thank you, Mr. Chairman.

    Mr. Murphy, it's good to see you again before this committee.

    Mr. MURPHY. Thank you, Congressman.

    Mr. OBERSTAR. I want to congratulate you on the splendid job you've been doing and the team that you have held together now for many years. It used to be that the Japanese had more-seasoned negotiators with more experience in aviation trade negotiations than our team, which turned over every 2 or 3 years, and I would say now, with the team that you have assembled, that we have people with 10 or 15 years or more of experience in these negotiations and can remember the talks that were held, the commitments made and broken by our foreign competitors.
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    I would say the U.S.-U.K. trade, U.S.-European trade, is bedeviled by alliances in code shares, and those underlying interests and agreements that skew carrier interests and bedevil policy-makers. I don't think that is the case in the U.S.-Pacific trade, but there may be some alliances in the works. Are you aware of some that, not now permitted, but made—but are being threaded together?

    Mr. MURPHY. Well, there are alliances beginning to form out there in the Pacific with U.S. carriers teaming up with Chinese carriers, talking to Japanese carriers, talking to carriers in Oceana, and we can see that what has already happened in Europe will happen in Asia.

    Mr. OBERSTAR. And as those alliances form and agreements are breached on code share, the thirst for direct access to beyond markets will be slaked; is that not right?

    Mr. MURPHY. That can happen. Yes, sir.

    Mr. OBERSTAR. And that will skew our overall negotiating policy or undercut principles that have been established by the Department?

    Mr. MURPHY. Well, Congressman, we have been vigorous in Asia in trying to obtain open skies agreements beyond Japan, and we have—we are on the road, we hope, to having six of those agreements. We already have three of them initialed and we're close on several more.
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    That would allow our carriers to over-fly Tokyo, to be able to compete more directly, and to form alliances. So we are trying to move and stay one step ahead of this process.

    Mr. OBERSTAR. Well, I encourage you to keep pursuing that policy and I encourage our carriers to keep their eye on the mark, that these code shares and alliances are not, in the long run, as beneficial as direct service by our carriers, themselves.

    There are some who have a view that the markets beyond Japan in cargo and passenger trade are not mature, they're not ripe yet, they're not—they are a long ways from being beneficial. I've heard this from many quarters, those who look at the U.S.-Pacific Rim trade. But when I look at the enormous energy unfolding in China market of 1,250 billion people, they almost have more population after the decimal point than we have totally in the United States.

    When I look at the second largest population, apart from India, in that Pacific Rim, Indonesia, and the development that is taking place there, their acquisition of U.S. air traffic control equipment to improve their facilities and attract more carriage; Singapore, many other airlines are buying second-hand aircraft from Singapore because they only hold on to their aircraft a few years and it's like new when they turn it over; and Hong Kong and the huge investments made in infrastructure, with China modernizing 35 airports and building 6 new ones, as we learned on our trip to China, spending about $100 billion over the next 5 to 10 years, $25 billion spent by Hong Kong on their new airport.

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    The opportunities are enormous. What evaluation has the Department made of the beyond rights and the opportunities in both passenger and cargo trade?

    Mr. MURPHY. Well, Congressman, we share your views on the growth potential. Asia is the fastest-growing area for aviation. All of the aircraft manufacturers see that as the largest market some time out in the future.

    Mr. OBERSTAR. I would add, if I may interrupt you, 90 percent of all the 747s ever manufactured fly in the Pacific trade.

    Mr. MURPHY. Yes, sir.

    Two years ago we at the Department held what I'll call a ''retreat.'' We got away from our building, we assembled our staff and State Department staff, and we invited in the airlines one by one to talk about Asia and how we could move ahead. And it was on the basis of that that we began this process of moving to negotiate better agreements in Asia.

    And we have not only done open skies agreements with three or four countries now and working on two more, but where we could not get open skies we signed better agreements with countries such as the Philippines, and we signed a better agreement with Hong Kong, and we are still pressing to see if we can get our first agreement with Vietnam, and we're still pressing with the Indonesians, and we'll be meeting with the Australians next week.

    We know that we need to push hard out there and to not let these six countries that we have started open skies with, or started working on open skies with in Asia be the last; that we're going to keep pressing all of our partners out there for an open market.
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    Mr. OBERSTAR. Thank you. I encourage you to continue that.

    Our delegation, led by Chairman Shuster, was present for the signing of the U.S.-Hong Kong open skies agreement. That was a very significant moment.

    Harking back to 12 or 13 years ago, when the Flying Tigers was highlighting the significant problems between U.S. and Japan on the issue of rights paid for but not exercised, the doing business issues, are those still impediments to U.S. operations in Japan?

    Mr. MURPHY. We have heard much less from our carriers in recent time about doing business problems. Our biggest problems on the ground are slots. Narita Airport is near full, and even the new airport at Kansai is quickly filling. So that any agreement we reach with Japan, we have to keep in mind the problem that our carriers will face in using those new route rights which we negotiate for them, and we have to make sure that we don't over-estimate how many new services our carriers will be able to operate, because they're going to run into slot problems as soon as they arrive in Japan because of the limited infrastructure there.

    Mr. OBERSTAR. Mr. Chairman, I just have a closing comment, and that is: the Japanese for years have used, with good cause, the lack of capacity at Narita, and, frankly, one of my silent heroes is that little Japanese rice farmer who had one little plot of ground in Narita and held out to the last. It was a stand against development. It was a great, courageous stand. He has now been purchased. There is no excuse for them not to proceed with the second runway at Narita.
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    There are plans already to spend $9 billion on the second runway at Kansai and a cross-wind runway.

    I don't think we should concede to the Japanese their claims of lack of capacity. In the United States, our airports, our cities, backed by our airlines and our Government and our AIP dollars, have spent billions of dollars to expand and add runways at O'Hare, at Dallas/Fort Worth, and to expand and extend runways and increase capacity through air traffic control equipment to enhance capacity at Detroit and Minneapolis and Seattle, and then the new airport at Denver.

    Those carriers have access to extraordinary infrastructure opportunities in the United States, and we should not cave in to them in negotiating on the thin claim that, ''We just don't have the capacity.'' Build it and we'll wait until you have the capacity before we let you have access to our billions of dollars in the United States of infrastructure that we have invested.

    Thank you for nodding assent.


    Mr. MURPHY. I'm speechless, but I agree with you, Congressman, and we take your point.

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

    Mr. EHLERS. Thank you, Mr. Chairman.

    I, unfortunately, had to step out for a meeting with some other Members and the Speaker, so I missed your testimony, therefore I'm reluctant to ask any detailed questions, but I would like to follow up a few of the comments of Mr. Blunt in terms of negotiations and sanctions.

    I'm from the State of Michigan, and for years we've been concerned about the Japanese auto industry and the balance of trade. The Japanese, of course, are very good business people. They're also excellent negotiators, and so I know the difficulty that you're experiencing.

    It seems to me, it's rather ironic that, with the huge trade surplus they enjoy with the United States, that they would be zeroing in on this.

    First question is, in terms of the sanctions that Mr. Blunt was discussing, is it possible for you to consider with State Department sanctions against other areas of U.S.-Japanese trade, rather than restricting sanctions just to the civil aviation industry?

    Mr. MURPHY. We have been encouraged in the past to look beyond aviation when we have trade disagreements with Japan in aviation. We have not chosen to do that at this time. I cannot tell you that we are prepared to do that at this time, but as we are reviewing now our next steps—in a process, I must say, that involves not just the Department of Transportation, but the Department of State, the Department of Commerce, the U.S. special trade representative, and the National Economic Council—certainly people who work on other trade areas with Japan are in those discussions, and certainly we can share with them your thoughts.
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    Mr. EHLERS. I'd certainly appreciate it if you would and if they would take a serious look at that, because I think it may be the only possible way of really impacting the negotiations.

    Second I have is just a comment. In terms of renegotiating the 1952 agreement—and there may be a need to renegotiate it, but I think it would be a very bad mistake for our Nation to renegotiate that and come up with yet another limited agreement.

    I think the only changes, the only negotiations should be those that successfully move both Nations towards open skies, and I would hope that you and the others would keep that in mind as you negotiate this.

    The only reason to negotiate is to move towards open skies. If we're not doing that, why even bother to change it?

    Thank you. You may respond if you wish.

    Mr. MURPHY. Congressman, I would just say that when the President put out his international aviation policy statement 2 years ago, its fundamental principle is that we would only move forward, we would only do agreements that move us toward the goal of a totally liberal aviation regime, and that's our fundamental principle, and we will adhere to that.

    Mr. EHLERS. Well, I appreciate that, and I would just say I'm a little skeptical, in view of the negotiating history of our country, starting with Bermuda II and going onward. We don't seem to have gained much with negotiations. If we're not gaining, why negotiate?
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    Thank you.

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

    Mr. Poshard?

    Mr. POSHARD. Thank you, Mr. Chairman.

    Mr. Murphy, first, is Japan honoring the 1996 cargo agreement that was supposed to set the stage for these future passenger talks?

    Mr. MURPHY. We believe they are with respect to the rights that we obtained that allow two new U.S. cargo carriers to fly to Japan: UPS, which is flying now to Japan and beyond Japan, that was obtained for us in 1996 and has been honored; and the second carrier is Polar Air, and they have just begun their service to Japan. So those were the two new opportunities that we received, and they have been honored.

    Mr. POSHARD. Is there any part of that agreement where you are suspect with respect to their honoring it?

    Mr. MURPHY. I just conferred with Mr. Oppler, our chief negotiator, and, no, all of the aspects of the 1996 agreement are being adhered to.

    Mr. POSHARD. Did the Japanese government ever offer any proof of their contention that we're lowering safety standards with respect to the deregulation of international air traffic?
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    Mr. MURPHY. No, they did not, Congressman. That was a very disappointing chapter in our aviation relations of late with Japan, that they would raise in public this charge that our carriers are somehow less safe because of deregulation. In fact, they presented absolutely no evidence to that.

    We have followed up on that. We have had our FAA look very thoroughly into our operations by our largest carrier in Tokyo, Northwest. They have found absolutely no problem out there. We've advised the Japanese of that and we've asked them to set the record straight with some public comment. So far we've received one public comment, but that was not satisfactory.

    Mr. POSHARD. So many of their very egregious comments that were made with respect to Northwest, the airline has never received an apology for those?

    Mr. MURPHY. No, sir.

    Mr. POSHARD. Mr. Murphy, would you just comment—and perhaps I missed your comments on this earlier because, I'm sorry, we have a couple of meetings going on and I missed the first part of the witnessing. Would you just comment on how we resolve the situation in the future with the British government with respect to our open skies versus antitrust provisions? How do we get past this conflict? It seems like a standoff at this point in time that just can't get resolved.

    Mr. MURPHY. I believe that it can be resolved, Congressman, but we have laid down the following sequence of events.
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    We will not even tentatively approve—and we've made that clear—we will not even tentatively approve antitrust immunity until we have open skies with the British, so the first part of this process that has to be completed is to negotiate an open skies arrangement between the United States and the United Kingdom.

    While we are negotiating that, we have begun to process this application for antitrust immunity, and we've just taken the very first tentative steps by requesting evidence. But we will not complete that process—we will not even tentatively make a decision in working through that until we have our open skies agreement—something the British promised us, something they promised Secretary Pena in 1993 in London that we would have within 1 year, and we're still waiting for that.

    Mr. POSHARD. So is there any movement on their part toward our position? Where's the middle ground here? Is there any compromise?

    Mr. MURPHY. No. I——

    Mr. POSHARD. It's a huge issue.

    Mr. MURPHY. We have made some progress. We think the British have accepted some of the fundamentals of open skies—for example, that Heathrow Airport will no longer be limited to two U.S. airlines, a situation which is really incredible when you think about it, that at a time when we have eight U.S. carriers flying to Frankfurt, eight U.S. carriers flying to Paris, we're limited to two at Heathrow.
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    But they've accepted in our talks that that limitation can be lifted, and they've accepted some of the principles, but we have a lot more work to do with them.

    I don't think there's a real compromise here in the sense that we're going to compromise open skies. Open skies means an open market where the carriers choose the service and the cities can be served as they need to be, not the governments trying to protect their carriers from competition.

    Mr. POSHARD. We've spent some time on this situation, as you know, and I think it's totally unacceptable, whatever the ultimate resolution to this problem is, that the American public—I mean, they don't want to go 60 miles outside London. They want to go to Heathrow, as they want to go to DeGaulle and other places, and I hope we can get this resolved in time, but I appreciate the stand of the Department of Transportation on this issue. Thank you.

    Mr. MURPHY. Thank you, Congressman.

    Mr. DUNCAN. Thank you, Mr. Poshard.

    Mr. Pease?

    Mr. PEASE. Thank you, Mr. Chairman.

    Mr. Murphy, you made reference to a number of existing open skies agreements with other nations in Asia and some that are currently under negotiation. Can you share with us who those are?
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    Mr. MURPHY. Yes, sir. We have initialed open skies agreements in Asia now with Singapore, Taiwan, Brunei, and New Zealand. We are working now with Malaysia and Korea. We have a next round of negotiation with Korea scheduled for July 14th. And so those are the six first countries that we are working with toward open skies.

    Mr. PEASE. How confident are you or how do you feel about those negotiations and the possibility that they'll be fruitful in the short range?

    Mr. MURPHY. We are getting very close with Malaysia, and with Korea we still have more work to be done. That is going to take longer, but we are hopeful that we're going to get an open sky agreement with Korea, our second largest aviation partner in Asia.

    Mr. PEASE. Is it possible that the Department could focus more of its energies there and, in the process, quite frankly, circumvent Japan for some of the markets that we want to fly beyond?

    Mr. MURPHY. I would say, Congressman, that we are committed to working with Japan and these other countries both, simultaneously. We have the resources that we don't have to choose one group over the other. We think every time we sign an open sky agreement anywhere in the world it creates an incentive for more agreements to be signed and puts more pressure on nearby countries to open up their markets.

    Mr. PEASE. That's precisely my point, I guess. Given our experience with Japan, it appears to me that maybe a technique to be explored is to put pressure on them by opening skies with other nearby countries, because, quite frankly, it doesn't appear, given the evidence so far of the experience, that they're much committed to this.
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    Mr. MURPHY. Well, we will keep moving ahead with open skies with or without the Japanese. It is not, whoever, as some have suggested, Congressman, merely a strategy to pressure the Japanese; it is a strategy which has much merit unto itself.

    Mr. PEASE. And with which I agree. Thank you.

