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THE RECENT BREAKDOWN OF AVIATION NEGOTIATIONS BETWEEN THE UNITED STATES AND THE UNITED KINGDOM
Tuesday, February 15, 2000
House of Representatives, Committee Transportation and Infrastructure, Subcommittee on Aviation, Washington, D.C.
The subcommittee met, pursuant to call, at 2:00 p.m., in room 2167, Rayburn House Office Building, Hon. John J. Duncan [chairman of the subcommittee] presiding.
Mr. DUNCAN. I would like to go ahead and call this meeting of the Aviation Subcommittee to order.
I would like to especially welcome all of our witnesses and those who have come from quite some distance to be with us.
I am pleased to have our first Aviation Subcommittee meeting of the year on such an important subject as the status of the United States/United Kingdom bilaterals. For years, talks geared towards an Open Skies agreement with the United Kingdom have moved forward at a snail's pace. Both cargo and passenger flights from the United States to Great Britain are still subject to one of the most severely restrictive bilateral agreements there is.
Time and time again, the British have signaled their desire to reach a more liberalized agreement. Each time, we have been unable to reach such an agreement. Recently, the British appeared to signal their willingness to move forward again.
Last year, the United Kingdom granted U.S. cargo carriers fifth freedom rights at Prestwick, Scotland. This allowed cargo carriers such as Federal Express the ability to fly into Prestwick and offload and onload cargo and fly on to other destinations.
At the same time, the United Kingdom signaled its intent to move forward with granting fifth freedom rights at Stansted, England; however, at the recent meetings, it became clear that this position had changed. As a result, FedEx has announced it will withdraw its daily wide body cargo flight into Prestwick and there appear no current hope for cargo liberalization.
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On the passenger front, the issue came to a head when British Airways dropped its nonstop service from Pittsburgh to London. For the first time in over ten years, Pittsburgh did not have nonstop service to London.
Negotiations between the two countries to remedy this situation and to expand the existing agreement began in November, talks continued into early January, and progress seemed to be being made on a mini-deal. Talks were scheduled for late January with indications that an agreement could be reached. However, when negotiations resumed, the British abruptly changed their posture and the talks were called off.
We are now stuck in a situation where only two U.S. carriers have access to Heathrow Airport, the airport where two-thirds of all passengers flying to London want to go. British Airways has at least nine monopoly routes in this market.
These are just two examples of the one-sidedness of this agreement. Some people who fly do not realize how important this issue is. We are the ones being taken advantage of by having fewer choices and higher fares.
Let me also point out that it is not just the American people who are losing out. The British and citizens of other countries who fly between the United States and the United Kingdom are facing these problems also. The British are some of our closest friends, yet in the aviation area, we have some of our sharpest disagreements with them.
I think most American citizens who do not follow this closely would be shocked to know that some of our most difficult aviation relations are with the British, the people whom we have always considered some of our closest allies. We certainly must act to remedy this inequitable situation.
I would like to welcome today our distinguished guests. We are glad to have the Secretary of Transportation with us today. Secretary Slater, it is always a pleasure to see you and to have you with us. We are honored to have you here with us.
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I am also delighted to see Fred Smith as one of our witnesses, the head of Federal Express. Federal Express is a very important company to my home State of Tennessee and in fact, to this entire Nation. We also have Stephen Wolf, Chairman of US Airways, probably the airline I fly the most between Knoxville and here. Finally, we are honored to have Sir Michael Bishop, the Chairman of British Midland, with whom I just had a very nice meeting and who has flown a long way to let us know his views on this very restrictive bilateral.
I would like at this point to also say that we invited the British Government. Although it is not attending, it did submit testimony for the record along with British Airways and other interested parties.
I would like to yield at this time to the Ranking Member of the Subcommittee, Mr. Lipinski.
Mr. LIPINSKI. Thank you, Mr. Chairman, for holding this important hearing today. I thank Mr. Secretary for taking time out his busy schedule to be here to testify today, also Mr. Smith and our friend from England, and also Mr. Wolf.
Mr. Chairman, would you like to interrupt my testimony for a minute and recognize someone else?
Mr. DUNCAN. At this time, we are always pleased to have the Chairman of the Full Committee here with us, Chairman Shuster, for a statement to make at this point.
Mr. Shuster. I thank both the gentlemen.
Mr. Chairman, I am particularly pleased that the decision has been made to have each one of these witnesses testify individually rather than on a panel because I believe what they have to say individually is very, very noteworthy. I thank you for that, Mr. Chairman.
Some years ago, I read where Winston Churchill said when he was asked by his colleagues in the twilight of his life what should our foreign policy be and he said, stay close to America, stay close to America. Of course that is what has happened between our two countries over the years, except on the issue of aviation. It is very, very distressing to find us here today faced with the problems we are dealing with in relation to what is supposed to be our closest ally.
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Last week, the London Times had an article in which they described me as an angry man. I am not an angry man, I am a determined man. I hope they write that. I hope they communicate to the British Government and to British Airways, which seems to control the British Government on aviation issues, that not only am I determined but that we are determined to see to it that we get a level playing field in dealing with British aviation.
I certainly want to commend Secretary Slater. He and I have had several very, very productive discussions about the problems that we face. It is extraordinary that our negotiators went over there in good faith and were snubbed by the British Government.
I have reason to believe that at the working level, the British Government was acting in good faith and indeed, we went over there with well founded expectations that we were going to be able to negotiate a fair deal as it related, not only to the Pittsburgh problem which is perhaps the most outrageous, but to a broader negotiation both with regard to passenger and cargo.
It is my understanding that at the last minute the working level British negotiators had the rug pulled out from under them by the top level of their government because they were dancing to the tune of British Air rather than to what should have been the best interests of our two countries.
You know the numbers as well or better than I do. British carriers control 60 percent of the U.S.-U.K. passenger market. British Airways alone controls 41 percent of that while all of our carriers together control only 37 percent of it. British Airways alone serves 21 U.S. airports, nonstop to and from London. All U.S. carriers combined serve only 19 U.S. airports nonstop. So we have to address this issue.
I was very much struck by the testimony or the information from British Midland, and they are a British carrier, that the current restrictive agreement between our countries results in business fares between the U.S. and U.K. that are 172 percent higher than comparable fares between the U.S. and other European cities.
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Indeed the collapse of these negotiations or the snubbing by the British Government, because that is what it was, was a breakdown that has an impact for both passengers and cargo. The lack of an Open Skies agreement hurts both our country and theirs.
In my discussions with Secretary Slater and in following up, we sent him a letter in which we suggested that he very carefully consider—and I am sure he is—several options, one, revoking all the slots and slot exemptions currently granted to British air carriers at New York Kennedy and Chicago O'Hare; second, prohibiting the British from operating the Concorde to and from the United States—after all, they don't meet our noise requirements; third, rescinding some or all of the current exemptions and the permits that exist under the current bilateral or indeed, renouncing the bilateral.
It is fortuitous that we are in the midst right now of considering major aviation legislation. We passed Air 21 overwhelmingly in the House and we are negotiating with the Senate right now, so this is a vehicle upon which we can work to attach some or all of the provisions that I have outlined here if that becomes necessary. I hope it doesn't become necessary. I hope we can work this out but I am not a bit timid about including this in legislation if that seems to be the best way to go.
To our erstwhile friends in Great Britain, I say I am not an angry man, but I am a determined man. The good news is there are many, many other people in this room who are just as determined as I am.
Thank you.
Mr. DUNCAN. Thank you very much, Mr. Chairman.
Mr. Lipinski?
Mr. LIPINSKI. Thank you, Mr. Chairman.
As I was saying before I interrupted myself a few minutes ago, I want to thank the Secretary for being here, Mr. Smith for being here, Mr. Wolf for being here and the gentleman I just met recently, Mr. Bishop.
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This is a very, very important hearing today. I have been involved in the situation with the United Kingdom and aviation for a long period of time. I remember leading the CODEL there many number of years ago to talk about this subject and not too many years ago, Chairman led a CODEL over there and we discussed and we unfortunately never got anyplace with the British on this situation.
It is really unfortunate because I think that this Administration, particularly under Secretary Slater, has done a magnificent job in opening skies around the world, but they have run into a real tough nut to crack here in the United Kingdom. Unfortunately, I think it is simply because British Air has so much influence on all the political parties in the United Kingdom and the British Government really is not able to negotiate with the United States without the undue influence of British Air.
I am not going to take a lot of time here today. I want to put my remarks into the record, Mr. Chairman. I do want to say though that we have a very significant turnout here in the spectator gallery for this hearing. Obviously, it is very, very important. We have a very good turnout on both sides of the aisle in regards to this subcommittee. I think it demonstrates the great interest that we, the elected representatives of the people, have in this particular area and also what interest the general public has in this particular area.
I would like to put in a plug right now for the legislation that I have introduced with the Chairman of this subcommittee, my bilateral aviation legislation which would give the elected representatives of the people a direct say-so in all these bilateral agreements. Most of you probably know that these bilateral agreements are negotiated by the Department of Transportation which I have the greatest confidence in but unfortunately, we, the elected representatives of the people in the House and the Senate, really have nothing to do with it whatsoever. My legislation would give us an opportunity to be directly involved in this legislation.
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We haven't been able to gain a great deal of support as of yet for this legislation because obviously the airlines don't want anybody else involved in this. The Department of Transportation doesn't want anybody else involved in this either but I still believe as the elected representatives of the American people we should have an official role to play in this.
Mr. Chairman, without further ado, I will yield back the balance of my time and I thank you.