    Mr. DUNCAN. Thank you very much.

    Mr. Traficant?

    Mr. TRAFICANT. Thank you, Mr. Chairman.

    I was noticing that the two TV cameras that are videoing this hearing were both made in Japan. Sony makes one, and Mitsushita makes another, although that Sony may be made in Pittsburgh now. We don't make any in America.

    With that I want to talk about the specifics here with Mr. Murphy.

    We have a huge trade deficit with Japan. We've had one for many years. They're cleaning our clock. China now is growing and may surpass Japan.

    Now, we heard all this talk about all these other agreements and bilateral agreements. I think the one that the industry is concerned about is we enjoy a trade surplus in the aviation industry with Japan. Japan, who enjoys tremendous surpluses with us in overall trade, just can't stand it, and they're manipulating the variables to cut back and to, in fact, cut into that surplus with America and turn their deficit into a surplus. There's no doubt in my mind.
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    So there is much concern throughout the industry that, although we're talking open skies with a firm resolve in many areas of the world, there seems to be willingness to do some moderating and compromising when it comes to Japan, and there are those that believe that they are dividing our industry and our political structure to attain those goals.

    So, specifically, you know, what I'm asking: is it our firm resolve for an open skies bilateral agreement with Japan or not? Yes or no?

    Mr. MURPHY. Congressman, that's our ultimate goal, but I must also add that we have made it clear that we are prepared to move in phased basis or interim basis to get to open skies with our partners.

    Mr. TRAFICANT. I didn't hear you say that about the United Kingdom. Your statement about the United Kingdom was right to the point, Buddy, ''We're going right for the open skies and that's the way it is and we'll accept no less. But when it comes to Japan, we're going to negotiate, we're going to treat them with kid gloves.''

    I'd like to know if there is any stratagem at all in any part of our trade analysis programs here to say, ''Look, we're going to manipulate the variables at our disposal, and if we're not going to get a reasonable program of open skies and open market competitiveness with Japan in the aviation industry, then we're going to look at other variables of trade to bring along this type of an attitude.''

    See, I think this is what the country is concerned about. They're hearing mixed signals. When it comes to Japan, we're going to compromise, we're going to negotiate, we're going to mediate, we're going to develop a long four-range strategy. When it comes to the United Kingdom, open skies.
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    What are we afraid of? Japan?

    Mr. MURPHY. Congressman, I would say the difference between the two is, first, that the British have committed to us in 1993 to do open skies, and we're going to press forward with that. With Japan they have resisted at every opportunity open skies, and we will have to make a decision in the coming days whether to press for the full open skies or something that falls short of that but takes us ultimately to open skies. It's ultimately that we want to get there.

    Mr. TRAFICANT. Well, Mr. Murphy, I want to ultimately ask you a few questions. I'd just like a simple, ultimate answer on them.

    Is it a fact that the U.S. airlines currently have a $5.3 billion trade surplus with Japan?

    Mr. MURPHY. I would have to check that number, but I will agree we have a very large surplus in aviation with Japan.

    Mr. TRAFICANT. Fine. With open skies, do you believe that the trade surplus with Japan will increase to the betterment of the United States?

    Mr. MURPHY. Yes, I believe that.

    Mr. TRAFICANT. Fine.
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    Mr. MURPHY. I believe with more U.S. carriers flying that we can do——

    Mr. TRAFICANT. If the United States agrees to Japan's proposals, ultimately would you agree that America's surplus with Japan will decline?

    Mr. MURPHY. Congressman, we're not going to agree to Japan's proposals that they——

    Mr. TRAFICANT. No. But I'm not asking that. I'm asking, for the record, if we, in fact, would agree, through some quirk of bureaucratic machination, to once again kowtow to Japan's proposals, would our surplus diminish?

    Mr. MURPHY. I haven't done an analysis on that, but I would assume they would, Congressman.

    Mr. TRAFICANT. Fine. So then you would agree then that open access to Asian markets, especially now with the emerging economies of other nations, is absolutely a key to the competitiveness of our industry, our aviation industry?

    Mr. MURPHY. Yes, sir. That's our goal—open markets for our industry.

    Mr. TRAFICANT. Well, I'd just like to say for the record, ultimately, Mr. Chairman, that I thank you for having this hearing and I think ultimately that Congress should ultimately ensure that some of these ultimate agreements reach the ultimate zenith of our behalf on some occasions.
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    With that I yield back my ultimate time.

    Mr. DUNCAN. Ultimately we will.


    Mr. DUNCAN. Mr. LaHood?

    Mr. LAHOOD. No questions.

    Mr. DUNCAN. Mr. Hutchinson?

    Mr. HUTCHINSON. Thank you, Mr. Chairman.

    I want to follow up on those questions in regard to negotiating with the Japanese government on open skies.

    I share the concern expressed by other Members that it seems like we come out on the short end of the stick and perhaps have a double standard or a different policy in our negotiating posture with that country.

    What leverage or pressure do you use in negotiating with Japan? And how do you try to pressure them and use leverage?

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    Mr. Pease mentioned one about using open skies agreement with other countries, but how can you put the hammer down on them?

    Mr. MURPHY. With regard to limiting this to our leverage with the Japanese in the aviation sector, that is one of our problems. Their needs, their desire for more opportunities are more limited than ours, so they do not need much. They would like to have ANA, All Nippon Airways, their second carrier, receive full access to the United States. That's their primary objective at this time.

    Mr. HUTCHINSON. That's the only leverage you have?

    Mr. MURPHY. That is the principle thing they want. We, for our part, want access for several U.S. airlines, and not only to Japan but beyond, so that is the imbalance that we face in the negotiation now.

    Mr. HUTCHINSON. Now, in regard to Britain, what is your leverage with them to move them to open skies?

    Mr. MURPHY. Well, number one, Congressman, I think that the British government must almost have to be embarrassed about Bermuda II. It limits the most important airport in Europe to two U.S. airlines.

    Mr. HUTCHINSON. What leverage are you using?

    Mr. MURPHY. The leverage now is huge. The A.A.-B.A. alliance will not go forward with immunity unless we have open skies.
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    Mr. HUTCHINSON. Are you not using our private carriers and their relationship as leverage in order to gain an advantage over Britain?

    Mr. MURPHY. These alliances with the British and elsewhere have been leveraged for the United States.

    Mr. HUTCHINSON. Now, you indicated that open skies with the British is a requisite before you grant antitrust immunity. Do you have any other criteria before you would approve antitrust immunity?

    Mr. MURPHY. Yes, sir. That is only the first criteria, the prerequisite. We will also have to review this transaction, the A.A.-B.A. transaction, top to bottom with the U.S. Department of Justice antitrust division and make sure that it is not harmful to competition, and if it is we will ask that certain measures be taken to limit that alliance or to spin off pieces or slots or whatever it takes to make sure that that alliance is not anti-competitive.

    Mr. HUTCHINSON. Who will take the lead? The Department of Transportation or the Department of Justice?

    Mr. MURPHY. The Department of Transportation has the lead in—we grant the antitrust immunity, but we work very closely with our colleagues in the antitrust division.

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    Mr. HUTCHINSON. Thank you very much.

    Thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you, Mr. Hutchinson.

    Mr. DeFazio?

    Mr. DEFAZIO. Ms. Danner was here first.

    Mr. DUNCAN. Ms. Danner?

    Ms. DANNER. Thank you, Peter. That was very courteous of you.

    I have only two questions. One has to do with the European Union. You mentioned that there is some question. Great Britain says they can sell the slots, or they think they can; the European Union says they cannot.

    Great Britain is not totally into the European Union, as would be Germany and France. Now, they have eight airlines going into those two countries, so slots there are assured.

    In those countries, in Germany at present time, are they selling slots? Can they sell slots?

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    Mr. MURPHY. I believe at this time there are not slot sales in Germany.

    Ms. DANNER. Simply because there aren't any sought or because they're precluded?

    Mr. MURPHY. It was a process that was never authorized in Germany.

    Ms. DANNER. Because of the EU?

    Mr. MURPHY. I think this goes back even before that, Congresswoman. They just have not had——

    Ms. DANNER. What about France?

    Mr. MURPHY. I'm not aware of slot sales there, either.

    Ms. DANNER. Because of the EU?

    Mr. MURPHY. Again, it's a longstanding policy even before the EU's involvement here.

    Ms. DANNER. So this has been a longstanding policy of some of the founding groups of EU's who now seek to impose it on others who haven't had this policy in the past, such as Great Britain. Then do we assume that if we cannot get the additional slots at Heathrow before and if Great Britain becomes a full partner in the EU that we probably will not be able to at that time?
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    Mr. MURPHY. No. We have not made that assumption. Our assumption is that, if the transaction is to go forward and if we were to require that slots be made available, that that is a matter for the parties, the two airlines, to resolve. We will review their transaction——

    Ms. DANNER. That might be your position, but would that be the position of the EU?

    Mr. MURPHY. That is a matter I think the EU and the British are discussing now.

    Ms. DANNER. I think that it becomes extremely important to us that we have access to those slots before Great Britain becomes a partner in the EU, with the thought that we might not be able to get them subsequently. Don't you agree?

    Mr. MURPHY. Well, again, I can only state, Congresswoman, that the transaction will not go forward unless we have the slots. And if the slots are held up by the EU or the British government, it is of no matter in the sense that if we don't have the slots they're not going to get their antitrust immunity.

    Ms. DANNER. My other question is a little more parochial. In any agreement with Japan, the United States requires that our currently-restricted carriers would have to obtain substantial new access to Japan as part of any transition to a more liberal agreement. Let us talk about TWA. What about the opportunities for airlines such as TWA that might want to provide nonstop service, let us say from St. Louis to Tokyo or Osaka?
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    Mr. MURPHY. Congresswoman, you raise a very important issue that my testimony failed to touch on. My testimony spoke about the rights of the large incumbent carriers, and it spoke about the opportunities we want for what we call the MOU carriers, the U.S. carriers who fly with lesser rights but are flying to Japan. There's a third category——

    Ms. DANNER. That's right.

    Mr. MURPHY.——which Assistant Secretary Hunnicutt always reminds us of, and that is the carriers that have no rights to Japan, and those primarily that come to mind are TWA and USAir, and we will seek rights for new U.S. services to Japan for companies like TWA.

    Ms. DANNER. We would appreciate that you do that aggressively. TWA is the second-largest employer in my State of Missouri, and extremely important to the economic viability of my State, because not only do they put in a lot of payroll dollars that are dominoed, but we certainly don't want them drawing down through unemployment, so we would appreciate whatever you can do and we would hope you would do it aggressively.

    Mr. MURPHY. We will.

    Ms. DANNER. Thank you.

    Thank you, Mr. Chairman, and thank you, Peter.

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    Mr. DUNCAN. Thank you very much, Ms. Danner.

    Dr. Cooksey?

    Mr. COOKSEY. No questions.

    Mr. DUNCAN. Mr. DeFazio?

    Mr. DEFAZIO. Thank you, Mr. Chairman. Mr. Chairman, I regret I was late. I had another commitment.

    I'm trying to puzzle through something I don't quite understand. As I heard when I came in, in response to Representative Poshard, there was some question about Japan's compliance with the 1952 agreement or the 1996 agreement, and there was some statement that there was or wasn't compliance.

    As I understand it, for the incumbent carriers, FedEx should, under our interpretation of the 1952 agreement, be able to, have cargo service that it wants beyond Japan; is that correct?

    Mr. MURPHY. That's correct, Congressman.

    Mr. DEFAZIO. All right. The Japanese are holding that up?

    Mr. MURPHY. They are.
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    Mr. DEFAZIO. Okay. Now, further, I'm hearing from some of our passenger airlines that there may be some thought on the part of the Administration to make concessions to Japan on the passenger side in order to get FedEx what we thought we had already under the agreement on the cargo side; is that correct?

    Mr. MURPHY. You may be hearing that, but that's not correct, Congressman.

    Mr. DEFAZIO. Okay. It's absolutely not correct? We are not going to make concessions to the Japanese to get rights we already have by treaty over here in order—we're not going to make concessions in another place in order to get them to honor an agreement?

    Mr. MURPHY. It is not our intention to trade off the rights of our passenger carriers to improve the rights of our cargo carriers, Congressman. We want to see the rights of both groups of carriers expand.

    Mr. DEFAZIO. Okay. Now, my further understanding is that under the 1996 agreement theoretically this was settled again; isn't that correct? The FedEx additional routes beyond Japan, wasn't that settled?

    Mr. MURPHY. Some of their rights were resolved in that agreement, but not all of them, unfortunately.

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    Mr. DEFAZIO. Were some of them theoretically resolved in an unwritten side agreement that the Japanese aren't honoring? That's been presented to me in that manner.

    Mr. MURPHY. No. They're honoring the letter of that agreement. Unfortunately, that agreement did not encompass all of the future plans of Federal Express. It resolved the problems of Federal Express that were then outstanding a year ago, and we obtained new rights for UPS and Polar.

    Mr. DEFAZIO. Right.

    Mr. MURPHY. Two other cargo carriers. But future opportunities for Federal Express continue to be held back by the Japanese as they take, as we say, hostages in trying to bring us to negotiate a deal.

    Mr. DEFAZIO. But in our interpretation, Japan, by holding those additional routes for FedEx hostage, is violating the 1952 agreement?

    Mr. MURPHY. Yes, they are, Congressman.

    Mr. DEFAZIO. Okay. So I would hope that it will continue to be, as you firmly stated, the position of the Administration that we're not going to trade off over on the passenger side where, as long as there's a level playing field, we're going to beat the heck out of the Japanese, as we have in many other industries? We're not going to make some kind of concessions to their advantage where they can't really compete with us and do that to—I mean, the allegations I'm hearing from some on the passenger side is, FedEx is trying to end run and really putting pressure on the Administration to make concessions on the passenger side to get them what they are already entitled to under treaty but they're not getting because the Japanese are, as usual, violating a treaty.
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    Mr. MURPHY. Congressman, all of the major carriers are putting major pressure on the administration——


    Mr. MURPHY.——to take this next process with Japan in the direction that each company would like to see.

    Our task is to weigh all of that—the needs of a Federal Express and a United and a Northwest and a TWA—and try to move forward in a progressive way that benefits all of our carriers and our travelers.

    Mr. DEFAZIO. And if we got open skies——

    Mr. MURPHY. That would be the easiest way to get there, Congressman.

    Mr. DEFAZIO. And everybody—all the American carriers would agree on that?

    Mr. MURPHY. I believe they would. Yes, sir.

    Mr. DEFAZIO. Including the cargo carriers?

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    Mr. MURPHY. Yes, sir.

    Mr. DEFAZIO. Okay. Well, then, it seems to me really clear that, you should be obdurate, adamant, unrelenting, and that's a position of the United States, as was pointed out by my colleague earlier. When we go to the United Kingdom, our allies in World War II, we say, ''By god, open skies or nothing.'' When we go to the Japanese, who we helped rebuild, who were our enemies in World War II, we say, ''Oh, gosh, what do you need? You're violating the 1952 agreement. Well, gosh, what do you need?''

    I mean, let's have the same attitude. Let's be consistent around the world. Open skies or nothing; 1952 agreement or we're going to retaliate. We said that once. They caved in. Let's say it again. Let's propose a very specific and stringent retaliation for their violations of the 1952 agreement. When we get tough, they cave; when we're wimps, they take advantage of us. It's been going on for 30 years. It's simple.

    I'm not a diplomat.


    Mr. DEFAZIO. Thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you, Mr. DeFazio.

    Mrs. Granger?

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    Ms. GRANGER. No questions.

    Mr. DUNCAN. Mr. Watts?

    Mr. WATTS. No questions.

    Mr. DUNCAN. All right. Mr. LaHood?

    Mr. LAHOOD. No questions, Mr. Chairman.

    Mr. DUNCAN. All right.

    Thank you very much, Mr. Murphy. You've been very helpful, as usual.

    We'll move now to the second panel. Our second panel is, I think, one of the largest panels we've ever had, but it includes many very distinguished witnesses and it is listed on the committee listing: Mr. Frederick W. Smith, Chairman and Chief Executive Officer of Federal Express Corporation; Mr. Gerald Greenwald, chairman and chief executive officer of United Airlines; Mr. John Dasburg, chief executive officer and president of Northwest Airlines; Mr. Robert L. Crandall, chairman and chief executive officer of American Airlines; The Honorable Gerald L. Baliles, former governor of Virginia and now chairman of Access U.S.-Japan; and Ms. Mary Rose Loney, who is the commissioner for the city of Chicago Department of Aviation on behalf of the Midwest-Asia Aviation Coalition.

    We're certainly honored to have all of these outstanding individuals with us, and we will proceed—our usual practice is to proceed in the order in which the witnesses are listed on the official notice of the hearing.
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    Mr. Smith, that means that you would proceed with your testimony first. Thank you very much for being with us, again.

    And let me say to two or three of the others who were not here earlier, I want to apologize. I think it was the first time that we've ever had to delay a hearing. Yesterday afternoon we were hit with an unprecedented situation in which we had 21 or 23 consecutive, back-to-back, 5-minute votes, and that about destroyed our hearing yesterday, which was more focused on U.S.-U.K. aviation relations, but we will get into that. We've gotten into that somewhat today. If any of you have any comments in that regard, you're certainly free to express them at this time, and we will get into them in more detail later on also.

    Mr. Smith, you may begin your testimony. Thank you for being here with us.


    Mr. SMITH. Well, Mr. Chairman, it's always good to see you and some of your colleagues. I would hasten to add though, however, that I'm here today very disappointed to have to be talking about this same issue over this long period of time.
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    I will, if it's acceptable to you, sir, submit my written testimony for the record.

    Mr. DUNCAN. Yes, sir.

    Mr. SMITH. I'd like to make several points.

    I have five charts that I'd like to put up there.

    Why is the issue that involves FedEx important for this committee and for the United States? First and most important, the chart to the right indicates the huge growth in world trade. And, as you can see by the chart, the growth in world trade substantially exceeds the growth of gross domestic product anywhere. Put a different way, absent the growth in international trade, most of the industrialized economies years ago would have experienced flat or recessionary economic conditions.

    In the case of the United States, the second chart will show that the growth rate has been truly dramatic.

    Now, the reason this is of such importance to the committee is that most of the time when people talk about international trade, what they think about is that container ship up there in that photograph on the wall.

    But the facts of the matter are, over the last 30 years, there has been an inexorable shift of the means of facilitating international trade of particular interest because it has been marked by the growth in high-value-added and high-technology trade. High-technology and high-value-added trade now is mostly moved by airplanes, either through express networks such as ours, traditional airport-to-airport all-cargo services, or in the bellies of combination aircraft.
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    Today, the movement of goods by air represents only about 1.5 percent of the tonnage of international trade, but it represents 38 percent of the value. If you take out petroleum and agricultural products, it's even more dramatic.

    So the movement of goods by air, and particularly through the FedEx system and our able competitors, is the primary mechanism in which the United States will engage in high-value-added and high-tech during the next century.

    Of course, everyone is well aware of the fact that the high-growth areas of the world economy are mostly located in the Pacific Rim, particularly China and the other emerging marketplaces there.

    The aviation situation between the U.S. and Japan and, in particular, the FedEx situation, is based, as you know, on a construct of treaties that was envisioned in the 1944 Chicago Convention. That treaty called for a series of aviation rights or freedoms—which, as I said before, is the most oxymoronic phrase I've ever heard—but a very important part of this system was not just the ability to fly to and from one's home country, but to have beyond rights.

    Originally those rights were called ''fifth freedom rights'' for U.S. carriers when you went to another country and picked up traffic in that country and took it to yet a third country, and for the country that was involved in the trading relationship it was called an ''anterior fifth freedom right.'' So it was clear that there was equivalency between these rights in the mind of the people who set up the 1944 treaty.
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    In 1952, the U.S. established an aviation relationship with Japan. As part of that 1952 agreement there were three carriers, all three of which are represented here as the successor or, in the case of Northwest, the carrier who actually achieved those rights to and from Japan and on the other side of Japan.

    We at FedEx, of course, acquired our beyond rights in the acquisition of Flying Tigers in 1989.

    Now, the two charts that I put up next just simply graphically depict what's involved with these so-called ''beyond rights.'' What that means is that Japan Air Lines and other Japanese carriers have the right, as a product of that 1952 agreement, to pick up traffic in every point in Asia, bring it over to their country, and then take it to any point in the United States.

    On the other side of the coin, by virtue of the 1952 agreement, we have the right to go to Japan and carry traffic from Japan to other points in Asia—an equal opportunity in terms of the hypothetical; in terms of the actual, the number of ton miles, which is how you get paid in our business, is substantially greater for Japanese interests than it is for ours because our market is so much bigger and the mileage is so much greater.

    Now, the Japanese, since 1993, have repeatedly refused to honor FedEx's 1952 rights. The Department of Transportation has found that to be the case and has twice issued orders stating that they were going to put countermeasures in place if the Japanese did not honor their treaty obligations.
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    In the spring of last year, the U.S. Government negotiated a new cargo agreement with Japan which is represented by the final chart. This indicates that the Japanese improvement in their aviation markets has been substantial since they began to punish FedEx, and so you can see that the agreement that was done in 1996 simply increased the Japanese advantage in these markets from about 1.7 to 1 in 1993 so that it is now 12.1 to 1.

    I was in the holding room there, but I was astounded to hear that my friend, Pat Murphy, answered a question that the Japanese have honored their agreement under this MOU. Although it was not a written part of this agreement, we were assured in the spring of 1996 that any agreement with Japan included their agreement to honor FedEx's operational right under the 1952 treaty.

    Mr. Chairman, we are here to protest most strongly for the treatment we've received over these last 4 years, to express our incredulity that the United States Government has permitted us to be treated in this way, and to request in the most earnest fashion help from the United States Government in negotiating promptly and quickly a resolution to our issue.

    Let me just say in conclusion, because I know my time is up, there are some on this panel who will advocate that we hold out for an open skies agreement. We are totally in favor of open skies. In our opinion, that is unrealistic and, in fact, believe that the new-found zealotry of some of the proponents of open skies is, quite frankly, to freeze the status quo.

    The second and last point that I would make to you, while some of the combination carriers are willing to accept constraints on their beyond rights, we are not. Fifth freedom is the equivalent of sixth freedom. In the cargo business there are many, many differences between cargo and passengers. As I've stated to this committee before, just for starters, cargo only moves one way, so it's unilateral in nature. Secondarily, cargo doesn't get off the airplane and go to the Ginza. Cargo is being moved through Japan only by the accident of these artificial aviation treaties.
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    And this is U.S. trade that the Japanese are unilaterally trying to control, and it is the most important part of U.S. trade, so we would urge the Government and this committee to do whatever is necessary to protect the interests of a U.S. citizen, meaning FedEx, to be able to compete in the Pacific market after 4 years of being unilaterally singled out by the Japanese and punished.

    One afterthought here, Mr. Chairman. It has also been amazing to me that recently the Japanese have now said that they are going to attempt to take away some of the slots, unused slots, which are extremely valuable, at Tokyo-Narita. Now, we have some unused slots. Well, of course, the biggest reason that we're unable to use our slots is because the Japanese have refused to approve a single schedule on its first filing with them, regardless of the fact that they are legally bound to do so. So this is extortion of the highest order, and we request your help in resolving this issue.

    Thank you for your attention.

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

    The next listed witness is Mr. Gerald Greenwald, the chairman and chief executive officer of United Airlines.

    Mr. Greenwald?

    Mr. GREENWALD. Thank you, Mr. Chairman.
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    We have filed a written statement. I'd like to speak in brief and less formally about our views on this subject, and I'll start with my theme: it is time to make a deal. The Japanese are ready and we should be ready.

    I'd like to back up a minute. I'm not a diplomat, but in the end, we do need to deal with reality. We have been at a stalemate for years—in my own personal view, at least in the 3 years—between the U.S. and Japan with regard to aviation matters.

    In the meantime, in these 3 years ANA—All Nippon Airlines—and JAL have built networks from Japan deeper into Asia, flying daily into virtually every major city of Asia, bringing traffic back into Japan. They have been doing this while they have successfully kept, in the case of passengers, Northwest and United from building similar networks.

    I tried to count them. I think they have 25 routes into all the cities of Asia going out of Narita and Osaka now. I think between Northwest and United combined, we have two or three. In short, they have been successful at stopping us from developing.

    Now, in spite of all the rhetoric of, ''Well, burn the house down if that's what it takes,'' the facts are that, between two sovereign nations, when something like this happens there are only two remedies: one, sanctions. Now, look back. We did that with France. It became another word for ''stalemate.'' Everything froze in place for years.

    A more drastic version of sanctions is to literally refuse them the rights, if we could, for their airlines to fly anywhere into the United States. Of course, what they would do is to refuse all the U.S. carriers the rights to fly into Japan.
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    The heat politically, for all the right reasons, in the United States and probably in Japan would cause us to stop that action, on both sides, in a matter of days. You can't stop the movement of commerce in such a drastic way. No one has been willing to, so far.

    So they are ready to make a big deal—not open skies, not full open skies, but a big deal, we think.

    We should do a big deal. Cities all over America would have rights to have carriers, U.S. carriers, fly from our cities into Japan, a part of that big deal. And flying from Japan elsewhere into Asia, it is true, in such a big deal would likely be unlimited, as are the current rights, for United and Northwest.

    But we believe a deal could be struck that would give us sufficient rights to grow as fast as either of us in our wildest dreams could realistically do in the next few years.

    I don't like giving up my rights, but if I get more than what I'm giving up, I'm ready. If I get less, I'm not ready. I am a proponent of not giving up my beyond rights. I am a proponent of open skies. But when I see a deal that dramatically is better for United, for the airline industry, being the U.S. carriers, and for the consumer in the U.S., I don't think I ought to stand on principle any more. I do not believe we should accept a little deal. I do not believe we should accept a deal that would compromise the cargo carriers' full rights. I do think there is a deal that can be struck that is a big deal just short of open skies.

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    To the question, ''What happens if we take such a deal? Will we ever get to open skies with the Japanese?'' there is no guarantee. My answer to the question is: there is a carrot, and it is called ''antitrust waivers.''

    Now, let me stop for a minute and back up.

    There is a growing acceptance that code share agreements, supplemented by antitrust waivers, represent major opportunities for airlines—U.S. carriers and, in this case, Japanese carriers. This big deal would permit, if it can get done—and I think it could—code share agreements between U.S. carriers and Japanese carriers, and other Asian carriers going into Japan.

    Once they, the Japanese carriers, understand the benefits of code share—again I can't give—give any guarantees—I predict there will come a time when they will want to go the next step. Toward an antitrust waiver. The only way they're going to get that—with their partners is through skies agreement. That is a pattern I endorse, no antitrust waiver without open skies.

    I think we can, in summary, end up with a big deal now short of open skies, 90 percent of what we could ever hope to have, and leave the last 10 percent, full open skies, with the carrot of antitrust waivers.

    Thank you, Mr. Chairman.

    Mr. DUNCAN. Thank you very much, Mr. Greenwald.
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    Before we go forward with further testimony, we're always privileged and honored to have the chairman of the full committee here, Chairman Shuster, and I would like to call on him at this time for any statement or comment or questions that he might have.

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

    I certainly want to thank you all for being here to testify today. As some of you may know, I met with Japanese officials when our committee was over there on a trip just a few months ago, and I am absolutely incensed at the unfair treatment that our airlines are receiving from Japan and the lack of fair treatment that we're getting as we try to deal globally, and particularly in Asia.

    As a result of the very unsatisfactory discussions I had with Japanese officials over there, when I came back we drafted legislation to deal with this issue. And I withheld introducing it because of this hearing today, and certainly would welcome comments from any of you or anyone else, for that matter, about this legislation.

    The legislation that I've crafted applies to all countries. It covers both passenger and cargo operations. And essentially it prohibits the sixth freedom flights of foreign airlines if that airline's home country restricts fifth freedom flights of the U.S. airline in violation of bilateral agreements.

    These fifth freedom flights essentially are the equivalent of the sixth freedom flights of foreign airlines, and if they restrict our flights, I believe we should respond in exactly the same way by restricting their flights.
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    I hope this sends an adequate message. I am deadly serious about this, and I know my colleagues are, on a bipartisan basis, as well. We want fair treatment, and we're either going to get fair treatment or we're going to retaliate.

    I hope we don't find ourselves in that situation, but this has gone on altogether too long. Japan, in particular, is not honoring their aviation treaty commitments, and there is a price that we must extract if this is the position they continue to take.

    I thank you very much for your appearance here today.

    Thank you, Mr. Chairman.

    Mr. DUNCAN. Well, thank you, Chairman Shuster. We certainly appreciate your being here and your input and your position.