Mr. DUNCAN. Thank you very much, Mr. Lipinski.
Mr. Oberstar?
Mr. OBERSTAR. Thank you, Mr. Chairman.
This is a very important hearing on a very important subject and I am delighted that you and Chairman Shuster have set aside time for the committee to give this careful and due deliberation and a public airing.
The United Kingdom has been our closest and longest ally in many domains. An exception is aviation trade. The U.K. seems unwilling to take the steps that are necessary to be taken to achieve what everyone admits, what any aviation economics analyst recognizes are extraordinary benefits to both countries by broadening our bilateral trade and moving to an Open Skies agreement. This is not a question of getting an upper hand on each side with our most valuable trading partners. It is a matter of balancing the equities of our two markets.
Fifteen years ago when I first began hearings on this subject of aviation trade, the market between the U.S. and the European Union was $10 billion; half of it was with the U.K.. Today, our trade with the U.K. is equal to the entire trade with the European Union of 15 years ago. It is a $20 billion market, half of which is between the U.S. and the U.K.. That is not a market in which you attempt to gain the upper hand or negotiate for favorites.
This is our second largest international passenger market with 17.2 million passengers in the last 12 months. It is the second largest cargo market for the United States. The governing air service agreement between the U.S. and the U.K., Bermuda too, is the most restrictive agreement we have with any of our trading partners.
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It used to be the second most restrictive. The worst was with Japan but we have been able to break through and negotiate a better agreement with Japan than we have today with the U.K..
The Bermuda II agreement limits access to Heathrow, the preferred airport for most carriers, to two U.S. carriers. It limits U.S. cities eligible for nonstop service to London, it caps entry in most markets to one airline from each country. Prior to Bermuda II, U.S. carriers flew 59 percent of the passengers between the U.S. and the U.K.. The British didn't think that was a good idea, they renounced the agreement, it was renegotiated the following year in 1977 which became known as Bermuda II, and the market absolutely reversed.
For the 12 months prior to June 1999, British carriers flew 10.5 million passengers in our market compared to U.S. carriers flying 6.3 million passengers. British carriers have 58 percent of the market, while U.S. carriers have 40 percent. Further, one carrier, British Airways, carries more passengers and serves more airports in the U.S. than all seven U.S. carriers combined. British Airways alone has 41 percent of that market. Seven U.S. carriers combined have 37 percent of the seats.
In another market, we might go to war over that but we are standing idly by benumbed in the past by that terribly important British accent. Well, it is time to speak the same language.
British Airways has 21 U.S. nonstop services, U.S. carriers have 19 nonstops to and from London. The market situation is so bad that Federal Express—Fred Smith, the very talented and brilliant chairman and founder of Federal Express will testify later—announced they are going to stop their operations at Prestwick, Scotland because of failure to liberalize the air cargo agreement.
We have negotiated 43 Open Skies agreements under this Administration, the Clinton Administration, under Secretaries Pena and Slater, who have done a superb job. Our principles have been open entry on all routes, unlimited capacity and unlimited frequency on all routes and flexibility in setting fares and liberal charter and cargo agreements. They apply elsewhere in the world; why can't they apply between the two longest-standing partners in the North Atlantic Alliance.
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When you have a protectionist regime, opportunities are limited. When you have an Open Skies agreement, market growth increases dramatically. Airlines of both countries participate in the growth. The U.S.-Canada market is a prime example. Prior to the agreement that Steve Kaplan, Chief Counsel under Secretary Pena, negotiated—by the way, this Aviation Subcommittee initiated in 1990—yearly growth was 1.4 percent. After the 1995 Open Skies agreement, growth annually was 11 percent, every year 100,000 more passengers are added in the U.S.-Canada market than were present in the previous year.
We are not the only ones unhappy about it. The Times of London has said, ''Bermuda II, brokered in a mercantile past, regulates not just who can fly where, but timing, number of flights, even size of the planes. It was written in a world that assumed that the pie is small and each crumb must be doled out by governments to friends and allies.'' How wonderfully they can write. ''Competition is not a consideration and the customer barely gets a look in and neither does the owner of the airport. BAA is the landlord at Heathrow and is suffering from this trade dispute in the stratosphere. While continental rivals such as Frankfurt and Charles DeGaulle enjoy a passenger boom, Heathrow stagnates with growth of 2 to 3 percent. BA has lost interest in hubs as it has lost interest in the economy passenger. It makes oodles of money flying business class passengers point to point from Heathrow to North America and Asia, but transfer traffic is more of a bother and makes less margin.'' I think that is a very devastating and accurate analysis of British Airways.
The Times goes on, ''It may make sense for BA to shrink its customer base to an exclusive franchise of the international rich traveling direct to London but it is a matter of some concern to the airport which wants more passengers and more carriers. BA is no longer interested in being everyone's favorite airline, just in those who can afford its fares.'' Now is the time to break open that stranglehold.
There are thorny issues on both sides of this negotiation. Never is it simple. Each side must give something but for our delegation to go to London in anticipation of an agreement that had been hammered out in principle in advance and then to be flat turned down is an insult. Our normally mild, thoughtful mannered Secretary was outraged to say the least, and rightfully and justifiably so. Secretary Slater has been, in all matters, a gentleman of the first water.
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If the U.K. fails to come to the table in good faith, our interests are better served in negotiating with those countries that recognize the benefits of Open Skies regimes and that could result in a shift of new gateways and new opportunities to new places in the European community.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Oberstar.
Due to time commitments of witnesses, we must proceed with Secretary Slater at this point. The full statements of all members will be placed in the record and we will come to each member in turn for questions and comments.
Our first witness will be our very distinguished Secretary of Transportation, the Honorable Rodney Slater. Secretary Slater, we are very pleased and appreciative that you could make time to be with us. You may proceed with your testimony.
TESTIMONY OF HON. RODNEY E. SLATER, SECRETARY OF TRANSPORTATION, U.S. DEPARTMENT OF TRANSPORTATION
Secretary SLATER. Thank you, Mr. Chairman.
To Chairman Duncan and also Chairman Shuster, to the Ranking Member of the Aviation Subcommittee, Congressman Lipinski, and to the Ranking Member of the full committee, Congressman Oberstar, to all of the other members of this important group of Members of Congress, it is a pleasure to come before you today. That pleasure is only enhanced by the presence of Fred Smith, the distinguished leader of FedEx, along with Stephen Wolf of US Airways, and also Sir Michael Bishop of British Midland.
International civil aviation is critical to the economic structure of the United States. In that regard, I appreciate the opportunity to discuss our progress in preparing this industry for the 21st Century and how we plan to move beyond Open Skies. I know that today you are particularly interested in our aviation relations with the United Kingdom. I will address that relationship.
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I will say at the outset though that it is a relationship that stands in stark contrast to the worldwide move toward liberalization. I also want to recognize the bipartisan cooperation that has been allowed us to take an industry that was seriously off course at the beginning of the 1990's and encourage its reinvention, working with the captains of its industry, working with members of this Congress, and working with a President and a Vice President committed to putting our economic house in order.
With President Clinton's and Vice President Gore's Open Skies initiative, we broke the mold on bilateral beancounting in exchange for new international aviation opportunities. The fruits of that initiative include 43 new Open Sky agreements, 7 reached in this fiscal year alone, and these Open Sky agreements have resulted in passengers and shippers receiving better and more cost effective access to an ever expanding range of markets.
In contrast then, and actually in stark contrast, to the fast emerging liberalization norm is our aviation relationship with the United Kingdom. Around the world large and small economies are freeing air services from regulatory secondguessing and government market management while the United Kingdom it seems remains paralyzed by a policy of protectionism.
As my testimony makes clear, we have invested a significant amount of time and effort designed to change the restrictive U.S.-U.K. aviation relationship. We have raised the problems with this relationship and graphically represented by the current problem at Pittsburgh, we have raised this issue to the highest levels of government in both the United States and the United Kingdom.
Despite those efforts, however, the United Kingdom continues to desperately hold on to the past as the United States and many, many of our international aviation partners look to the future. The U.K. economy and its consumers and its airlines all are paying for the price of stagnation as economies all around them secure the price and service benefits of competition.
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Achieving an Open Skies aviation agreement with the United Kingdom has been a priority, a top priority beginning in the first days of this Administration. Our focus on that liberalization goal has been constant and we too, Mr. Chairman, have been determined. However, our strategy has also been innovative and flexible.
My predecessor, Secretary Federico Pena, was actually willing to introduce liberalization progressively but the British failed to follow through on their commitment to work with him. In response to the desire of British Airways to enter the world of immunized alliances, I worked with Deputy Prime Minister Prescott to move forward with an Open Skies agreement initially on an immediate basis and then at the request of the British with a transition regime. However, as this Subcommittee is fully aware, the British once again pulled back from liberalization, still grounded in the past rather than being lifted by the limitless opportunities of a new century and a new millennium. The Department then dismissed the application from American Airlines and British Airways for antitrust immunity for their proposed alliance.
Late last summer, the British suggested that liberalization of all cargo be brought to the forefront, a goal that we have been pursuing since the mid-1990's. As I will discuss in more detail later, a willingness on the part of the United States to pursue this sectorial approach was again met with British retrenchment.
We are meeting today in the wake of yet another British failure to begin the dismantling of the Bermuda 2 restrictions with the opportunity to enjoy mutual benefits. I assure you, this restrictive agreement has mutually negative consequences of a reach and a capacity that will affect both of our countries, the United States and the U.K., and our joint interests.
Mr. Chairman, you and I, as well as many, many other members of this subcommittee, share, as we all know, a concern about the British unwillingness to allow the restoration of service to Pittsburgh, but I am sure as you have noted that we also share a more basic concern about the restrictions that constrain the entire U.S.-U.K. aviation relationship.
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At U.K. insistence, we continue to live in a bilateral world where agreement restrictionsm, rather than carrier management initiative, determine the prices that airlines charge, the markets they can enter and the level of service they can provide--all restrictive rather than being allowed to be determined by market forces.
A significant consequence of the inability of airlines to respond freely to market forces is that competition has not and cannot develop as fully as would normally be expected in a market as large as that between the United States and the United Kingdom.
I can think of no more potent an example of the perverse economic consequences of the Bermuda 2 restrictions than the current situation in Pittsburgh. A U.K. airline has left the market and a willing U.S. airline is prevented by Bermuda 2 restrictions from restoring Pittsburgh's link to London.
We have been working in what I believe to be a progressive fashion, working with the British since last fall to find a mutually acceptable exchange of opportunities that would include the restoration of service to Pittsburgh. We had hoped that the issue would be resolved in talks last January. However, unable to bridge mutually exclusive positions in the U.K. airline industry itself, the U.K. negotiators merely reiterated proposals that we already rejected. Even so, additional ideas for possible solutions were posed by our delegation.
On February 4, the British responded to our ideas through their embassy in Washington. Their counterproposal, however, was seriously unbalanced and unworkable. As you know, President Clinton recently raised with Prime Minister Blair the unsatisfactory state of our aviation relationship. In response, the U.K. came back with the same seriously unbalanced and unworkable ideas raised by their embassy.
As will come as no surprise to this committee, I will be letting my U.K. aviation counterparts know that we cannot proceed on the basis that they have put forward.
Protectionism is thwarting progress on the cargo side as well. Again, I am very pleased that Fred Smith is here with us today. Last fall, the British authorized fifth freedom rights from Prestwick for U.S. airlines and indicated a willingness to expand those rights to other points in the United Kingdom. We confirmed the availability of comparable rights for U.K. airlines. However, the British, responding to protectionist pressure from small U.K. cargo airlines, rejected our U.S. offer because it would not permit U.K. airlines to operate within the U.S. domestic market which they know is precluded by U.S. statute. I am personally profoundly disappointed that the British were once again unable in recent talks in London to rise above near term, self-serving arguments against liberalization.
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Your calling this hearing today confirms your deep concern and interest in these issues. I believe that the British, however, should have significant concerns as well for it is their airlines whose entry into the evolving global network of services is being deferred. It is their industries that are being denied improved access to the global marketplace. It is their airports that are in danger of losing their preeminent gateway position in Europe. It is their passengers and shippers that are being deprived of the service and the price benefits of competition. It is their economy that must bear the cumulative burden of all these foregone benefits.
In contrast, the Netherlands market stands as a clear example of the benefits that liberalization can bring about. Traffic and flights have increased significantly under the Open Skies regime between the United States and the Netherlands. This growth has redounded to the benefit of Schipol Airport, KLM, Northwest, the Dutch and U.S. economies. Moreover, much of the traffic that is feeding the growth of the Amsterdam hub would have previously used London as the gateway to Europe and beyond.
Restrictions on the development of a competitive U.S.-U.K. aviation environment are not without more parochial consequences as well. As the subcommittee may be aware, American Airlines and British Airways have applied to the Department of Transportation for code-share authority. As would be the case in any other closed market, the competitive shortcomings in the U.S.-U.K. market have implications for this regulatory decision.
We are processing the application as we are required to do under the terms of Bermuda 2. In deciding on code-share applications, it is consistent Department practice to consider the existing competitive environment and the effects of the proposed cooperative arrangement on that environment. That same approach will be followed in deciding on the American-British Airways application.
I do not pretend that the United Kingdom is an unimportant market. We would not have put forth such effort and such a priority on its liberalization if that were the case. Consequently, we will continue to explore options to bring about a more open and responsive relationship with the United Kingdom, a relationship that this U.S.-U.K. market deserves. In the meantime, we must not and we will not let this impasse divert us from our ultimate goal of progressively moving forward with those partners who share our vision for aviation in the 21st Century.
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As the December Chicago International Aviation Conference made clear, there is a worldwide consensus supporting international aviation liberalization and our strategy is to advance on all productive fronts—bilateral, plurilateral, regional and global—in that regard. Our Open Skies bilateral successes are continuing. We too are determined. We are working on advancing liberalization in regional and multilateral forums such as APEC, OECD and CARICOM, just to name a few. A dialogue with the European Commission could be a prelude to future negotiations of a regional agreement, although true negotiations must await the EU Commission's receiving a full negotiating mandate from the member states.
In Africa, a draft multilateral agreement is being circulated and will be taken up by heads of state of the nations of Africa later this year. As with trips to Central American and the Caribbean immediately following the Chicago International Aviation Conference, I will personally be involved in keeping up the momentum of Chicago in upcoming trips to Asia, Europe, Latin America and Africa.
Remaining ever visionary and vigilant, we have sought to be a good partner with this Congress and with the management and labor personnel of this vital airline industry, to bring an industry back on course, to stretch the bounds of the bilateral aviation system and to craft a vision for a new paradigm to reshape the world of international aviation in the new century and the new millennium. I look forward to continuing that partnership as we work to move from strength to strength in ensuring this vitally important economic sector is able to realize its full potential to grow, to prosper and to support an emerging global economy.
With that, Mr. Chairman, once again, we thank you for the opportunity to be a part of this very important session and discussion.
Mr. DUNCAN. Thank you very much, Secretary Slater.
For the first questions, we will go to Chairman Shuster.
Mr. SHUSTER. Thank you very much.
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I want to thank you very much, Mr. Secretary, not only for your testimony but even more importantly, for the fair and forceful position that you are taking.
I have two questions. My first one is with regard to the bipartisan letter which we sent down to you in which we listed several options for consideration, are any of those options beyond the pale or are they all under very serious consideration?
Secretary SLATER. They are all under consideration and I am sure that over the course of the hearing, there will probably be other options put on the table, but they are all under consideration.
Mr. SHUSTER. My second question is with regard to action. Assuming that we aren't able to resolve this impasse with the British, would you see taking action in a matter of days, weeks, months or years?
Secretary SLATER. In taking action with the British, we will clearly have to explore all of our options. As you know, there has been a conversation now between President Clinton and Prime Minister Blair, so clearly the Department will be working closely with the White House as we decide how we will proceed. That is independent in many respects of what the Congress might do. You mentioned the FAA reauthorization legislation.
Mr. SHUSTER. That is what I am really getting at because we have a golden opportunity here to put legislation on the aviation bill but hopefully it is going to get done in a matter of weeks. So I am going to need guidance from you as to where things stand. If we are not able to work things out, then I am going to have to move to put things in legislation even though I really don't want to. Otherwise, I will miss the opportunity.
Secretary SLATER. I understand. Mr. Chairman, we will definitely stay in touch. Again, I appreciate the timing of this hearing. It does afford us an opportunity to work together and for the Congress to respond as it would deem appropriate. Again, the Administration will also be moving forward to address this issue as well.
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I should say though, that we are working on a number of other fronts on a number of other matters as well. I think I shared with you that this weekend I leave for Asia with stops in Singapore and Hong Kong, Tokyo and Beijing. That is all a part of our effort to build on the momentum of Chicago and to engage the APEC countries in a more liberalized aviation relationship between those countries and the United States. As soon as we return, we then will continue to address this matter. It is a matter of importance to us, we will give it the time and attention that it deserves, but we will, as I think you would want us to do, continue to engage with those international aviation partners who are of like mind.
Mr. SHUSTER. Of course you have excellent people sitting right behind you with whom we have had the pleasure of dealing. I would emphasize as strongly as I know how the importance of negotiating a satisfactory deal in a matter of days or weeks. Otherwise, we will be faced with a legislative solution. I would prefer not to go that route.
Thank you very much.
Secretary SLATER. I understand.
Mr. SHUSTER. Thank you very much, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Chairman.
Mr. Costello?
Mr. COSTELLO. Mr. Chairman, thank you.
Mr. Secretary, we appreciate you being here today on this important subject.
As you may know, the British Government has submitted written testimony to this subcommittee that states that ''The domestic market of the U.K. is essentially the whole of the European economic area and the U.S. Open Skies proposal would give U.S. carriers access to that market while denying U.K. carriers access to the U.S. domestic market.'' I just wonder what your reaction is to that statement?
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Secretary SLATER. Our effort to gain access to the whole European economic market is to deal with the individual countries of Europe. We have enjoyed significant success in that regard. There is the possibility of, at some point, dealing with the EU Commission but as I noted in my oral presentation, you cannot get into full-fledged negotiations until the Commission has been given that authority by the individual countries. We are accessing the European market and we are doing so by dealing directly with the individual countries that make up Europe.
Mr. COSTELLO. You mentioned in your testimony, and just made reference again, to the European Commission on creating a transatlantic common aviation area. I wonder if you would explain that concept to us and give us a status report as to where that is?
Secretary SLATER. Certainly. During the Chicago conference—and Congressman Lipinski, let me thank you again for the wonderful host that you, the Mayor and the entire City of Chicago served as you hosted individuals from 93 countries, over 900 delegates and we really had a very successful meeting— during the course of that meeting, Minister de Palacio, who is the Minister of Transportation for the EU, put forth this transatlantic idea.