    The next witness, as set forth on the committee list, is Mr. John Dasburg, chief executive officer and president of Northwest Airlines.

    Mr. Dasburg?

    Mr. DASBURG. Thank you, Mr. Chairman.

    We have also submitted written testimony, and I'd like to provide a very brief overview of Northwest Airline's position.
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    We are one of the original carriers designated under the 1952 agreement. In 1952, the Japanese designated JAL—and I'm talking only passenger here—and the United States, during that period of regulation, designated Northwest Airlines and PanAm. Ultimately, PanAm's rights under that agreement were acquired by United.

    During the 1980s, while there were some modest changes made to this agreement, the fact of the matter is that the Japanese—and we believe principally in reaction to the deregulation of the airline in the United States and our increased competitiveness, the Japanese, at their insistence, requested that the member carriers under the 1952 agreement be frozen at JAL, Northwest Airlines, and PanAm.

    Subsequent to that period of time and subsequent to this freezing, the Japanese share of the market between the United States and Japan began to shrink. We believe this is because of the competitiveness of the U.S. carriers. Indeed, in the mid-1980s, Japan had a greater share of passenger revenue between the United States and Japan than U.S. carriers.

    Today, U.S. carriers share a two-thirds advantage over the Japanese carriers. We again believe this is a result of our competitiveness.

    In addition, what we've discovered is that the Japanese, in their competitive view of the world, have begun to fail to honor this agreement with regard to Northwest Airlines. We applied for a route from Japan on to Jakarta. They have not—and, in our view, since this is a ministerial type action, they have failed to grant us the right to fly beyond Japan, and we believe that this is part of this overall plan to deal with and negatively affect the airline industry and our competitiveness.
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    We know that the Japanese recognize we have two-thirds of the market. We know that they recognize that we have a $5 billion plus trade surplus in commercial aviation. And we know that their interest is in, somehow or another, circumscribing that competitiveness.

    Their proposal, which has been put on the table, is to introduce ANA as a full-52 carrier. Remember, in 1982, at their insistence, we restricted the member carriers. They are insisting that ANA be given full rights under the 1952 agreement, and that, in addition, certain of our rights be constrained—that is, our fifth freedom rights, which give us access to Asia.

    We believe simply this is a rotten deal. It damages severely Northwest Airlines. We have acted in reliance on the 1952 agreement, made billions of dollars of investment in aircraft and in facilities, and fully intend to expand our operations into Asia through the use of the hub in Japan, and that hub in Japan was granted to us under the 1952 agreement.

    And so, therefore, we urge that any agreements that are reached with Japan be open skies agreements or be very specific as to open skies as the end result, and nothing more than a transition period, and that transition period should not be conditioned, it should be a condition period based on only the passage of time.

    We know that historically the Japanese simply do not live up to the bargains that we negotiate with them, which is why we can't fly to Jakarta today.

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

    The next witness is Mr. Robert L. Crandall, the chairman and chief executive officer of American Airlines.

    Mr. Crandall?

    Mr. CRANDALL. Thank you, Mr. Chairman.

    I'd like to, if I could, just take advantage of the license you offered us at the outset to make a point that I think will be of interest to members of the committee.

    As many of you know, your colleagues on the Ways and Means Committee are considering, even as we sit here today, a number of aviation-related tax measures whose purpose is to pay for things that have nothing to do with aviation. This committee and many of the individuals sitting here have been steadfast over the years in opposing that kind of taxation. Here we are talking about a potpourri of measures that would tax aviation with the proceeds directed to pay for a number of other completely unrelated programs, and those taxes are structured in such a way that, in my judgment, are very likely to slow down the continuing growth of air transportation and cost a lot of jobs in a lot of communities all across America.

    I hope those of you who are focused on aviation will take the opportunity to contact your colleagues on the Ways and Means Committee and urge that that not be pursued.

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    Having taken advantage of that opportunity, Mr. Chairman, let me turn my attention to the subject of this inquiry, which has to do with the aviation environment between the United States and Japan.

    You've heard a good deal from the preceding witnesses about the history of the circumstances in which all of us operate. You have not heard as much about it, but I think most of you are well aware that there is an enormous competitive imbalance between the U.S. airlines operating between the United States and Japan and the United States and Asia.

    My own company, for example, is able to serve Japan from only three gateways. We operate a total of 20 flights a week. By way of contrast, United flies 87 weekly round trips from many U.S. gateways. Northwest operates 154 weekly round trips. United and Northwest together operate more trips per day or twice as many trips per day as we are allowed to operate in an entire week.

    The so-called ''fifth freedom'' rights that you've heard about from Mr. Smith and from others have enabled United and Northwest each to develop a hub at Tokyo, by means of which they provide service to many of those Asian cities that you saw on Mr. Smith's chart.

    By way of contrast, American is prohibited from operating beyond Japan to any point in Asia, and has thus, as a practical matter, been excluded from the Asian market.

    That severe competitive imbalance is obviously adverse to the have-not airlines, which include my own and Delta and Continental. It is also, in our judgment, adverse to the interest of passengers and shippers in the many U.S. cities without adequate service to Japan, and to the U.S economy.
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    More than 40 States, for example, have trade and investment offices in Tokyo, but only 12 U.S. cities have nonstop service to Japan. By way of contrast, 14 U.S. cities have nonstop service to Paris, 15 to Frankfurt, and 22 to London.

    By any measure, there is substantial demand for more service between the United States and Japan and other points in Asia, and that lack of service has also resulted in making U.S.-Japan fares a good deal higher than they ought to be.

    A Coopers & Lybrand study shows that both average and discount fares from U.S. cities to Tokyo are substantially higher than fares between the same U.S. cities and Paris, Frankfurt, London, Hong Kong, Taipei, and Seoul, and we will be happy to provide copies of that study for the record.

    To address those problems, a coalition of communities, businesses, economic development organizations, and airlines known as ''Access U.S.-Japan,'' began a nationwide effort in early 1996 to persuade the U.S. Government that securing additional air rights between the United States and Japan is in the public interest. Access U.S.-Japan is headed by former Governor Gerald Baliles of Virginia. Governor Baliles is at the witness table and you will hear from him later.

    Very recently, as you've heard already, the Japanese government has indicated a willingness to negotiate modifications to the existing agreement, thus creating a real opportunity to increase competition in Pacific aviation markets and, at the same time, initiating a great debate about whether we should or should not insist on open skies.
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    American strongly supports open skies around the world. Indeed, I have recently testified in support of an open skies agreement with the United Kingdom. But the U.S. aviation agreement with Japan is unique. Those who call for holding out unconditionally for open skies with Japan are, in my judgment, effectively urging a continuation of the status quo.

    Given the fact that two U.S. carriers operate hubs in Tokyo and have virtually unrestricted operating rights to and beyond those hubs, it is quite clear that the Japanese will not make the same concessions that the United States quite properly seeks from other countries who have provided U.S. carriers with far fewer opportunities.

    Now, we believe the U.S. should aggressively pursue a revised agreement with Japan, but a new agreement will not enhance competition unless it is focused on offering new opportunities for new carriers, and it will not enhance competition unless it grants more U.S. airlines the right to fly beyond Japan or, at a minimum, the right to code share beyond Japan.

    We think the moment is at hand for the successful liberalization of commercial aviation relationships between the United States and Japan. The winners will be not only the have-not airlines, like my own, but the passengers, shippers, and communities of the United States which want and need more service and more competition.

    We are very grateful for your interest in this matter, which we think is vital to the public interest and is very important to our company.

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

    The next witness is The Honorable Gerald L. Baliles, the former governor of Virginia and now chairman of Access U.S.-Japan.

    Governor Baliles?

    Mr. BALILES. Thank you, Mr. Chairman. To you and members of the subcommittee, thank you for asking me to appear here today to participate in this hearing on an international aviation policy issue that affects the economic well-being of all Americans, not just our airlines.

    With your permission, Mr. Chairman, I would like to abbreviate my testimony and ask that my written presentation be included in the record of these proceedings.

    I've always thought that the purpose of transportation is to move people and products to markets and destinations. The air transportation system that is in place today between the U.S. and Japan is inadequate. It severely limits the regions and cities that may be served. It restricts commercial opportunities and consumer choice. And for countless businesses, scores of cities, and millions of consumers in both countries, the current bilateral agreement imposes incredibly high cost. It stymies economic growth.

    For years the U.S. and Japan have been arguing about the ultimate shape of the bilateral aviation relationship. The U.S. has consistently pursued a free trade environment or open skies, and Japan has consistently pursued a managed trade environment or regulated skies.
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    Years of meetings, uncounted rounds of negotiations, various sanctions and counter-sanctions issued by both governments have failed to change the view of either side. All that has happened is that consumers and businesses on both sides of the Pacific have been deprived of a better, more-competitive, and efficient air transportation system.

    Mr. Chairman, I've just returned from a week-long trip to Japan, during which I met with high-level Japanese government and airline officials, as well as officials from local governments and businesses. In my judgment, someone has been doing a lot of listening and thinking recently about this aviation matter. I can tell you that virtually everyone I talked to expressed interest in or support for a new proposal for increasing air service between the U.S. and Japan.

    For the first time in many years, Japan is now saying that it is willing to significantly expand the opportunities for U.S. and Japanese airlines into the next century. The new opportunities would provide much-needed service to U.S. communities and regions, would improve the competitive environment in the market, and would create billions of dollars in annual economic activity.

    So what is the problem? Why can't the U.S. and Japan just get on with creating a new, more-competitive environment between and beyond the two countries? Well, it appears as if the major problem is the philosophical debate on what should be the ultimate shape of the new agreement. Rhetoric is getting in the way of results.

    As Cyril Murphy, United's vice president of international affairs, recently was quoted as saying, ''Open skies is a great thing, but there comes a point when you have to say, 'How much longer will you be strangled waiting for the perfect agreement?'''
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    The debate on how a new U.S.-Japan agreement will be characterized is depriving U.S. cities and businesses of an estimated $9 billion a year in new economic activity. On one side of the debate are those who want some kind of symbolic victory over Japan and are holding out for, as Mr. Murphy says, ''the perfect agreement.'' On the other side are the majority of airlines, businesses, and communities, including the more than 2,000 members of Access U.S.-Japan, who want new service and new opportunities now, not at some unknown time in the distant future if and when the U.S. can claim the symbolic victory.

    Japanese officials told me last week that they are now prepared to eliminate restrictions on flights from virtually any U.S. city to every city in Japan except Tokyo and Osaka. In those two Japanese cities, where airport capacity is limited, the Japanese are prepared to allow increases in frequencies from U.S. cities.

    In markets beyond Japan, which are critical to three U.S. airlines, the Japanese are willing not only to affirm current operations, but also allow expansion of those operations.

    The Japanese also said they are now willing to allow a significant level of code-sharing between the airlines of the two countries, and, if asked, would be willing to consider code sharing beyond their country between U.S. airlines and carriers of a third country.

    What the Japanese say they are unwilling to do is to sign an agreement which the U.S. calls ''open skies.''

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    I told the Japanese in those discussions that, in my judgment, they must agree to more than just 3 or 4 years of expansion; they must increase the level of new opportunities unoffered; and that expanded beyond rights must be a part of any deal. They agreed and said that they are now prepared to move forward on all these issues.

    So I ask again: what is the problem? Is this becoming a matter more of labels than of larger markets?

    The choice between the U.S. today is whether to ignore this opportunity for larger skies by holding out for the perfect agreement or to embrace the opportunity so that as much new airline service as possible can be achieved for U.S. businesses and communities.

    The first alternative will provide nothing. The second will produce substantial benefits for airlines, passengers, businesses, and communities across the Nation and move this country forward toward its long-haul goal of larger markets.

    The choice seems apparent to me and to Access U.S.-Japan. The U.S. should engage the Japanese now in formal talks and walk through this door of opportunity to produce more flights by more airlines to more cities between the U.S. and Japan and beyond. I believe it's time to start the negotiations.

    Thank you.

    Mr. DUNCAN. Thank you very much, Governor Baliles.

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    Our final witness on this table is Ms. Mary Rose Loney, commissioner for the city of Chicago Department of Aviation, speaking on behalf of the Midwest-Asia Aviation Coalition.

    Ms. Loney, I don't know who made out this listing, but I suppose they decided to save the best for last, so you may begin your testimony.

    Ms. LONEY. Thank you very much, Mr. Chairman.

    I would also, like my fellow witnesses, like to summarize my comments and then have my full statement appear in the record.

    Good morning, Chairman Duncan. I appreciate the opportunity to appear before the subcommittee this morning, particularly along with these other distinguished witnesses.

    I am the commissioner of aviation for the Chicago airport system, which is home to Chicago O'Hare, the world's busiest airport. I might also add that Chicago is also home to Midway Airport, which is our Nation's premier point-to-point service airport. It does happen to be located in a very important district on Chicago's southwest side.

    But this morning I'm here to testify about one of the last remaining holdouts—the U.S.-Japan bilateral agreement.

    All around the world we've seen the march toward open skies go forward. Unfortunately, the relationship with Japan is stuck in a swamp, and that swamp is a 1952 agreement, as well as a complicated series of consultations, minutes, and amendments that have been negotiated since that time.
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    As leaders of the world's busiest airport, allow me to underscore our most fundamental point: cities and the traveling public both here, as well as in Japan, are suffering enormously under the current aviation regime in terms of lost trade, tourism, and jobs.

    Securing new air service opportunities with Japan is critical. In our region, we recently forged the Midwest-Asia Aviation Coalition, which is a growing alliance of more than 130 business, labor, government, and civic leaders who collectively recognize the importance of increased air service between the midwest and Asia.

    Our bipartisan coalition includes both United and American Airlines, Chicago Mayor Richard M. Daley, Illinois Governor Jim Edgar, and your former colleague, Congressman Bob Michael, who all serve as honorary co-chairs of the effort.

    You did hear me correctly: United and American on the same page in Chicago. Now, while that certainly isn't peace in the Middle East, it's about as close as we get in the midwest.

    Ideally, we support the Administration's quest for complete open skies with Japan. We believe it would lead to enormously improved service from Chicago to Tokyo, Osaka, and beyond.

    In a new report which was commissioned by our coalition, Arthur Andersen found that the number of trans-Pacific passengers flying through O'Hare would more than double by the year 2000 if a sufficient number of flights were available. However, based on the negotiations so far, we recognize that open skies with Japan is not on the immediate horizon.
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    The U.S. may need to accept a phased approach, like our agreements with Germany and Canada, or we may need to explore an interim deal that makes as much progress as possible, given the differing agendas of the parties.