Over the course of the meeting in private conversation and then during broader open discussion, we expressed an interest in engaging the EU on the question, noting that still we can't fully negotiate this kind of arrangement until they have negotiating authority and also acknowledging our concern about some of the items of the proposal.
Be that as it may, what we respected about the proposal was that it does seek to take us beyond the bilateral regime or paradigm that has governed international aviation relations since the 1944 Chicago convention, which by the way was a convention that was called together in partnership between President Roosevelt and Prime Minister Churchill. I think that is significant and quite interesting and ironic here.
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That is what we saw as something that was interesting and we are engaging Central America, I am going to Asia to engage the APEC countries, we have also been to the Caribbean. We believe that we can move forward with a paradigm shift where you start to negotiate these agreements more on a plurilateral basis and in some instances quite possibly dealing with cargo or safety matters, you may be able to negotiate these agreements in something close to a multilateral arrangement, global in nature.
Mr. COSTELLO. I have no further questions, Mr. Chairman, but I would like to associate myself with the remarks of Chairman Shuster and that is that we hope that you can bring about a negotiated solution to the problem, but we have a very short window here as far as a legislative solution. So I hope everyone involved realizes that.
Thank you, Mr. Secretary.
Secretary SLATER. Thank you, Congressman.
Mr. DUNCAN. Thank you very much, Mr. Costello.
Mr. Sweeney?
Mr. SWEENEY. Thank you, Mr. Chairman, and thank you for conducting today's hearing along with Chairman Shuster.
I would like to join you in voicing my concern and in noting that I, as well, am very determined to help develop as creative and as swift a solution that provides us better opportunity to open aviation agreements.
You noted in the prior question, Secretary, that an expansion on the current strategy involved look at plurilateral and multilateral negotiations. You have 43 Open Sky agreements, 7 in the last year. I commend you on that, you have done a marvelous job.
If you could, to give me a better sense, without being too specific because I think it is important we give you as much flexibility as we can, explain if you might how and if we will continue to provide certain opportunities for the British in terms of their access. For example, explain if you have considered that we provide British Airways with as many slots as it needs out of JFK and O'Hare and what might be done in terms of a negotiation in order to maybe present a tougher stance on our part. As I understand, the U.K. does not provide the same for U.S. carriers out of Heathrow.
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If you can, explain why the U.S. authorized deals like the Virgin Airways agreement to serve Las Vegas in light of the one-sidedness and if other occurrence such as that may be arising soon?
Secretary SLATER. You actually have two realities you are dealing with. One is a restrictive regime, the Bermuda 2 arrangement in and of itself. It is very restrictive on both sides of the Atlantic. Then you have the inequity of the agreement where, frankly, U.K. interests, especially British Airways, basically has an upper hand when it comes to the relationship with other airlines in that regard. A lot of this relates to access to Heathrow as a major gateway airport.
Our objective is not so much to flip the scales here as much as to level them and in doing so, create an environment that will result in more travel and therefore a greater opportunity for all of the airlines to do better. That is what we have seen in our experiences around the world, where you bring this openness to the process, where market forces drive the process rather than governments and restrictive agreements, that you have enhanced service, lower prices and greater ridership. That is what we are trying to achieve. That is the end that we are trying to achieve.
Mr. SWEENEY. Are there examples of those kinds of agreements that you would point to that you believe will help make all of us a little more optimistic that the U.S.-U.K. aviation relationship is about to be liberalized?
Secretary SLATER. Congressman, I think that as noted in comments earlier, before now you probably had two relationships with our international partners that were very restrictive, one with Japan and then the one with the U.K..
Last year, we were able to enter into a very good agreement with Japan. It is not Open Skies. We have a number of our partners where it is not fully Open Skies, but it is a much better and a much more liberalized arrangement than is the case now with the British. That is the case with Canada, Mexico, Japan and France. They aren't fully Open Skies but they are much more liberal. Therefore, they give market forces greater sway in determining the market and in determining the quality of service.
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You also unleash the magnificent leadership that exists within the industry itself. We have Fred Smith here today, Stephen Wolf and also Sir Michael Bishop. These are individuals who can compete. They just want an open market in which to compete. That is what these agreements are designed to produce.
Where we can, we like to have those agreements fully Open Sky agreements, but as I have noted in my testimony about our dealings with the U.K., we have recognized that we may not be there at the beginning, but as long as we can make significant steps forward liberalizing our relationship with the ultimate goal of getting there, that is an agreement that we can talk about, work on and hopefully consummate.
Mr. Sweeney. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Sweeney.
Mr. Boswell?
Mr. BOSWELL. Thank you, Mr. Chairman.
I do have a couple of questions. I would just comment, not to be making opening remarks, but comment that I too was very disappointed about the lack of results of the conversations between our President and Prime Minister Blair.
Our Chairman made kind of a strong statement about being determined. I can say this, as I listened to that, there are a lot of us who are determined to stand with him on this. Determination ripples through this committee and I trust everyone would be paying attention and appreciate that because it was a sincere statement and I intend to support him on it.
I would like to know what is your view of the importance of air cargo and express carriers given the growth of the E-commerce. I have a couple of follow-ups. You said a little about that but it looks to me like we are giving a lot of attention to the passenger side, which we should, but the other is a very important factor to economies around the world.
Secretary SLATER. Your point is well taken, Congressman Boswell. Let me make mention of the fact that Fred Smith actually spoke to this issue at the Chicago conference. Interestingly, when we went to Jamaica the next week, the minister there, Minister Phillips, quoted almost verbatim Fred Smith's speech and said, ''I want now to move on bringing the CARICOM countries together to discuss the possibility of a cargo aviation agreement with the U.S..''
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A lot of times it may be actually easier to move on the cargo issue because you don't have national carriers necessarily involved, and you don't have all the emotion and sentiment that go along with that. I am making Fred's argument—he makes this argument to us all the time—as we seek, wherever possible, to combine passenger and cargo.
Speaking more specifically to the issue of the value of this industry, aviation, I have often said, is going to be for this country in the 21st Century what the construction of the interstate was for the country in the second half of the 20th Century. The interstate basically connected communities, cities, towns and States together as one across America.
Aviation can do the same thing, not only domestically, but aviation can connect us to communities, towns, cities and nation states around the world, and can do so in a way that is timely, that is efficient, and that is customer-oriented. The cargo industry really speaks to this as it relates to aviation.
In the U.S., we move about three percent of the tonnage of our cargo by plane. It accounts for over 45 percent of the value of all cargo that moves. When it comes to E-commerce and just-in-time delivery, these business philosophies—transportation in general and aviation in particular—become very, very critical.
Just last week, we joined the Council on Competitiveness, UPS—one of Fred's competitors—and a number of other leaders in Atlanta as we talked about the importance of the physical infrastructure when it comes to meeting the demands of E-commerce and how it is revolutionizing the economy.
You would normally think that E-commerce, with the focus on technology, might obviate the need for a strong, physical infrastructure. In fact, the opposite is the case. It requires a very flexible, yet strong transportation system to deliver on the power of E-commerce to make it whole. Transportation is an enabler to E-commerce.
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Sometimes I use the example of being able to order an Omaha steak on-line but you cannot have it delivered to your home from the warehouse or from the meat packing yard without a quality transportation system. We are giving a lot of thought and attention to this issue and it is a critical issue.
Mr. BOSWELL. I appreciate that and I accept your determination to stay on target on that. I am concerned a little bit and I want to continue to express the concern about the carriers—UPS, Federal Express and Express Carriers—to be able to access the markets that are going to be in higher and higher demand. We continue to battle for the Open Skies for them as well as for passengers.
One kind of little nagging question for me is why do we postpone the talks with Hong Kong months ago when it seemed like we were almost on the verge of an agreement?
Seretary SLATER. Your point there is well taken. That is why I am going to Hong Kong. To be quite honest, we thought we had a deal with the U.K. and it was a matter of closing that deal. That is just being honest about it and I wanted my strongest team to be a part of that process.
Not only did we meet here the first part of the year, but we actually made a trip to London. It just didn't happen. Your point is well taken that we could have split up the teams, but I just knew that we had worked hard for this possible agreement and every indication was that it was there to be consummated. That was the case the week before the Thursday meeting and it didn't happen.
I am committed to Hong Kong; that is why we are going next week and we are going to try to wrap that up .
Mr. BOSWELL. Thank you very much.
In closing, Mr. Chairman, I would just say I am very disappointed. I reflect over the arrangements worked with the U.K.. We have been such an ally for so long and I personally have reflection as I am sure many do in the committee. Great Brits come to mind like Wing Commander Hatton who I served with and Captain Notley of the Royal Navy I served with. This is not the way we do business and I would hope we can come to some agreement to get this behind us and continue to work together.
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Thank you.
Mr. DUNCAN. Thank you very much, Mr. Boswell.
Mr. Pease?
Mr. PEASE. Thank you, Mr. Chairman.
Thank you, Mr. Secretary for being with us. I will say quickly in public what I have said to you in private and that is how impressed I am with your professionalism and your capability in all of the transportation areas, particularly today as we talk about aviation, and how grateful I am for the assistance you and your staff have given to me and to my staff.
Mr. Chairman, one brief statement and then just one question for the Secretary. The Chairman knows that I am one of the strongest advocates for free trade in this Congress, sometimes even to the point of getting myself in trouble at home, and one of the strongest opponents of trade sanctions.
My frustration level is probably as close to the Chairman's as anyone's, particularly since I met personally with other members of the Congress with representatives of the British Government last spring in trade and transportation. We discussed a number of issues regarding aviation and were given assurances, for instance, that things at Prestwick would be wonderful, among other things. I see nothing but continued failure to progress.
As a member of this committee, and as a member of the conference committee that is currently dealing with the FAA reauthorization bill, I want you to know that I would consider a number of trade sanctions at this point if that is necessary, including a unilateral renunciation of Bermuda 2, including revocation of landing rights for British carriers at U.S. airports, including prohibition of British carriers' overflight of American air space.
I can't believe I find myself saying those things. I know there will be consequences for it, but the frustration level of our inability to deal with an ally is stronger than I have felt in any trade issue that I have dealt with here in the Congress. I don't want to make your job more difficult by saying those things but I don't think I am far from the consensus feeling in the Congress right now on our relationship with the U.K. on these issues.
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Having vented and said all of those things, can you tell me what is happening with the cargo issue, particularly at Prestwick, if there has been any change in the situation there, and what we can expect?
Secretary SLATER. First of all, let me say thank you for your comments and the expression of your sentiments. I think on the issue of Prestwick, Mr. Smith would be in the best position to talk about this and to also talk about what he is willing to do based on the situation as it currently stands.
I will say this. As much as with Hong Kong, we have really worked hard on the cargo issue and Fred and his colleagues did a great job there. We are going to try to continue our efforts to continue to work with him, with the U.K. where we can and especially with Hong Kong, that is still an opportunity that is yet ripe.
In this field of cargo, I do believe that there are possibly greater opportunities for some of the plurilateral, multilateral agreements that we would hope to consummate in the future. I am very pleased to have a very energized cargo industry with Fred and FedEx providing a lot of the leadership but also I would like to mention Jim Kelly with UPS and other cargo carriers as well.
However, I do think Mr. Smith would be the best person to talk about what is happening there.
Mr. PEASE. That would be fine.
Thank you, Mr. Secretary.
Mr. DUNCAN. Thank you, Mr. Pease.
Ms. Millender-McDonald?
Ms. MILLENDER-MCDONALD. Thank you, Mr. Chairman.
I wish to thank you also for convening this hearing. It seems like deja vu with this Open Skies and the disappointment of the British to come forth with an agreement with us.
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I do have a statement for the record. I think it is as strong as the Ranking Member's statement earlier today because we do recognize the British as one of our strongest allies and the second largest international passenger market. Yet, we are still grappling with this whole idea.
I must also commend you for a very thorough and very profound statement that you gave this morning. You may not want to flip the scales but we here would love to flip the scales if in fact the British do not wish to cooperate. Perhaps it may not be yours to flip the scales, but we certainly will with legislation.
Mr. Pease, I go on board with you on all of those pronouncements that you have just made. We just need to do that if in fact we cannot bring them to the table with this agreement.
I read with interest your statement when you spoke about how Bermuda 2 is one of the most restrictive and the number of U.S. cities that can receive nonstop flights from London. As we look at the expansion of LAX in Los Angeles, clearly the cargo that is going to come in to Los Angeles via LAX as well as cargo on the ports of Los Angeles and Long Beach, we are very interested in some type of agreement. With the inequities that have been put forth and the perverse economic consequences, we can ill afford to continue to set around.
My question to you in saying this, and I do agree with you that it seems like Britain is becoming an isolationist when it comes to dealing with us in this open market, is there any way or do you feel there is any time that we can even encounter some conversations with them on the agreement that we have to date with Japan, France and China on those agreements that we have? It is not Open Skies but at least it is something that gives us more competition.
The second thing is, do you ever thing there will be some type of a liberalization between the U.S. and the U.K.?
Third, I would like to hear more about Africa's involvement with reference to our aviation plan.
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Secretary SLATER. First of all, let me say that the sort of step by step approach that you made reference to that is consistent with what we have done with Japan, Canada, Mexico and France, that has been on the table with the British for some years. Actually, Secretary Pena acknowledged the willingness on our part to do that more than three or four years ago, and I have been Secretary for three years. Clearly it has been an extensive period of time.
We have walked through all of these options at every turn. We have actually had agreements in principle that we have gone to the table with only to have the British walk away. So that is what we have here.
On the issue of whether we will ever have a liberalized aviation agreement with the U.K., that is unclear. I will say this though, that we will continue to work with our international partners throughout Europe and throughout the world. There is the issue of this agreement and its restrictive nature, but there is also another issue. That is the U.K. is not at the table when it comes to fashioning the aviation paradigm of the 21st Century. That is the real issue as well.
In Chicago, there was a presence but we did not have the Minister of Transport as we had from 93 other countries. We just didn't have that kind of presence and participation.
By the end of this year—and we want to work with the committee on this—in a broader context, we are going to host an international transportation symposium dealing with all aspects of transportation. It is our hope at that time we will be able to get an update on what we have been able to do over the course of roughly a year on the aviation front when it comes to moving beyond the bilateral paradigm to a multilateral, plurilateral arrangement.
Whether they will be there, I don't know. There will always be the opportunity to come but there is also something about being there at the beginning where you are helping to set the table.
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Ms. MILLENDER-MCDONALD. Mr. Secretary, how long do we stay poised until we move into the secondary aspects of legislation? We can ill afford to continue to sit here and allow them to posture in the manner they are and we not do something in retaliation. I hate to use the words in retaliation but I have used it, so now it is there.
Secretary SLATER. Again, the Congress, I know, will work its will. We are working within the Administration looking at all options. As I said, it is not like it is just at the ministerial level. The President did call Prime Minister Blair, underscored the importance of the relationship and the need to enhance the relationship with an improved agreement. So that is in the mix as well. We will just have to see how it all plays out.
You also asked me another question dealing with Africa. Let me just say that we are making significant progress on the African front. We now have two Open Sky partners in Africa—Tanzania and Namibia—and evidently we have just added Burkina Faso, which is great. We have agreements first with Tanzania and more recently with Namibia and now, I guess, in the last day or so with Burkina Faso.
This is quite significant because at the Chicago conference in 1944 there were only three African countries represented. In our most recent conference there were 23 African countries represented. Because of the spirit of the moment, they actually gathered as a body and entered into their own sort of international aviation agreement where they talked about working better among themselves and also as a group working better with their trading partners. So we are seeing significant progress there.
We have also worked to lift the ban on flights from Nigeria. When President Obasanjo was President-elect, he came and met with members of our Administration, he later met with President Clinton and we made a commitment to work with him and we have done that.
Two weeks ago, we had the inauguration of service from Johannesburg, South Africa to Atlanta, the first such service there. So in a nutshell things are moving along very, very well.
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By the way, the African countries were very supportive of the ministerial declaration that was signed in Chicago. I am sure they will be interested in the upcoming international transportation symposium held here in the fall. So I think we are making significant progress there.
Ms. MILLENDER-MCDONALD. Thank you, Mr. Secretary.
I would like for you to have the staff who is working with you on the Africa piece to contact my office as I am working with the Ambassadors of Africa and the Caribbean and would like to keep apprized of what is going on.
Mr. Chairman, thank you so much and I have statement for the record that I would like to submit.
Mr. DUNCAN. That will be placed in the record.
Mr. Isakson?
Mr. ISAKSON. Thank you, Mr. Chairman.
Mr. Secretary, I first of all want to express to you my personal appreciation and of all of us from Georgia for the time you have spent, most recently I believe Friday, in Atlanta working with our surface transportation issues, working with Greta. It has been the most proactive agency of all the Washington agencies in working with our State. I think it is because of your leadership. I associate myself with what Ed Pease said, and we appreciate it very much.
Secretary SLATER. Thank you.
Mr. ISAKSON. Secondly, I apologize to Mr. Smith for prereading his testimony but in case I was going to miss some of it, I wanted to make sure I had read it because I read an interesting statistic in there that said current commerce by volume is only two percent in air cargo, yet in value it is 40 percent of international commerce. I believe that is the number I read.
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Having some understanding of business relationships back and forth with Great Britain, I am sure probably the commerce between Great Britain and the United States would probably be even higher in terms of the volume content because of intellectual property, computers, technology and stuff like that.
Given that Mr. Smith is here and his excellent company, and given that UPS is in my district, I wanted to ask this one question with regard to cargo. It appears to me from reading everything I have read that the British position, while it may be beneficial to British Airways, is detrimental to British commerce to the cost of commerce to the British people and actually they have a more expensive, less timely shipment of air cargo than any other European country. Would that be a fair statement?
Secretary SLATER. That would be a fair statement. I would also note that Sir Michael Bishop is here as well and would probably be in a better position to talk about this in general terms. That is a fair statement.
Mr. ISAKSON. I will end with a comment. If it is a fair summary and I appreciate the comprehensive information both you have given and Mr. Smith is about to give, free and open trade particularly in the commerce of the 21st Century is essential. I feel like every other member of the committee, it would be a real shame for the great relationship we have on almost all fronts with the United Kingdom, Great Britain, to be hurt by this type of relationship.
I will work in any way possible with the committee to help give you the leverage necessary so that we can have free and open trade between the United States and the U.K..
I thank you for being here today.
Secretary SLATER. Thank you, Congressman.
Mr. DUNCAN. Thank you.
Ms. Danner?
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Ms. DANNER. Thank you, Mr. Chairman.
First of all, let me apologize. I had to leave because, like my colleagues, I have many constituents here both now and waiting.
This issue of the transportation between Pittsburgh and London of passengers, cargo, freight, et cetera is very time sensitive as we know. We do know the President has spoken with Tony Blair about it and so both of their level of awareness has been raised.