    Regardless of the nature of any interim agreement, the city of Chicago believes it is absolutely necessary to secure new service for American Airlines, increase service for United Airlines, increase opportunities for U.S. carriers to serve Kansai, as well as increased opportunities for Japanese carriers. We also feel that broad code sharing rights are essential.

    To get from here to there, we believe that the time has come for the U.S. to be open about discussing the possibility of putting some form of reasonable constraints on the ability of U.S. carriers to expand their beyond rights in exchange for significantly expanded third and fourth freedom opportunities.

    We feel that dogmatic insistence on open skies may forego present-day opportunities for a greatly liberalized regime between the U.S. and Japan.

    If we can achieve code sharing and global alliances as the a first step, request for antitrust immunity no doubt will follow. Soon both sides will see the benefits to be derived from complete open skies.

    Today there are 160 weekly flights between the western United States and Asia, and only 59 weekly flights between Asia and the midwest.
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    In 1952, when the bilateral agreement was reached, the technology did not exist to fly from the midwest to Asia, but that is no longer the case. In fact, because of Chicago's unique location on the great circle route, flying through Chicago is actually a more direct route to Japan than from many cities on the west coast. Three out of five Americans reside east of the Mississippi River, yet the region's airports can offer only one out of five of the weekly flights to and from Japan.

    Mr. Chairman, the Midwest-Asia Aviation Coalition is trying to change the way we look at negotiations with the Japanese. Traditionally, the focus has been on giving a route to one carrier or another and whether the 1952 carriers or the MOU carriers would benefit from a new agreement. It is simply not about one carrier versus another any more. It is time for us to focus on the communities and correct the imbalance that exists between the coastal gateways and Northwest's hubs and the restricted limited service in the midwest.

    We urge U.S. policy-makers to change the dynamic now.

    I thank you for the opportunity to appear here today, and would be happy to answer any questions from you or your colleagues.

    Mr. DUNCAN. Thank you very much, Ms. Loney. And thank you to each of the witnesses who have testified.

    Mr. Smith, you ended your testimony by saying that you hope the Congress and the Administration would do everything possible—well, in your formal written statement it says, ''We encourage the U.S. Government and the Congress to take quick and decisive action to protect FedEx's rights under the existing U.S.-Japan air transport agreement.''
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    What specifically do you think we should do? If you were in charge of these negotiations with Japan, what would you say to the Japanese about the situation as it relates to cargo aircraft at this time?

    Mr. SMITH. Well, if I were in charge of the negotiation with Japan, the first thing I would ask them is, ''Why do you think we should negotiate a new agreement with you when you are unwilling to honor the agreement that you have?''

    I don't know how the United States can deal with a trading partner who unilaterally attacks the economic interest of the United States and not do something in return.

    The U.S. has issued two countermeasures orders, one last summer, which is still outstanding. As I showed on the last chart there, the Japanese transport of so-called ''sixth freedom'' cargo traffic into the United States is a huge part of their cargo business, so if the United States tomorrow embargoed that sixth freedom traffic and they were to embargo our fifth freedom traffic opportunities beyond, we win, because the market opportunity is so incredibly greater for Japanese interests than it is for U.S. interests to begin with.

    And so the first thing I would say is that the Japanese have to honor the treaty obligations that they have before the United States initiates a new treaty, and if they are unwilling to do that, the United States should execute the countermeasures order, which the Department of Transportation issued last summer but has been unwilling to act on it.

    And the third thing might be, as Chairman Shuster said, to pass legislation. If the Administration is not going to perform its duty as I understand it to be, then perhaps the Congress should put certain constraints on the ability of the relative Executive Branch organizations to conduct these affairs.
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    Mr. DUNCAN. So that was going to be my next question, as to what your reaction was to the proposed legislation that Chairman Shuster mentioned that would restrict the sixth freedom rights of any country that restricted our fifth freedom rights.

    And you would say then—I'm sure there would be some who would say that would lead to a trade war in aviation that wouldn't be good for anybody, but you would say we're already at war and we're not really winning it?

    Mr. SMITH. Well, Mr. Chairman, there is no question we're in an aero-political war as it applies to the cargo business.

    Sandy, put that chart back up there.

    Look what the Japanese have been able to do since 1993. They've gone from a 1.7 to 1 advantage to a 12.1 advantage.

    You know, it's very difficult for me to come up here, Mr. Chairman, and talk about this, I'm so frustrated about this issue. If you'd told me 30 years ago, when I was a captain in the Marine Corps, that the United States Government would permit a country to do this to a U.S. interest like they have done to us, I would have said we would have had the Third Marine Division ashore there. This is incredible.

    So I don't know what you can do, but I can tell you this much: the Japanese economy has experienced a beneficial trade balance with the United States to the extent of over $1.25 trillion over the last 10 or 12 years. For them to deal with aviation interests under an existing treaty in this manner in this mercantilistic fashion, if you can call that anything other than economic warfare I'd like to have another more-accurate description, because that's what it is.
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    Mr. DUNCAN. Is there a reasonable alternative for you? Can you fly directly to China, for instance, if Japan denies you those?

    Mr. SMITH. But you see, Mr. Chairman, that's exactly my point as to why the countermeasures in the cargo area would be so successful. Japan's cargo operations are not sustained by third and fourth freedom traffic into the United States. They are sustained by their ability to collect traffic all over Asia.

    In the 5 years leading up to today, Japanese all-cargo capacity has increased on the other side of Japan at a rate of three or four to one. I don't have the very latest statistics. It's three or four to one over the rate of growth in Japanese-U.S. traffic. Why do you think they're adding that—excuse me, three or four to one over the rate of growth of intra-Asia traffic. So why do you think they're adding that capacity? They're adding that capacity to move U.S. trade while they're constraining themselves—constraining us, who is the most effective competitor there.

    Now, one thing that's very important to remember about this situation, there has been a lot of talk about article 12, which is the part of the treaty that says that the primary purpose of this agreement is to facilitate aerial operations or third and fourth freedom traffic between the two countries.

    You never hear the Japanese saying anything about that as it applies to cargo. The reason they don't is that, one, the market shares are much more in balance in the passenger side of the house, and, number two, were you to get a manifest of the Japanese all-cargo aircraft, you would find that they are chock-a-block full of sixth freedom traffic.
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    So they don't want any of these constraints they'd like to put on Northwest on the passenger side on the cargo side, because it's not to their advantage to do so.

    So, to go to the short point of your question, yes, we have been economically attacked by Japan, and the Administration has allowed them to be successful in that and harm us greatly, and the United States' response would be to insist that the Japanese honor their current bilateral agreements before it enters into any new agreement.

    Mr. DUNCAN. All right. I've got several other questions I want to ask of the other witnesses, but my time on this first round has expired.

    Mr. DeFazio?

    Mr. DEFAZIO. No questions.

    Mr. DUNCAN. Mr. Oberstar?

    Mr. OBERSTAR. No questions, Mr. Chairman.

    Mr. DEFAZIO. I do have a question. Thank you, Mr. Chairman.

    Mr. Smith, I can see you're not too much of a diplomat, either, and I really support your statements here. I hope the Administration is listening. I would agree with all of them.
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    I'm going to move beyond that, because I think you've pretty succinctly stated my position, which is, you know, we—and someone once said something about, ''When you negotiate with the Japanese and you sign an agreement, that's the beginning of the negotiations for them and we think it's settled,'' and that's pretty clear with the 1952 agreement. We're still negotiating to get the 1952 agreement, and to have another agreement which makes concessions plays into strategy that has worked very well for them for about 25 years, and I think it's time to play a little tougher with them.

    To the passenger side, I'm a bit puzzled, because it seems that there has been some movement that I'm not quite certain I understand.

    I think a cynic might say to Northwest, ''Well, you've got a nice share of the market now, a spirited position, and you're advocating a purist position which can't possibly be successful because you want to protect the status quo,'' and even your fellow CEOs might say that, even beyond what a cynic might say.

    And then to Mr. Crandall and Mr. Greenwald one might say, ''Well, it seems there has been some movement here because, of course, United previously was very avid about protecting its beyond rights. There has been a little movement, and American, who isn't, in the market to the extent that they'd like, it seems like their position generally, when I know Mr. Crandall would advocate open skies, is a bit of modification.''

    And a cynic might say to those, you two, that, ''Well, I guess you've negotiated deals which are pending with the two Japanese airlines on code sharing, so you just want to say that U.S. interest is served by code sharing and not by fully open skies, and we'll get to open skies later, but with the Japanese, you often don't even get to what you already agreed on, let alone get to the greater.
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    So I guess I'd like the three of you to sort of address what a cynic might have addressed to you and respond.

    Mr. GREENWALD. We'll be coded. I'm cynic number one.


    Mr. GREENWALD. It is true that United Airlines has changed its position. If you look back 2 or 3 years ago, or maybe even a year ago, our position was the Japanese must first satisfy existing rights before we go on to work on a liberalized agreement.

    That was United's position, and it was United's position because it was our belief that, at the time, the Japanese wanted to implement a plan which would have lowered United and Northwest's beyond rights in exchange for some, and relatively few, MOU carrier direct flights. The Japanese were also insisting that ANA become an incumbent carrier with both direct and beyond rights.

    We believed at that time it was bad principle—you shouldn't give in on a right you already have. It would have hurt United Airlines. And, more importantly, if we were to have applied an economic value for those beyond rights to the United States, it would have hurt the United States.

    Now let me move to today. We don't know exactly what agreement the Japanese are ready to sign. We think that what they have described, which was best outlined by Governor Baliles a few moments ago, is very likely what they have in mind to do.
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    What does it do for us? It is—I used the term ''a big deal.'' In our view, it will increase the favorable balance of trade between the United States and Japan, first and foremost. Translation: more flying, more open opportunities for more carriers, both Japanese and U.S.

    Now, all of us have said the Japanese are not competitive with the U.S. carriers. If we liberalize flying, we think we win, net. That's why United has changed its view to say, in the context of a big deal, a lot more flying for U.S. carriers, including United. By the way, we were just characterized as having the freedom to fly where we want from the U.S. to Japan. It's not fact. We, alone, are limited to six flights a week from our biggest hub, O'Hare, to Japan.

    Mr. DEFAZIO. But are you, in conceding the beyond rights to their new captive hubs which they've been building up under protection and wouldn't continue to exist over the long term without protection, because they are less efficient, aren't we conceding something to them that, in a truly competitive environment, over time we could capture, which is they get to operate lucrative hubs into Asia, you get a code share, and then you get to make more money bringing people back to the U.S., but we're conceding a market which we could theoretically capture?

    Mr. GREENWALD. During these 2 or 3 years, while we've all been—I call it ''getting ourselves excited in the locker room,'' and not doing anything on the playing field—

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    Mr. DEFAZIO. Well, they've been protecting their markets. They always do.

    Mr. GREENWALD.—they have been expanding their networks into Asia, making it more difficult for us to dislodge them. I'm not saying we're not going to go try.

    Second, in these last 2 to 3 years, all of us have been watching an evolution around the world. Let me try an example. Northwest and KLM have an agreement flying in and out of Amsterdam. Northwest has the freedom, should it choose, because there is an open skies agreement, to fly into other places into Europe, i.e., beyond rights. It chooses not to use those. Instead, it code shares with KLM, who would do that flying.

    Now, NW is not being a nice guy, I don't think and John can speak to that. I think they're following their own economic interests.

    So there are now two ways to compete deeper into Asia: beyond rights, which we want to protect as best we can, allowing us the right to keep growing, starting with a handicap now 3 years out; and code share agreements that all of us would have the opportunity to explore. That's the reason United has changed its position.

    Mr. DEFAZIO. But we don't jettison Mr. Smith's interests in this area, do we?

    Mr. GREENWALD. I will repeat what I said earlier. I believe the cargo situation is a different one, and I support FedEx's view that no new deal should be struck if it doesn't establish full beyond rights—reestablish, reaffirm full beyond rights that FedEx wants.
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    Mr. DEFAZIO. Thank you, Mr. Chairman. I see my time is up. I'll get back to the other two later, perhaps, or do you—

    Mr. DUNCAN. Go ahead.

    Mr. DEFAZIO. If you want to respond to my original question, that would be great.

    Mr. DASBURG. Yes. Thank you.

    First, we also at Northwest Airlines believe that FedEx's rights should be respected and enforced. Indeed, our position is that the current relationship, the 1952 agreement, should be enforced before there are any substantive negotiations.

    As to the fifth freedom point, we have a strategy built around flying beyond Japan, so, as a consequence, we oppose any restrictions or any trading away, if you will, of our fifth freedom rights or our beyond rights in exchange for someone else's third's and fourth's.

    So, while I'm sympathetic with America Airline's objectives to obtain more third's and fourth's at the price of our beyond's, I'm only slightly sympathetic.


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    Mr. DASBURG. As to open skies, Northwest Airlines has been a supporter of open skies as a general principle and, indeed, benefits from open skies with the Netherlands and with our joint venture partner, KLM.

    We had historically thought that open skies was unlikely in the case of the Japan-U.S. relationship, but we now believe that, with the continued misfortunes, economic misfortunates of JAL and ANA, that the Japanese are more inclined to want to reach an agreement with the United States than they have heretofore.

    Our view is that this is like any other negotiation: they will see how much they can get in exchange for how little they will give up, and the proposal on the table, of course, is that ANA get full-52 treatment. That is the equivalent of ANA and JAL, in essence, having open skies, but they're not offering open skies for U.S. carriers. They're offering some adjustments and alterations.

    If, in fact, ANA were given 1952 agreement treatment, then the question I have is: what, in fact, is there left to trade when we go to them the next time to either achieve additional penetration of U.S. carriers into Japan or Asia, or what is there to trade or negotiate when, in fact, they refuse to honor the latest version of some kind of contractor relationship between their country.

    So our view is we don't want our fifth freedom rights constrained, traded away, or otherwise modified in exchange for someone else's third and fourth increases. We do want the current agreement enforced. We do support sanctions. And we do believe that if ANA gets 1952 treatment, Japan has already gotten open skies for its carriers. We just haven't gotten open skies for our carriers.
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    Mr. DEFAZIO. Do you want to respond?

    Mr. CRANDALL. Mr. DeFazio, I'm not quite sure what the cynic would say to me. I think our views with respect to Japan have been quite consistent.

    By way of contrast to my colleagues, of course, we essentially can't fly there. That greatly limits our ability to participate or to compete effectively in the domestic marketplace.