Obviously the next question is, who has the football now. Being from Missouri, the wrong side of the State, Kansas City, but being from Missouri and I might mention the champions of the Super Bowl, we need to know who has the football now.
Recently, and I will segue back into the issue of aviation, I had a situation arise in my district that I thought some of the people working for me and working for a particular department in Washington could handle but in fact of the factor, it got to the place where it only got handled because I personally got involved and spoke with the Secretary of the department.
My question is, now that the President has broached this subject to Tony Blair, and I know you have a very busy travel schedule, are you handling this issue personally with your peer in London or elsewhere in England so that we can get this resolved?
Secretary SLATER. Clearly I will be and I am. Actually, the President and I talked about the issue before he made the call and so we have been in constant communications. I do plan to continue to engage my counterparts and that would be Minister McDonald and also Deputy Prime Minister Prescott. I can tell you though that most of the calls that occurred between us have been calls I have initiated.
Ms. DANNER. I think that is very important because I think the British will take it very seriously if they recognize the level that we are willing to commit with regard to our public servants.
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Just quickly, I might ask you how are we doing with the issue of hush kits in the EU? That is also worrisome for me?
Secretary SLATER. That is a worrisome issue. As you know, the President has made it clear that we are prepared to bring an Article 84 action to resolve this question. There was the back-and-forth on this and I did have a pretty extensive conversation with Minister de Palacio in Chicago concerning it. Also members of my team, Mr. Brad Mims and others, were in Brussels last week and they met with Minister de Palacios. Hopefully this too can be resolved in a way that is beneficial to all.
I can tell you that our industry is as concerned about the environment as the EU. We have made that point and we are interested actually in moving forward with the crafting of a Stage 4 design for aircraft, clearly with a schedule that takes into account the kind of capital investment you have to make but to make the point that you always have to be looking forward and you have to be prepared to move to the next level once you have achieved a significant advance. That is what we have with the Stage 3 aircraft. We are committed to looking forward and moving forward.
Ms. DANNER. As long as we are able to make the British Government aware and the British aviation entities aware that this committee is very serious. If they don't think we are serious, they need to take a look at who our Chairman is and they will find out this is probably one of the most serious committees in the House of Representatives.
Thank you and safe journey on all of your travels.
Secretary SLATER. Thank you, Ms. Danner.
I will say that the U.K., the French and the Germans actually sought to be helpful in dealing with the hushkit issue. Still, we have not been able to get a satisfactory resolution there, so we continue to look at our options, which include the Article 84 action.
Ms. DANNER. Thank you, Mr. Secretary.
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Mr. DUNCAN. Thank you very much.
Dr. Ehlers.
Mr. EHLERS. Thank you, Mr. Chairman.
I won't ask you any questions because the questions I would really like to ask I don't think you should answer while you are still in negotiations. I will make a couple of comments.
I came on this committee about six years ago and one of the first things I learned in my research was the background and the existence of the Bermuda agreement. Frankly, I was astounded, if not appalled. We really gave away the store in those negotiations. It is hard for me to understand how we even did that since we have an Open Skies policy, but it is clear that we did, perhaps because the store wasn't that big at that time, so we didn't give away that much. That store we gave away has grown considerably over the years, and we now have what I consider an extremely inequitable situation between the United States and the United Kingdom.
I believe we have to resolve that soon as possible. I can understand why the U.K. doesn't want to do so. They have a huge advantage in that agreement. At the same time, they are a nation of very fine people, they are good friends, and I hope they will bear that in mind and reach agreement soon. It is absolutely essential we do it because it is clearly so inequitable that this Nation has no other recourse than to take strong action if they refuse to renegotiate and reach an agreement with us.
I have dealt with many of their parliamentarians on various issues. I would have no hesitation in taking strong action because of the basic and gross inequity of that agreement between our Nation and theirs and it has to be corrected.
I wanted to get that comment on the record and state my position clearly and give you the strongest possible encouragement to get back to the bargaining table and indicate that you have the full support of the U.S. Congress in doing that.
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Thank you.
Secretary SLATER. Congressman, well stated and thank you for your support and for your comments.
Mr. DUNCAN. Mr. Lampson?
Mr. LAMPSON. Thank you, Mr. Chairman.
Mr. Secretary, first of all, thank you for all that you have done to open up the restrictive aviation bilaterals that have limited growth for far too long. You have gotten Open Skies agreements where that was possible and less restrictive bilaterals where Open Skies were not possible. That has been important for every part of the United States but it has been even more important for the American heartland.
Typically, the old restrictive agreements gave air service to just a few points on the east coast or on the west coast. As air service has dramatically increased in the middle part of the country, mid-America cities in particular found themselves with airlines willing to provide international service but they were often completely blocked by the old agreements from getting that service.
So the great majority of us who are not from the few cities allowed flights by the old restrictive agreements are in an even greater need of your efforts to open up these restrictive agreements and we appreciate your efforts even more.
The irony here is that the U.S.-U.K. agreement remains one of the most restrictive of all of our agreements, even though the U.S.-U.K. market is our Nation's largest overseas air transportation market. Houston has been trying for more than a decade to get authority for flights for Heathrow and has airlines eager to provide that service. Houston is now the fourth largest city in the Nation by population; it is now the eighth busiest international gateway in the Nation, largely due to the relaxation of restrictions on flights to other countries; but it has been absolutely shut out of any possibility of service to Heathrow.
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It is not just Houston, there are a number of other U.S. cities that have markets to support air service to Heathrow and have airlines eager to provide that service but are blocked from getting the service by the restrictive U.S.-U.K. agreement and have actually no Heathrow service as a result.
I know that you have a lot of tough issues on your plate in these discussions with the U.K., but I would just ask your assurance that you will not forget all of these cities across the United States that have airlines eager to provide service to Heathrow but are blocked from getting the service by the outmoded and highly restrictive agreement.
Thank you very much.
Secretary SLATER. Thank you, Congressman Lampson. I assure you that dealing with the broad U.S. interest, that is the approach that we have taken and that would ensure that airlines like the ones you mentioned, and clearly that Houston would have a shot at, this improved relationship.
Mr. DUNCAN. Thank you, Mr. Lampson.
Mr. Quinn?
Mr. QUINN. Thank you, Mr. Chairman.
Mr. Secretary, thanks for being with us today. It is an opportunity for me to thank you for your work on not only air travel but near and dear to my heart, railroad work and safety on our roads and all across this country.
I wanted to make an observation, not a question. I had a chance to hear this testimony as you did and while I was out of the room heard it in our meeting room next door, one of the things that impresses me here is that this topic is a bit more narrow than other hearings you appear at before this committee and the full committee.
We hear support coming from at least our house here between Democrats and Republicans, Chairman and Ranking Member, the Administration as well as the Congress and I think more than anything else, you can take that with you to know that as you negotiate some of these tough negotiations on our behalf that you have the support of all of us back here. It came through loud and clear to me this afternoon. I think we knew that beforehand, but please know as said earlier, we are here to help you, we want to support you to get what is best for us and our country as well. So know we are here to help you.
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Secretary SLATER. Thank you, Congressman Quinn. I should note that I did make a mental note of the fact that, not only did we have the subcommittee Chair and Ranking Member, but we also have the full committee Chair and the Ranking Member, as well as many, many members of the committee who have come. We have all of the industry here represented as well, so it is clearly a matter of importance to us and we very much appreciate the support as we go forward.
Mr. DUNCAN. Thank you.
I apologize but we do have to take a very brief recess to cast a couple of votes. Then we will come back and conclude very quickly with Secretary Slater.
Thank you very much.
[Recess.]
Mr. DUNCAN. Let us proceed once again. We will try to move through this fairly quickly.
We will go now for questions and comments to Mr. Lipinski.
Mr. LIPINSKI. Thank you, Mr. Chairman.
Hello again, Mr. Secretary.
Secretary SLATER. Hello, Mr. Congressman, a pleasure always.
Mr. LIPINSKI. There has been a lot of talk today about what dramatic actions you were going to take in regard to the U.K. if they don't liberalize their aviation policy but I think we all would realistically say the chances of Open Skies being achieved in the next few months is very unlikely.
Do you have any idea what the elements of the agreement would be between the United States and the United Kingdom that you think would be satisfactory at this particular period of time with hope for greater liberalization in the not too distant future?
Secretary SLATER. Congressman Lipinski, I think your position is well stated and one that I agree with, that we are not likely to get Open Skies here. I do think that we can have a much more positive relationship and agreement, much more liberalized, akin to possibly the agreement that we have with either China, Mexico, Japan or France where those are not fully Open Skies but they are significantly enhanced relationships.
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Without getting into all of the details of what has gone back and forth, there are certain principles that we have always acknowledged as important to us. Prior to the situation with Pittsburgh, we always talked about Open Skies as a goal, access to Heathrow, new designations as relates to Heathrow, that kind of mix in the relationship.
With the situation in Pittsburgh, we have also added that and generally leading with that, that we have to have restoration of that service before we can even move to a discussion of the other issues. We pretty much stand there.
I should tell you that we have been very close to getting that kind of agreement that would also—and I want to hasten to add this—include a significantly enhanced relationship on cargo and in many instances, we have talked about that relationship being basically Open Skies. I know that Mr. Smith will talk about how that relationship has gone back and forth over the years and where it currently stands. We have been very close to actually having Open Skies there as relates to cargo, with significant improvements as relates to passenger.
Mr. LIPINSKI. But you can't give me any specifics on what the elements of a possible agreement would be that would stop short of Open Skies? I would just like to say that as far as resolving the situation with Pittsburgh, I certainly don't believe that is sufficient progress whatsoever for the United States to enter into an agreement.
Secretary SLATER. I agree.
Mr. LIPINSKI. Pittsburgh, plus a number of elements that you have talked about or the United Kingdom has talked about in the past, and resolving the problem with regard to cargo, those would be some of the more specific elements that I would have in mind. I was wondering if you could perhaps delineate some of those or do you feel you would be giving away your bargaining position if you were to do that?
SecretarySLATER. Going beyond just the general principles that I have laid out, I think I would be divulging too much as relates to the negotiation process, but the principles, we have been very public about those—access to Heathrow, new designations, cargo and passenger liberalization. We acknowledged early on that it is not likely that we will get to Open Skies but we should clearly be moving forward in that direction. Then, as you noted, we have the issue of Pittsburgh to address as well.
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There are some other issues that are out there, but as I noted earlier, when it comes to the American Airlines-British Airways question, we always look at these kinds of issues with an assessment of the climate of competition that exists. So we will make a decision on that question but it will be viewed in that context.
Mr. LIPINSKI. You mentioned the BA-AA code-sharing situation. Is there still opposition to even their code sharing on behalf of other American carriers at the present time?
Secretary SLATER. We have had some U.S. airlines express their concern about that, yes.
Mr. LIPINSKI. Some of those that had expressed concern in the past have now withdrawn those concerns in light of the fact that you have rejected the—it escapes me.
SecretarySLATER. The antitrust immunity request that was made earlier. Here, it is simply code-sharing, but we have also had U.S. interests express themselves on that question.
Mr. LIPINSKI. I would just like to say for the record everyone here has talked about if nothing is done, then we should all move forward in Air 21 whenever that moves forward, to put some legislation in there to do this legislatively rather than administratively. I would certainly go on record concurring with that and being a very strong supporter of that if there has been no resolution of this situation with the U.K. prior to the time we enact the legislation.
I wanted to go to cargo. In reading Mr. Smith's testimony, he comes across as not being very happy with the fact that there is much more emphasis placed upon passenger negotiations than there is on cargo negotiations and that quite often, cargo negotiations get dropped off the table extremely quickly in any kind of negotiations.
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In light of the fact that he has testified or will testify to that very shortly, I am sure he has expressed that to you on many occasions before.
Secretary. SLATER. A few times.
Mr. LIPINSKI. In all the interest that has been expressed by members of the committee in regard to cargo, would it be possible for you to decouple passenger and cargo in your negotiations and negotiate both of them on a parallel track or perhaps in some areas where you do not anticipate any progress in regards to passenger and you could have progress in cargo, would you be willing to start entering the negotiations decoupled and also perhaps just on cargo?
Secretary SLATER. Congressman, we have actually had some situations where we have done just that, where we have entered into Open Sky cargo relationships with countries independent of any movement on the passenger side. Generally though, we have tried to deal with them together just because that would be the best of all outcomes.
I will say this though, that as we deal with the issue of changing the paradigm where we move from just bilateral relations country-to-country to plurilateral or multilateral arrangements, the area where we may have the first breakthroughs there I think may be on the cargo side. So clearly we are going to work with the cargo industry to see if that might be the case.
With deregulation, it was the cargo side of the ledger that really led the way in that regard in many respects. So there is the difference and, as Fred Smith has noted in the past, we have been more inclined to want to deal with the two together, but we have some examples where we have dealt with cargo separate from passenger and as we move to change the paradigm, may have many, many more such instances.
Mr. LIPINSKI. His testimony didn't seem like he was as concerned about you moving together; his testimony seems to be more concerned about the fact that cargo was sort of a second class citizen rather than being on a parallel course with the passenger negotiations.
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Secretary SLATER. Usually when we think about transportation, we are thinking about mobility and we are thinking about either moving, on the surface side, cars. We have come to recognize it is more than about moving people, it is also about moving goods. I think that has come to be more a matter of significance and enlightenment as we have seen the tie between transportation and the economy. The change in philosophy as relates to just in time delivery, the power of E-commerce, all of those revolutionary types of management and technological innovations have caused us to see the closer connection between transportation and the economy.
That means that I think you get a better view and a better emphasis on cargo carriers as relates to these international aviation agreements. So I think we are going to see more of this. Fred has been there from the beginning because this has been his business. He has played a leadership role in setting up opportunities in many instances for the Administration to move forward. Here, I want to also mention Jim Kelly but Fred has definitely been a leader in that regard, but UPS as well along with FedEx.
Mr. LIPINSKI. I am sure that Fred Smith's powers of persuasion are much greater than mine. Consequently, I brought it to this point and I am sure he can once again pick up the ball and bring it across the finish line.
Secretary SLATER. Congressman, you know after my comments, Fred, I am going to have to leave, so we will pick up the conversation a little later, but you are right.
Mr. LIPINSKI. I don't think he testifies immediately after you so he could probably walk with you to the car.
[Laughter.]
Mr. LIPINSKI. I have heard some concerns expressed by some people about night flights in Europe being banned. Have you heard any of these concerns? Is this another European conspiracy against the United States of America?
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Secretary SLATER. I have heard the issue surface but it doesn't seem like it is an issue that has a lot of attraction. My understanding is it is something that was raised but that it has been solved.
Mr. LIPINSKI. It has been solved?
Secretary SLATER. Yes.
Mr. LIPINSKI. Now that you have solved that one, when are you going to introduce the Article 84 in regard to the hushkits so we can solve that one? I heard you in a question about it earlier but can't you give us any kind of time frame on when you are going to do this?
Secretary SLATER. With the hushkit issue, we have to work with a number of departments. You have the State Department that is very much the lead here, you have the Commerce Department as well as the Department of Transportation and you have the National Security Council. So you have a lot of people involved.
Clearly, and I don't think I am speaking out of school here, we would like to resolve this issue short of having to take this kind of action. We have only taken an Article 84 action I think, three or four times. So it is not something that we have done often but I think it has been communicated that if we have to, we will. That was communicated by the President during the most recent U.S.-EU bilateral meeting.
Mr. LIPINSKI. I was just going to say that Chairman Shuster and others talked about Air 21 and resolving the problem with the U.K.. I have a feeling that there will be individuals who will want to try to resolve at least our problem in getting this introduced by legislation also. I think it would be wise for you to move as quickly as possible.
With that, I thank you very much for being here.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you, Mr. Lipinski.
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Mr. Oberstar.
Mr. OBERSTAR. Thank you, Mr. Chairman.
Mr. Secretary, it is always a delight to have you with us.
Secretary SLATER. Thank you, sir.
Mr. OBERSTAR. And to enjoy your command of the issues of aviation that you have developed during your tenure to a very fine degree.
Just to follow up a point that Mr. Lipinski was making a bit ago about cargo negotiations and passenger negotiations, the 1987 Cargo Policy Act does direct the Department to separate cargo issues from passenger issues lest cargo rights as they were at the time be traded away for passenger rights.
Secretary SLATER. Right.
Mr. OBERSTAR. I am disturbed by the increasing tendency of our negotiators to lump cargo and passengers issues in the same negotiation, usually to the detriment of cargo services. I offer that counsel.
Secretary SLATER. Thank you, sir.
Mr. OBERSTAR. Starting from the principle that in Bermuda 2 and the subsequent MOUs that Pittsburgh is a switchable gateway, which is an unusual term and appears only rarely in other negotiations, let me, if I may, paint a tableau.
As a negotiating principle, Pittsburgh is not the issue. Open Skies is, or a broadly liberalized aviation trade agreement.
Secretary SLATER. That is right.
Mr. OBERSTAR. In which should be included other access points in addition to Pittsburgh. There is Detroit, there is Minneapolis-St. Paul and we have heard from Houston. There are other cities that are interested but have been shy to come to the table realizing there wasn't much chance. There are charters at stake, a very significant issue for us and an important sector of commercial aviation.
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Cargo should be a separate subject. Fifth freedom rights—there are rights to Frankfurt, Berlin, Hamburg and Munich but those are very limited in the MOU and therefore, very under utilized, to be kind and on the U.K. side, the AA/BA code-share, the route rights for British Midland in the U.S. and the British Midland-United Airlines code-share.
Secretary SLATER. That is right.
Mr. OBERSTAR. From my experience in these matters over a few years, whenever in negotiations one side has an overriding need or is perceived to have an overriding need, the other side takes enormous advantage. The side perceived to have an incredible need then becomes vulnerable and the other side carries out the aviation equivalent of a Jesse James bank raid.
If it is apparent to the British or if it is communicated or if it seems to them that what we want out of these talks is access for Pittsburgh to Heathrow, and we get it and they get whatever else they want, there will not be another substantive negotiation between the U.S. and the U.K. for five to ten years. So the future of aviation is in your hands in how skillfully you negotiate the pending agreement.
Amidst all these pressures, and they are multibillion dollar pressures, access to Heathrow for American Airlines was worth $400 million when they acquired the route from TWA. Had TWA at the time—the financier who was stripping the airline of its assets to fill his pockets, to be kind about it—retained those rights, TWA might be in a much stronger financial position today.
So I urge you to continue, and the President also to back you up, in negotiating no deal that forecloses any further opening of progress in the U.S./U.K. market.
Secretary SLATER. Yes. Congressman, I think your point there is well taken. Clearly, a bad deal here would be worse than no deal, and our objective is to approach the situation where we're actually making progress. It may not be fully Open Skies; we've acknowledged that, but it should be a step toward Open Skies, and you actually noted some of the elements in your comments—fifth freedom rights; to the degree possible, passenger and cargo access for new U.S. markets, and also access to Heathrow—I mean, all of those things are in the mix.