    As Mary Rose has pointed out, a great many people who want to go to Asia live east of the Mississippi. None of them will move to gateway points on American Airlines, or essentially none of them. They will all get on either Northwest or United, because only Northwest or United can take them where they want to go. That's obviously not good for us, it's not good for our employees, it's not good for the cities we serve, and we don't think the absence of competition is good for the Pacific marketplace, either.

    Mr. GREENWALD. I'd like to just try to summarize. Maybe the gist of the earlier question was it's hard to figure out who the players are without a score card as this thing moves around.

    I'd just summarize for you to say we've tended to categorize U.S. carriers as have's and have-not's. United, in fact, is an in-between. Northwest has the freedom to fly, generally—check me on this if I'm not exactly right—freely from the United States to Japan, and also has beyond rights. United has some rights to fly between the United States and Japan and full beyond rights. American is restricted in both places.
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    There are today, best I know, only two carriers who would argue that the big deal, if it can be done, would be bad. There are only two: Northwest and JAL. Why would that be? They are the only two carriers on either side of the water who have general freedom to fly between the United States and Japan.

    I'll rest.

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

    On our side I'm going to go first to Dr. Cooksey and Mr. LaHood, because they had to go last last time and didn't really get any questions.

    Dr. Cooksey, we'll go to you this time.

    Mr. COOKSEY. I'm going to use a little bit different approach. I'm going to give you all the questions at one time and direct them to you and see if you can answer my questions in the time frame.

    My first trip to Asia was in an RF-4 refueling behind a tanker, but I've since been back on all three of your carriers, and except for the lack of an ejection seat the amenities are much better in your airlines.

    Mr. Smith, first question: what are the general categories of the cargo that you transport to Japan? And is Narita your only airport that you fly to in Japan?
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    I'm going to go ahead and give you another question: are you ready to make the big deal that Mr. Greenwald refers to?

    My third question for you, Mr. Smith: do you think this Administration is sophisticated enough in foreign affairs or strong-willed enough or skilled enough to negotiate a successful and fair treaty?

    Now, Mr. Dasburg, do you—of the two methods of competing, you don't really have to worry about beyond rights any more, do you? That's my understanding. If so, which is your preferred choice, beyond rights or code sharing?

    Secondly, Mr. Dasburg, do you feel that code sharing linked to antitrust waiver is the solution to a near open skies technique?

    And, Mr. Crandall, I share your views about taxes on the airlines, the carriers, and the taxpayers, and the passengers. I did vote against the FAA tax because it's not fair the way it's structured.

    Does Singapore Airlines have this same problem in Japan that the American carriers have?

    And my last question is to you, Mr. Crandall. It's one of the questions I asked Mr. Dasburg. What is your preferred method of competition: beyond rights, code sharing, or are you still just scrambling for third and fourth rights?
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    Mr. Smith?

    Mr. SMITH. In response to the three questions, are we prepared to accept the big deal, obviously I can only speak to the all-cargo issues. The all-cargo issues, as have been stated before, are substantially different than the passenger issues, and I don't think it would be appropriate for me to talk about the combination issues, but as it applies to cargo, you must have reciprocal, freely-operable opportunities on the beyond rights for both sides.

    We would never agree to anything that gave the Japanese the ability to restrict our beyond services because, just as has been demonstrated these last 4 years, they would sooner or later attempt to use those mechanisms to harm us.

    We carry on our aircraft the high-tech and high-value-added trade of both countries, electronics, avionics, optics, medical supplies, pharmaceuticals, precision machinery, fashion items—those things which are the gross sectors of the U.S. economy. That's why this is so important, because Japan, even with the emergence of China as a huge economic power in the world and Asia, even by 2015 Japan will still be at least 60 percent or greater of the entire economic activity of the region.

    So if you don't have the ability to commingle cargo on the other side of Japan, while they do have the ability to pick up all over Asia, particularly in these growth markets, and bring them into the United States, that's tantamount sooner or later to giving up the market to them.
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    So we want our 1952 rights honored and we don't want restrictions on our beyond flights except to the extent that they're willing to accept them on their beyond traffic. I mean, that might be a different matter. As I explained earlier, I don't think you will find them anxious to do that.

    Cities served—we fly to Tokyo, where we have a hub. We fly to Kansai, where we—at the new Osaka Airport, which we are building up, to the extent that they will let us do it. We also have the right to fly to Okinawa with full beyond rights, but last week I was incredulous for the Japanese to take a great deal of credit for authorizing one schedule for FedEx, which is the first schedule they've approved for us in 4 years without U.S. Government threat of sanctions, and the only point that they approved was Okinawa, which our company has had the right to fly to for 40 years. They refuse to let us fly to Manila, where Tigers and FedEx has flown to since the beginning of this 1952 relationship. They have repeatedly refused to accept any schedule for any of our beyond flights.

    Regarding the skilled capabilities, we have very good negotiators and very able people at Department of Transportation and State. However, for whatever reason, there has just been a lack of commitment on the part of the Administration to solving this issue.

    I have seen everyone—I have seen the President, I've seen Secretary Christopher, I've seen Under Secretary Spiro, Secretary Pena, Secretary Slater, Under Secretary Gerchick, Under Secretary Hunnicutt—I mean, I could list them on and on. Every one of them agrees our position is right. Every one of them agrees that we have been disadvantaged hugely. And every one of them has committed to solving the problem. But here we are 4 years after the Japanese first declared aero-political war on FedEx without resolution.
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    Mr. COOKSEY. In 1993. Who'd like to go next. Sir?

    Mr. DASBURG. Northwest Airlines, as to Asia, has adopted the beyond rights approach. We have established, in essence, a hub and spoke system at Narita and are building one in Kansai. In fact, we have 82 jet departures a week now in and out of Kansai. So in Japan our approach has historically been, since we had beyond rights, to invest in using the beyond approach.

    On the other hand, in the case of Europe, we have adopted the approach of code sharing and antitrust immunity and entered into an alliance with KLM.

    One of the observations that I think is important here is that Japan has two carriers, JAL and ANA. The United States has a number of carriers, but at least seven major international passenger carriers.

    The fact of the matter is that only two of those U.S. carriers will ultimately have a code sharing antitrust relationship with the two Japanese carriers, so the other five carriers, or whoever decides to fly the Pacific, will be forced to use beyond rights and a hub-and-spoke system in Japan.

    I would like to have the election to choose which way to conduct my business, and so therefore we wish to continue to operate a hub-and-spoke system in Japan.

    Mr. CRANDALL. Dr. Cooksey, as you know, we essentially have very limited—essentially no operations to Japan. Starting from that posture, and given the shortage of landing slots at Tokyo, it is unlikely in the extreme that we would ever be able to fly beyond Tokyo, whether or not we had those rights under an agreement between the United States and Japan.
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    But I think, in terms of competing in markets beyond Japan, we are going to have no choice but to try and strike a code sharing deal with one of the Japanese carriers.

    In terms of flying across the Pacific to Japan, obviously there we would much prefer to do that with our own airplanes. On the other hand, we're going to have a very hard time getting landing slots.

    Mr. COOKSEY. Well, in spite of your limited number of slots, my preferred way to return a few years ago used to be flying your 747-S direct—

    Mr. CRANDALL. Right.

    Mr. COOKSEY.—to D/FW and picking up the jet stream.

    Mr. CRANDALL. Across the Pacific, the so-called third and fourth rights—that is, the Pacific flying we would prefer to do ourselves and would do ourselves as we get rights to do it. In order to compete, however, effectively in service to Japan, we're going to have to offer accommodation to points beyond Japan, and in order to do that I think we are going to have to have a code sharing relationship with one of the Japanese carriers.

    Mr. COOKSEY. Thank you, Mr. Chairman.

    Mr. DUNCAN. All right. Thank you, Dr. Cooksey.
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    Mr. Oberstar?

    Mr. OBERSTAR. Thank you, Mr. Chairman.

    I welcome our panel. As I look at this distinguished group, it occurs to me that we have more innovative aviation brainpower gathered at one table than at any time in American history, with the possible exception of when the Wright Brothers sat together. I wish we could rearrange this format so that we could have a running dialogue, rather than this rather structured committee format, and I think that some time in the future, Mr. Chairman, might be a very good thing for us to do—engage in a more free-flowing discourse.

    Japan is again hiding behind the thin veil of constrained capacity at Narita and Kansai. They drag their feet in these negotiations saying, ''We don't have the capacity. We can't add the carriers. We can't—noise and runway capacity.''

    And with Mr. Murphy at the witness table earlier, before most of you were in the room, with the exception of Mary Rose and Governor Baliles, I pointed to the growth of infrastructure investment in Japan and points beyond Japan. The Japanese government has embarked on a 10-year, $3 trillion investment in expansion, modernization of all of its infrastructure, over $5.5 billion in their high-speed train, billions of dollars in their port capacity. They spent $12 billion on Kansai Airport. They are poised to spend another $9 billion on adding the second runway and a cross-wind at Kansai by the year 2002.

    The holdout, my hero of all time, holding out against overwhelming development, this little Japanese farmer who had this one square kilometer—less than that—a plot of ground that held up development at Narita, has now been bought out and now construction of the second runway at Narita can begin.
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    Check Lap Cok Airport will be open this time next year—two runways, 11,000 and 13,000 feet in length; airport terminal capacity, 288 gates; 1.3 kilometer length inside that could hold four Dulles Airport terminals inside the one. They'll have 90 million passenger capacity. And we should settle for something less? We should listen to the Japanese argument about constrained capacity?

    China is underway modernizing 35 airports, investing in six brand new airports, a cost of $100 billion spent over the next decade in China, alone. We should listen to their arguments about constrained capacity when the Japanese then get access to the United States where we have spent tens of billions of dollars in modernizing our airports and building new ones and investing in air traffic control technology to enhance the capacity of existing airports where we have capacity constraints? We ought to sit there and tell them, ''Invest. You are underway with a $3 trillion plan. Build the runways. Add the capacity. Expand your—enhance your existing capacity with advanced air traffic control technology.''

    They count on us—Governor Baliles, I listened with great interest to your statement. How much longer will you allow yourself to be strangled, waiting for the perfect agreement with Japan? That's exactly what they're counting on—our impatience.

    For 30 years the same negotiator in Japan negotiated with the U.S., who negotiated the 1952 agreement. Ours turned over time and time again. Dr. Cooksey asked, ''Is this Administration sophisticated enough or skilled enough to negotiate?'' Yes, we now have people in place, we now have negotiators that have the seasoning and the understanding. Do we have the collective will to wait it out? Do we have the collective will to stand up and to understand what it is Japan really wants—to let this competition that is gathered at this table chew itself up while they hold us back from that huge capacity that exists beyond Japan?
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    Once again, as in the 1930s, Japan wants to be the funnel through which cargo and passengers move from the Pacific Rim to the rest of the world and into the Pacific Rim from the rest of the world. We should not allow them to be the gatekeeper in aviation trade. We have got to have the political will and the wisdom and the strength and the collective energy to stand up to a time-honored practice.

    I would say, Mr. Smith, your predecessor, when you acquired Flying Tigers, led the way for the great leap forward that American carriers and cargo and passenger have made in the last decade in turning around our disadvantaged standing with Japan by fighting them toe-to-toe, point-for-point, operating-right-for-operating-right that they refused to allow us to exercise in that marketplace.

    That's their strategy again. They know we're going to tire. They know we're going to weaken. They know that U.S. carriers are going to fight each other for access to that market with our blinders on to what lies beyond—the enormous energy of 1,250,000,000 people in China that is exploding with growth, exploding with economic energy, spilling over.

    Hong Kong sits there with $65 billion in capital reserves investing in $25 billion new airport. They'll pay it back in 5 years. And we should be denied access to markets like that? That's nonsense.

    I see all of you as innovators, creative minds. You've built your carriers. You've done extraordinary things in the U.S. marketplace. We still fly half of all the passengers in the world in the U.S. marketplace. But that won't be the case for very long. With 600-plus million boardings this year in the United States, a $5 billion market between us and Japan, that's going to double. World passenger traffic is going to double. But there is going to be more competition, and we've got to be in that marketplace, and we should not be there with shackles on, with tethers to our creativity, and with restraints on our ability to compete.
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    I've listened with great interest to what you've said, each of you, but take a lesson from our past. Flying beyond and code sharing beyond, I think it is demonstrated over and over again that when you can fly beyond you get the greater benefit.

    Why should you be constrained to code share beyond? Why should our great cargo trade be constrained because the Japanese say, ''You know, we're just a struggling little country. We can't allow you into that marketplace yet. We're not ready to compete''? That's not true.

    I don't have a question, just a homily.


    Mr. OBERSTAR. Thank you.

    Mr. DUNCAN. Thank you, Mr. Oberstar.

    Mr. LaHood?

    Mr. LAHOOD. Thank you, Mr. Chairman.

    I think this is a very, very fine hearing, and I commend you for having the most distinguished witnesses I think we've had before our subcommittee in a long time.

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    I'm always surprised, and I know I shouldn't be, by the encyclopedic knowledge that Mr. Oberstar has about these matters. It's always very enlightening.

    You're also very good. I figured you'd probably use your time to expound, which you did, and then ask two or three questions. You have a very good way of doing that, too. But I always learn a lot from listening to what you have to say, Mr. Oberstar, particularly on these matters.

    I think it would behoove the Administration to look to you as somebody who could help with these negotiations. You'd be an excellent Secretary of Transportation or FAA administrator, and I have no doubt that you would solve these problems very expeditiously if you were in that position, but I'm not announcing your retirement here today.


    Mr. LAHOOD. Mr. Crandall, are you opposed to the ticket tax that will expire and then be reimposed under the tax bill that the Ways and Means Committee is considering now?

    Mr. CRANDALL. I think it's an inappropriate way to finance the FAA. The fact of the matter is that a ticket tax, which simply collects money as a percent of revenue, does not require the operator of all aircraft to pay the same price for the same service. Most of the other countries in the world—I think I'm right in saying all of the other countries of the world use a cost-based formula for financing their air traffic control system. That is what we'd prefer.
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    The commercial airline industry has said we are perfectly prepared to pay the full cost of operating the air traffic control system, but we would prefer to pay it on the basis of a cost-based formula so that each operator of an airplane receiving the same service would pay the same price.

    Mr. LAHOOD. How about the other gentlemen?

    Mr. DASBURG. My position is the same as Mr. Crandall's. I would go a step further and suggest that the air traffic control system, if not privatized, should somehow or another be impacted directly by its users, either in the form of a board or some other mechanism.

    I believe that the commercial expertise of the airlines influencing the environment of the air traffic control system would improve efficiency and effectiveness, drive down ultimately the cost of providing air traffic control, and matching that with user fees would be something that Northwest Airlines would totally support.

    Mr. GREENWALD. I'd like to seize the moment and demonstrate unity for the first time this morning. I would agree with my colleagues on this issue.

    Mr. LAHOOD. What do all of you think about the idea that it sounds like, for me, listening to you, that Northwest is in first class, United is in the coach position, and I'm not sure where American is at with respect to this or the others, but do you think if all of you were united on this issue of how we deal with Japan that that would help us in our negotiations with them; the fact that you're in competition with one another and have differing views on this leads us not to be able to really convince the Japanese of the value of this?
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    I mean, it's obvious there's competition here and there's a difference of views, and the fact that one airline can—is in a better position over the others.

    I mean, if all of you were united, wouldn't that help our cause with our folks in transportation that are trying to lead the charge on this?

    Mr. GREENWALD. I'd like to make an observation here that it's tough to meet a standard of 100 percent in this case but we're pretty close. When you count, you're only looking at three of us to ask your question, but if you were to add up the U.S. carriers that fly internationally and add to them the Japanese carriers who fly internationally, I repeat, I believe there are only two who would not support this plan if it could be implemented as outlined by Governor Baliles.

    Mr. LAHOOD. And who are they?

    Mr. GREENWALD. One in the U.S. and one in Japan.

    Mr. DASBURG. My response is that clearly, if we had a consistent position among us, it would be easier for the U.S. side to negotiate. That is for certain. However, I would like to add a footnote to your observation about first class, coach, and what have you.

    The fact of the matter is that United Airlines acquired their rights from PanAm, and that was a commercial transaction in the 1980s after the industry was deregulated, and so therefore the price they paid for what they acquired reflected the fact that PanAm did not have the authority to Chicago. So we do have an open market here and you know what you're bidding for and you know what you're prepared to pay for those assets.
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    Mr. CRANDALL. From the confines of the belly compartment—


    Mr. CRANDALL.—with respect to the Pacific, I would simply make this observation: I think you're perfectly right. If the U.S. airline industry were united on this and other issues, it would be much easier for the State Department and the Department of Transportation to make these deals, and this isn't—that isn't true only with respect to Japan, it's true around the world.

    One of the underlying realities, as Mr. Oberstar pointed out, we're about half the world's market. We also are essentially the only country with many large competing airlines.

    Now, that has some benefits to the country because we're always out to ding one another, and that produces lots of good service competition and price competition. It is not particularly helpful in international aviation, where each of us pursues our own interest, and that's what competitors are supposed to do.

    So I quite agree with you. It's a complication. I don't have any way to resolve that except to observe that I hope whatever deal is done will allow us to advance to at least the coach compartment.

    Mr. SMITH. I'd just like to make the observation that as long as the aero-political world is governed by the 1944 Chicago Convention bilateral treaty model, there will always be have's and have-not's, and the inability of airports and the air traffic control systems to expand without regard to constraint simply exacerbates that.
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    To some degree, many people take advantage of that, as Mr. Oberstar pointed out about Japan's Narita Airport, which serves a city of 15 million people. We have in Memphis three jet runways to their one for a community of 1.25 million, and the mightily-congested Heathrow Airport isn't particularly more congested in terms of take-offs and landings than Memphis is.

    So if you take those two things, you're always going to have have's and have-not's. In the case of Japan, one of the reasons that we have had such a tough time is because the Japanese have successfully exploited the differences of opinion among the U.S. carriers, and, most importantly—how shall I say this delicately with my friends to the right, a number of whom have changed their position at least once, and in one instance twice, and with that the Japanese have been able to, in essence, stall anything. That's the major reason they've been able to stall everything.

    You ask why the Administration—Dr. Cooksey did, about whether they were able to do it. I think at the end of the day they are able to do it. It has been the fact that the political will to do it has been lacking because there hasn't been uniform support by the U.S. industry, and the Japanese have exploited that enormously, as have other countries in trading situations around the world. That's one of our biggest problems.

    Mr. BALILES. Your question was whether the negotiating position of the United States would be enhanced if the industry were united on these questions. Without question, that would be the case, but it should not be any surprise to any member of the committee or anyone else in the country that this is a very diverse industry, and because of its competitive nature it is rare to find unanimity on very many issues. All you have to do is to look at the U.S.-U.K. You will find this industry with different partners on different issues at different times throughout any set of negotiations.
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    But to the extent that the industry can be together on a number of these issues, clearly that's helpful. But I would also point out that the negotiating position of this country, it seems to me, should be what is in the best interest of the country, not just specific carriers or specific regions or cities. What we're talking about is the very competitive airline industry, the cities and States and regions of this Nation, along with the business travelers and the tourists. They're all involved in this transportation picture.

    It seems to me that we should be negotiating on what is in the best interest of the Nation, and in my judgment that includes the carriers but should not exclude other parties of interest.

    Mr. LAHOOD. Mr. Chairman, let me just conclude by saying, as someone who has tried to encourage bipartisanship around here among 435, I would encourage all of you, which is a much smaller group, and probably not any less diverse, to get together, get your act together, try and work together, which I think would encourage our country then to be in a much better position to negotiate with Japan.

    Thank you very much.

    Mr. DUNCAN. Thank you very much.

    Dr. Ehlers?

    Mr. EHLERS. Thank you, Mr. Chairman.
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    It's very tempting to ask Mr. Smith if he might have a few planes available to fly in the Third Marine Division.

    Mr. SMITH. We'd be happy to make them available.


    Mr. EHLERS. But I won't get into that.

    I will not ask a question, but just respond to the points raised by Mr. Oberstar and Mr. LaHood, and I couldn't agree more with them.

    It's excellent to have competition in the air. I don't think your competition should be in the halls of Congress or with the FAA. I think there is great advantage to unity in this.

    I recognize there are have's and have-not's, and I know in this particular case, as we said, one is first class, one is cabin or coach, and the third we stumbled at a term. I would suggest ''waiting on the tarmac for clearance.''

    The point is simply that there are have's and have-not's with Japan, but there are also have's and have-not's in other countries, and I think, the have's and have-not's are pretty well equitably distributed at the moment, perhaps by intent, perhaps by historic accident.
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    You're going to continue to perpetuate the have's and have-not's situation if you don't work together and support the Federal Government in an attempt to have open skies where, in fact, you could concentrate on competition in the air rather than competition with the FAA or the Congress.

    So I do encourage you to work together, and I extend it beyond just the passenger industry. I think all of you should be very supportive of Mr. Smith and his problems. I think it takes a united effort from the entire industry, not just the cargo industry, but united effort of the passenger and cargo industry working together.

    So I encourage you. I cannot conceive of any reason—as I said in my opening statement, Mr. Chairman, we have to work from the standpoint of what's best for the Nation and its citizens, not what's best for a particular airline. And I cannot conceive of any situation where it would be in the best interest of our Nation to give up beyond rights, to give up something we already have, in the hope of getting something that would benefit only a few.

    I think we have to hold tough on this and really say we've got certain rights now, we want to extend those rights, we want open skies to the maximum extent possible, and we're going to work towards that, and by doing that it will benefit everyone.

    It's sort of an Adam Smith approach that if we work together and have a competitive atmosphere, then the invisible hand will guide us to the maximum benefit of all. I think that's got to be the real guiding principle.

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    So I hope, Mr. Chairman, that the industry will work with us as we attempt to achieve what I think has to be achieved if we're going to have truly free trade, truly free commerce, and truly free flight throughout this world.

    Thank you.

    Mr. DUNCAN. Yes, Mr. Smith?

    Mr. SMITH. Mr. Ehlers, I just wanted to make one point. Obviously, I was trying to be humorous about the Third Marine Division, but there are very real U.S. security interests here as it applies to the all-cargo area. We at FedEx have our entire intercontinental all-cargo fleet in the civil reserve air fleet, and I'm sure that the Secretary of Defense and the Air Force would tell you that the United States cannot mount out a military engagement without access to the civil reserve air fleet.

    We flew half of all the missions that went into Desert Storm flown by civil aircraft, which was about half of all the cargo lifted into Saudi Arabia. The Japanese refusal to let us exercise our beyond rights has meant that we have not been able to add long-range intercontinental freighters to the extent that we would like to have done so and which we would have had the requirement for had they not precluded us, and every one of those is a net loss to the mobility capabilities of the United States. So there is a very real national security interest here. That's before you even get to the issues of the Gibralter-like control of the high-tech trade in the next century that this kind of unilateral constraint represents.

    Mr. DUNCAN. Thank you very much, Dr. Ehlers.
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    Mrs. Granger?

    Ms. GRANGER. I'm sorry, but I had to leave after Mr. Smith's remarks, so I have no questions at this time. I have your remarks in their entirety, and I assure you as I ride on Mr. Crandall's airline tomorrow I will read all of them and study. These are very, very serious subjects you're talking about and we'll take them very seriously.

    Mr. DUNCAN. Thank you very much.

    Mr. DeFazio?

    Mr. DEFAZIO. Thank you, Mr. Chairman.

    I think at least we could probably back up for a minute and agree on one thing here, which is that we would have unanimity on the 1987 legislation that says the U.S. is not going to trade off cargo versus passenger. I would assume we've gotten agreement here that we're going to support—I think Mr. Smith's position is very clear, and we don't need to be making trade-offs on the passenger side in order to get him the rights that he's entitled to by the 1952 treaty. Is that assuming too much?

    Mr. DASBURG. I agree with that.

    Mr. DEFAZIO. Well, that's good. Mr. Crandall?

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    Mr. CRANDALL. I agree with that.

    Mr. DEFAZIO. All right. Well then the U.S. perhaps has a strong position there, and perhaps before we enter into the part of discussions where we know the Japanese have something to gain, which is passenger, we can get that resolved and off the table and not even make it subject to conditions.

    Now, I guess I'm just a little—just wanted to come back to this issue of the code sharing, the ANA access. I guess Japan has only one other airline, and all they want is access for that one other airline to the U.S., and once they get that, although the fine point was made about antitrust that it won't give them everything they want until they get the antitrust exemption, we can hold that out, I don't see why the Japanese—first, I'm not confident they would live up to the spirit of the agreement, but if they did live up to the spirit of the agreement and we negotiated it somehow that it was—it seemed like it was mutually beneficial, I'm not sure that's going to work.

    I mean, once ANA gets access to the U.S. and once our carriers get code sharing there, I don't understand, what further we can do to move toward open skies.

    I mean, it seems like the Japanese are on the verge of getting everything they want. They've only got two airlines they care about. We have a number. Maybe we'll even have a new international entrant into our market in the not-too-distant future. I mean, who knows? I can't anticipate that in our country.

    And I'm not quite so sanguine that the code sharing, and particularly in response to Mr. Oberstar's statement, is going to get us the benefits we want. It's a lot like, some other things that have happened to us over time in trade where, a lot of the value added in some of our products is being done elsewhere, but, gee, a U.S. company still gets to market the goods here so they get the mark-up.
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    Well, if we get the U.S.-Japan leg, and then we code share into the huge market in China, I'm not so confident that that's a great deal, and I'm not sure again, under the scenario I'm hearing, that we are going to get the beyond rights and the access to that under this sort of scenario because, again, the Japanese aren't going to have any motivation once they get ANA in here to really allow us to go and get the beyond rights, as opposed to the code sharing. I'm just—it seems to me this is going to be one heck of a big agreement that's going to get—if it's going to work, it's going to have to get us almost all of open skies.

    Mr. DASBURG. Sir, I agree with you. I believe that if we let ANA in under the 1952 agreement or some modified version of the 1952 agreement, the negotiations are over. They will have what they want and we will be frozen out, and decades from now we'll be trying to find leverage to negotiate with the Japanese.

    Mr. GREENWALD. I think you said a phrase which is really pertinent. I believe that there is a big deal to be had that meets the definition of almost open skies, and I don't think we should say yes to anything short of that. I agree with that.

    Now, I pose a question for anybody who believes that we should stay the course and wait until a time when the Japanese are ready for open skies. When is that? Is it six months from now or 6 years from now or six decades from now? We see no evidence that that date is some date in the near-term.

    And so when people say, ''Take this big deal or take open skies,'' those aren't the choices, I suspect. I don't know with certainty, but when you're negotiating you sort that out.
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    I think our choices are, ''take a big deal or get nothing and wait for some long-term and undefined period when somehow, in some fashion, the Japanese are ready for open skies.''

    Now, these are all opinions, but those are the issues.

    Mr. DEFAZIO. My concern is, again, in our history of dealing with the Japanese, as Mr. Oberstar pointed out and I think Mr. LaHood and Mr. Ehlers pointed out, by understanding our system a lot better, or at least acting in understanding it better than we do theirs, they come and they can try and divide us. They'll try and divide cargo versus passenger. They'll try and divide United versus Northwest versus American, and figure, ''Well, we'll get these different people at certain times to put certain pressure on certain decision-makers, and we'll weaken their overall position until we get something that's more to our advantage.''

    I'm concerned in this vision of the big deal that isn't open skies what is the—what's not there, and is that going to be a very critical component? I think the beyond rights are—I mean, if you look at China as, a market that is being looked at to the future of tremendous size, it's a lot to give away if we are, in fact, giving it away.

    Mr. CRANDALL. It's not at all clear, Mr. DeFazio, why we should fly to China by way of Japan.

    Mr. DEFAZIO. Yes. Okay.

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    Mr. CRANDALL. It seemed to me for a long time that the U.S. Government's dedication to enhancing both this country's commerce with Asia and opportunities for its airlines, that one of our objectives ought to be not to better serve China by way of Japan, but to stop using the scarce resources of Japanese landing rights to serve China and fly there non-stop.

    Mr. DEFAZIO. Okay.

    Mr. CRANDALL. Which we are prepared to do tomorrow, but the United States has made no progress, and, so far as I know, no serious effort to get additional nonstop rights to China.

    Mr. DEFAZIO. Okay. That's an excellent criticism and point.

    Mr. CRANDALL. In fact, I would have to come back to a point that Mr. Greenwald makes, that there has been a lot of discussion about insisting on our rights under the 1952 agreement. The fact is, we are not prepared to insist on our rights under the 1952 agreement. We're not prepared to sanction the Japanese. That is what Mr. Smith has been complaining so vigorously about, and I think quite righteously.

    The fact remains that if an agreement is in place and we are not prepared to sanction the Japanese for not honoring all the details of that agreement, then I would agree with Mr. Greenwald that it may very well be six decades and there will not be an open skies agreement with the Japanese, which means that while we will not have triumphed over the Japanese, it also means that a great many U.S. cities won't have service, a great many U.S. consumers will pay much higher fares than they should, and those U.S. airlines that do not fly to Asia by way of Japan today will never have that opportunity.
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    Mr. DEFAZIO. But, I mean, your point about China is well-taken, and it's one—I mean, obviously we all kind of get locked into what's exactly before us, but, I mean, something that was technologically required before is no longer required. Why not? I certainly question—I'm going to put to the Administration, which is: what are their plans for discussions about more direct access to China?

    Mr. CRANDALL. Sure. I mean, today only two U.S. airlines are permitted to share China. Both of them do so by way of Tokyo. Hence, there is no opportunity for us to fly nonstop from Chicago to any Chinese city.

    Mr. DEFAZIO. Yes.

    Mr. CRANDALL. Or from Dallas/Fort Worth to any Chinese city.

    Mr. GREENWALD. I just wanted to make two quick points.

    The first is that I do want to make it clear that in the shorthand description of a big deal I don't think we, the United States, should say yes to any big deal that limits beyond rights to existing use of those beyond rights for passenger carriers, Northwest or United.

    I believe, however, that, in an exchange for something that is well worth exchanging; some form of a growth plan for beyond rights that exist would be a fair exchange and a growth path that is well above realistic expectations of what any of us would be using in the time frame of the next several years.
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    The second point I want to make is I think we can take some console when looking back on how the relationships between the U.S. and Canada occurred. We waited 15 years, and when we finally reached an agreement we settled for something short of full open skies with Canada.

    Mr. BALILES. Congressman?

    Mr. DEFAZIO. Yes?

    Mr. BALILES. A couple of observations. A little perspective might be helpful here, it seems to me. This country, as a matter of public policy, for decades has been insisting on open markets, free trade. It has taken this country 50 years to expand GATT to the point where WTO is now formed, and even that does not yet embrace all services and commodities and other products.

    It seems to me we're embarked upon a similar course in this whole field of aviation transportation.

    Sometimes I think we make mistakes in confusing strategy with tactics. The strategy is for that open market and large markets, freer markets. The question is how to get there.

    It seems to me that the goal really should be the larger market. This is an important aviation marketplace that exists between the U.S. and Japan, the two largest international economies, and one could argue most important on the face of the earth, and yet served by a very restricted aviation agreement.
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    The question is whether it can be changed, whether it can be expanded, whether benefits can be extended to cities and regions not now being served and other important centers such as Chicago and New York and other under-served areas, including Newark and others, can be expanded.

    It is interesting, Congressman. I was in your State last year, and a computer executive was complaining about the inability to get to Japan on short notice. She's a computer executive. She said on short notice she has to fly south to Los Angeles to get a flight to Japan, flying back over your State on the way to Tokyo. She is very definitely interested in an expanded aviation marketplace between the two countries.

    As I understand it from my trip last week, the Japanese are now interested in an increase in the length of that agreement and the time that would be provided, an increase in the frequencies between the two countries, an increase in the designations, an increase in the beyond rights, and an increase in code sharing opportunities, including the ability of U.S. carriers to code share with third country carriers.

    That is a different proposition than what we were talking about just several months ago, so the question is whether this country is willing to sit down and commence negotiations. If we don't talk, we will never know what kind of an expanded marketplace can be created.

    It seems to me that the economic studies done last year point out that in this country, alone, an expanded aviation marketplace could generate as much as $9 billion a year in new economic growth for the cities and regions of this country. Cities such as Houston, Orlando, Cincinnati, Miami, St. Louis, Salt Lake, and Boston are among those that need service, can't get it, but carriers are willing to provide it. They should be given that opportunity to participate.
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    Mr. DEFAZIO. Governor, if I could, I mean, I don't think there's much philosophical disagreement. The question is: given our track record with Japan, given the tactical or strategic moves—everyone wants to look at these negotiations we have to go through—how are we going to get to that point?

    My concern about what I heard from Mr. Greenwald is that, if we have contingent or negotiated future expansion of beyond rights, but ANA gets everything they want now, the Japanese will just simply say, ''Oh, you misunderstood our agreement, and actually you can't have those beyond rights.'' They've done that to us hundreds of times.

    So it needs to be something that is quid pro quo all the way through it. Every time one country gets a step up, the other country gets a step up at the same time. And if we don't get our step up, they don't get theirs. But if they get their major concession up front and we get a continuing series of theoretical honored commitments later, they won't be honored.

    I love the Japanese and they do a very good job at taking us to the cleaners, and I'm just tired of being taken to the cleaners. I mean, great culture, but we just have to get a little smarter in dealing with them.

    So I don't think we disagree. You're just taking a little—I just don't want to say more naive, but, you're a good advocate for your position.

    My time is up. Thank you, Mr. Chairman.

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    Mr. DASBURG. May I—

    Mr. DUNCAN. Yes, sir.

    Mr. DASBURG. Thank you. Mr. Crandall spoke briefly about China, and Mr. Greenwald spoke briefly about constraints on fifth freedoms—that is, some formula that would allow some future growth.

    The fact of the matter is that, for the most part, airline economics dictate that a hub and spoke operate with a rich mixture of local passengers and connect passengers, and, indeed, you often open markets by virtue of the fact that you have a hub and spoke that is carrying a rich mixture of local traffic.

    We have open markets in Asia as a result of having a hub-and-spoke system in Japan where our system carries a substantial number of Japanese travelers between the two countries, which helps the economics of the entire system work.

    We expanded into China on that basis. We have an operation in China that is growing, that is serviced out of Japan. As that operation grew and became successful and profitable, we, indeed, began flying to China directly from Detroit, and indeed fly three times a week between Detroit and Beijing, but we opened that market up by first flying that market over Japan, where it was an economic thing to do.

    So the fact is there are steps in opening markets, and fifth freedoms to Northwest Airlines, at least, under our view of the economics of this industry, are integral to ultimately having direct flights to those same Asian countries.
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    Mr. DUNCAN. Yes, sir. Mr. Smith?

    Mr. SMITH. I just wanted to make one clarification here, Mr. Chairman. There are actually three U.S. carriers authorized to fly to China, one of which is FedEx, and in the cargo business the issues that John Dasburg was talking about are hugely more important because cargo, again, only goes one way, and trade flows sometimes are significantly imbalanced.

    Today we have an enormous trade imbalance with China, which means that there is a huge amount of air cargo moving east-bound, not as much moving west-bound. But over the last few years our exports to Japan have increased enormously.

    So, longer-term, for us to be successful in both China and Japan, we have to be able to eclectically put those markets together utilizing third and fourth and fifth freedom traffic flows.

    If you don't, in the cargo business, at the end of the day we'll be driven out of the market, particularly when you understand that the cashment for cargo is much greater than passengers, and by that I mean people from the east coast aren't going to be real thrilled generally about going to Frankfurt by way of Japan, but cargo could care less whether it comes from Frankfurt into the United States by being routed on a much more circuitous routing.

    So, again, cargo has to have the ability to mix beyonds or fifth freedom traffic and third and fourth freedom traffic rights, and to take account into these unilateral traffic flows in order for U.S. carriers to be competitive. Otherwise, we'll be in the same place we are in the maritime industry where all of the United States trade is carried by foreign folks.
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    Mr. DUNCAN. Well, thank you very much.

    I know that, as phenomenal as the growth has been in air passenger traffic, air cargo traffic has really been exploding, also.

    I've got a couple more questions but, Dr. Cooksey, did you have another question?

    Mr. COOKSEY. Just a question, really not to the panel, but I can't help but wonder, and I certainly feel that there's certainly probably someone here who is from Japan or representing Japan. It would be interesting to hear their position that we've been bashing all day. Number two, if they're not here or not willing to step forward, I think it might be worthwhile to have a hearing so that we could hear their position, even though we're not going to negotiate it.

    If we cannot negotiate something with Japan—and this is a rhetorical question—maybe consideration should be given to having another hub in Asia so—

    Mr. SMITH. You can't do that, Doctor, because of the demographics of the area. I mean, as I mentioned in my presentation, or during my talks, even as late as 2015 the Japanese economy will still be the vast majority of all economic activity in Asia. Now, you get into the 2020 and 2030 area, China may well be the largest economy in the world, but that is a long way off.

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    Until that time comes, at least in the case of cargo, you have to be able to intermingle third and fourth freedom Japanese traffic and beyond traffic to be able to stay in the Asian marketplace; otherwise, you'll be pushed out of the Pacific.

    Mr. COOKSEY. That may be the case, but I can't help but think that Northwest and United did either have the foresight or the luck—and I'm sure they feel like it was stealth and cunning—to be in Asia many years ago before anyone else was there, and perhaps that same foresight can be used to get into whatever the next economic market should be.

    Mr. SMITH. But that is China.

    Mr. COOKSEY. Sure. I feel like it's China, too. So maybe it should be Shanghai or Singapore.

    Mr. DUNCAN. Thank you very much, Dr. Cooksey.

    Mr. Dasburg, let me ask you this. We've hinted at it or gotten around the edges, especially when Mr. LaHood talked about the first class and the coach and so forth, but some of your competitors and some people feel that you're advocating total open skies because you're in the catbird seat right now and that you really want the status quo, and you heard Mr. Greenwald say that we could probably get 90 percent of what we want now and we could enter into a big deal, and that it might be—he even said six decades before we get total open skies.

    How do you respond to that?
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    Mr. DASBURG. That's a cynical view. Our view is that today, if ANA is allowed under the 1952 agreement to have 1952 rights, that the fact of the matter is the negotiation is over. If we can get essentially the equivalent of open skies, if this bundle of things that everyone's talking about is open skies for U.S. carriers so we don't end up with two Japanese carriers having full access to North America and whatever we end up with stalemated for decades and decades to come, then I'd like to see that negotiation and that term sheet. I just don't believe that that's possible. It's an interesting hypothetical, but I don't think that's going to happen. I think the Japanese are too shrewd for that.

    My own view is that what will happen is they will offer up—they will request ANA, they will do everything they can in negotiation to curb my fifth freedom rights. If they are successful, that's the last time we'll see them other than when we are in there begging for a crumb.

    I feel very strongly about that. We've been in that market since the history of the—since the 1952 agreement. In fact, we were the first carrier after World War II. Don Nyrop negotiated that agreement. Northwest Airlines has acted in reliance on that agreement, invested billions of dollars, and I welcome the competition of my colleagues, but not at my expense.

    Mr. DUNCAN. Mr. Greenwald, are you about to enter a code sharing arrangement with ANA?

    Mr. GREENWALD. We believe that alliances are good, good for United, good for the other partner, good for the flying public, and we're continuing to explore additional Asian alliances.
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    Mr. DUNCAN. Government Baliles, you headed up a commission, I think in 1993, to come up with ideas or suggestions about making the U.S. aviation industry more competitive, and so you've studied all of this in this country, and now you head up this new group studying a new relationship with Japan. You just—I believe you said you just came back from Japan.

    You seem to think, from your testimony here today, that Japan is just now ready to greatly expand what they have allowed us up to this point. Is that accurate?

    Mr. BALILES. That is correct. That's my perception. That's what I gathered from a week of discussions with rather high-level officials in both government and business.

    Mr. DUNCAN. And you know that in the past times they've said they didn't have the capacity to allow great expansion of either flights beyond Japan or more flights from the U.S., but Mr. Oberstar got into that briefly. Do you think there is sufficient capacity to have a great expansion of both flights from the U.S. and flights beyond Japan?

    Mr. BALILES. Yes. I might point out and reiterate a point I made in my opening remarks. I pointed out that I thought any deal between the U.S. and Japan had to include increases in beyond rights.

    The point about capacity is well taken. If you take the label ''open skies'' and say that this agreement is going to be put in place, and even if you were to be able to get the Japanese to agree to such a labeled proposal, you would still have capacity constraints at Narita.
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    The physical expansion of the runways there and in Osaka will take time. I believe the Osaka second runway and crossway will be completed in the year 2007. The additional capacity expansion at Narita will take several years.

    So the point is that capacity constraint is there, regardless of whether we have a new agreement or whether we continue to enjoy a stalemate that now exists.

    I did point out to the Japanese in my discussions that I thought they were overlooking some opportunities to increase slots at Narita. For example, it's my understanding that Narita is capable of receiving about 25 flights per hour, while at other comparable airports around the world, including those here in this country, they can take about 48 per hour. So there is some additional capacity expansion there—not a lot, but some. And when they complete the infrastructure investments that Congressman Oberstar alluded to, there will be additional capacity.

    Mr. Chairman, sometimes I get the feeling that we are prisoners of our own terminology. Words mean different things to different people. But I, too, have served in a legislative body, and, like you and others, I appreciate the ability to recognize opportunities for an agreement between two different positions.

    To me, I don't think the consumer or the business traveler cares what the label is as long as there are expanded service opportunities between the two countries, greater competitive choice, and reduced fares, and I think a large expanded aviation agreement between the two countries will produce those economic benefits for the consumers and businesses of both countries. I think we ought to worry more about expanding the size of the market than worrying about the size of the market share.
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    Our industry will compete wherever it has an opportunity, and do so effectively, I'm confident.

    Mr. DUNCAN. Of course, that's the point of all this. You said our industry will compete wherever it has the opportunity to do so. Do you think it's going to be necessary for Chairman Shuster to introduce the legislation that he talked about earlier?

    Mr. BALILES. Mr. Chairman, I don't believe we will know the contours of any new agreement unless the United States and Japan sit down and commence formal negotiations. As we all know in this room, over the last year there have been a series of informal discussions, but that's not formal negotiations.

    And I don't believe that this country can or should negotiate an aviation agreement that is adverse to the interests of this country.

    And, as I stated earlier, I believe that includes cities, states, regions, businesses, and tourists, as well as carriers.

    I'm confident that, with what I perceive to be an increased willingness, almost anxiousness on the part of the Japanese to sit down and commence new negotiations, I believe we conclude such an agreement that will be in the best interest of this country.

    Mr. DUNCAN. All right. Well, I've been here long enough, and I think you all have, too, and I thank you very much. This has been a very interesting hearing. Thank you very much.
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    That will conclude the hearing.

    [Whereupon, at 1:14 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]

    [Insert here.]