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I can tell you that as late as October of last year, we thought that because that kind of deal was on the table and everyone was at the table, that it was the kind of agreement that we were going to have. But it did not come about. And, you know, that was unfortunate for all concerned. But we do have other things that we're going to be about as well. I mentioned in my opening statement that this impasse must not and will not divert our attention from our ultimate goal, and that is moving forward with our international partners who share our vision, and we are committed to doing that. The trip to Asia next week is part of that effort; the trip to Europe in March, a part of that effort; and then later, Latin America and Africa.
Mr. OBERSTAR. I applaud you for persevering, but, you know, it is clear in these negotiations that the British government is in effect the agent for British Airways, to the detriment of British Midland and other interests and the other airports, beside Heathrow. They could open up all of their aviation if they took a broader view.
But I was just wondering—and you may wish not to respond—that the weakened financial condition of British Airways because of the numbers of business actions they have entered into have caused them to lose market share and to lose money in their low-fare carrier entry, both in the U.K. and on the continent, might be even more of an obstacle, might be a cause for the British government to retrench further and be more defensive of their national carrier, for want of a better word.
Secretary SLATER. Well, let me respond in this way. When we came into office seven years ago, many of the U.S. carriers were in similar straits. I recall that the first meeting that the President had outside of Washington was to travel to Everett, Washington and meet with the leaders of this industry, with labor present as well. And a decision was made that we really needed to work together to bring the industry back and make it strong again. I think they had lost about $10 billion in the previous three years.
There was a commission established that Governor Baliles headed. Look at the industry now. I know that Stephen Wolf is here and he can talk about his airline, but the industry in general—Fred Smith can talk about FedEx and the industry in general, but we have an industry that is as strong as it has ever been. And we were opening new markets at the time. We were entering into Open Sky agreements at the time, and everyone recognized that that would create a more competitive environment, and that if you wanted to remain viable, you had to strap up and compete. And that's what the industry has done.
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Even when you look at the relationship with our partners in these agreements, their airlines and their economies and their consumers have enjoyed the benefits of this open and more positive environment.
Mr. OBERSTAR. Thank you very much, Mr. Secretary. I would say that while I authored the legislation to create the commission, I always thought that a revival of the economy would do more than any commission.
Secretary SLATER. That's a good point.
Mr. OBERSTAR. I think the President's leadership on the economy, bringing our economy back and making it the strongest-performing economy in 100 years, has more to do with airline recovery than anything else that we've done, and the British ought to take a lesson from that—instead of trying to protect their national carrier, to cut it loose.
Secretary SLATER. Congressman, I need to be on record saying that as well, so I echo your comments.
Mr. DUNCAN. Mr. Secretary, I want to thank you very much. I'm not going to ask any questions because we need to move on to other witnesses, but I will say that Chairman Shuster's very strong resolve to get something done on this very quickly has been seconded by many members; I think every member of this committee or this subcommittee feels that way.
I notice that when someone with the knowledge and background in aviation that Mr. Oberstar has compliments you on your grasp of aviation, that's a high compliment indeed. I know you were testifying this morning in front of another subcommittee, so you've been here on the Hill all day. I suppose you're just about worn out by now, but thank you very much for being with us. You've been an outstanding witness here today.
Secretary SLATER. Thank you, Mr. Chairman.
Mr. DUNCAN. All right. The next witness will be Mr. Stephen M. Wolf, who is Chairman of US Airways.
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Mr. Wolf, we are very pleased to have you here today, and you may begin your testimony as soon as you are ready.
TESTIMONY OF STEPHEN M. WOLF, CHAIRMAN, US AIRWAYS GROUP, INC.
Mr. WOLF. Thank you. Mr. Chairman, members of the subcommittee, good afternoon, ladies and gentlemen. I want to thank you for inviting me to participate today. I want to commend this subcommittee, and especially Chairman Shuster and Congressman Oberstar, who work so vigorously to bring balance and meaningful competition to the aviation market between the U.S. and U.K.
I have submitted written testimony for your considered judgment. It reviews the well-known and well-documented ills of Bermuda 2. I would like to focus very briefly this afternoon on one basic question: Why has the government of the United Kingdom, through years and years of negotiation, been so firm in its defense of an aviation agreement that is so anachronistic, so harmful to consumer interests in both the U.S. and the U.K., as to be a shameful embarrassment?
The answer, unfortunately, is clear. It is no different than the reason British Airways gave when it invoked its own economic interests in canceling the decade-long service between Pittsburgh and London. Put another way, the British government has insisted on maintaining an anti-consumer mercantilist aviation policy in order to accommodate its entrenched aviation interests.
Events of the past few days have demonstrated clearly that the status quo cannot be maintained. Bermuda 2 does not work. It has not worked for consumers; it has not worked for the creation of jobs; it has not worked for expanding the economic opportunity. Bermuda 2 works only for the entrenched British carriers. It must be changed, and it must be changed now.
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At a hearing before Chairman Shuster, Congressman Oberstar, and other Members of Congress last October in Pittsburgh, Assistant Secretary of Transportation Brad Mims said Pittsburgh is ''a poster child'' for the ills of Bermuda 2.
Our negotiating experiences since then, sadly, have made those words so very prophetic. A brief review of this sad episode shows that last August, British Airways announced that it was terminating its Pittsburgh-London service, apparently without regard for the impact on those who have come to depend on it. The people in Pittsburgh, western Pennsylvania, and the surrounding region not only fully support the service, but they have come to rely on this critical link to Europe's primary financial and commercial center.
For months, the U.S. Government has been seeking authority for U.S. carriers to provide replacement service in the Pittsburgh-London market; yet despite strong bipartisan support in Congress, these efforts have been to no avail. Just last week a British official publicly stated that the U.S. must ''think about how badly they want Pittsburgh and the price they are prepared to pay.'' British Airways abandoned the people of Pittsburgh and western Pennsylvania, and yet the U.K. government has the arrogance at the 11th hour of negotiations to ask what we are prepared to pay for a service that was discontinued by British Airways for its own selfish interests.
After more than a decade of support for the people of Pittsburgh and the surrounding region, the British gave these communities no consideration. The United States Government should not pay ransom to the British for holding the people of Pittsburgh hostage.
Mr. Chairman, the message that is becoming clearer and clearer in this election year is that the American people are seeking straightforward responses to fundamental issues. It is a populist message that recalls the bipartisan way in which this committee and this Congress have supported the Government as it has aligned itself to the forces seeking a free aviation marketplace. That same determination now must be brought to bear on Bermuda 2, which remains largely unchanged and which has permitted the British government—and British Airways in particular—to veto innovative pricing and, most importantly, to restrict access to London.
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Bermuda 2 is a dinosaur in the age of cyberspace and free trade. It must be changed. It is time for us to act in our own economic interest and end this very one-sided agreement. For the benefit of U.S. consumers and communities, the U.S. Government should immediately take decisive action to right the wrong that has been done to the people of Pittsburgh and to move on from this new threshold to ensure competitive access to London. The time for access is indeed now.
Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much, Mr. Wolf
Chairman Shuster?
Mr. SHUSTER. Mr. Wolf, I couldn't improve on what you had to say with one word, so I would simply say ''ditto'' with three exclamation points, and they are not exclamation points in anger, but rather in determination.
[Laughter.]
Mr. DUNCAN. Thank you very much.
Mr. Sweeney?
Mr. SWEENEY. Thank you, Mr. Chairman.
Mr. Wolf, thank you for your testimony, and I would like to echo the words of my Chairman. Your statement is very strong and very appropriate. I will make one comment and ask one question.
I would like to note that in providing competitive access, there are two elements. If you looked at the recent testimony of this committee, in the last several years, at least, those two elements are reducing the cost of airfares and providing greater options for access to service for the public. In general, there has been a lot of talk, as well, a lot of conversation, about that being a problem with travel in various parts of the United States, so you can understand the frustration in applying your angst here, that many of us have, with some of those issues within our own borders.
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Nevertheless, from 1991 to 1996 your organization partnered with British Airways, and other airlines objected at that time and fought against that partnership. And then in 1996 that partnership ended, and now British Airways wants to partner with American, and there is some objection within the airlines industry to that partnership.
Could you explain, in your opinion, what circumstances are different here and how that relates to the issue of competition?
Mr. WOLF. Yes. As it pertains to the arrangement that came into being in approximately 1991—and it did indeed go through 1996—between British Airways and then-USAir, British Airways had made an equity investment in USAir.
Now, let me point out with some chagrin that at that point in USAir's history it was teetering under great financial burden, having lived through some multiple years of staggering losses. British Airways made an investment in the company, which gave them a large amount of preferred stock, three seats on the Board of Directors, and also the ability to negotiate a marketing agreement which heavily favored British Airways.
When the management of the company changed some few years later, we felt that although the two separate arrangements did come about at one point in time, that they presented stand-alone issues—the equity investment and the marketing agreement. We wanted to negotiate some significant changes to the marketing agreement to make it fairer to US Airways.
British Airways, for whatever reasons, decided that they wanted to do something with American Airlines, and announced a new agreement, and we had a parting of the ways.
In terms of their new agreement with American, I would say it's somewhat unusual. We're talking about the largest carrier in the marketplace, and the second largest carrier in the marketplace, setting prices together. However, we're not opposed to that as long as there are full Open Skies, and US Airways and other U.S. carriers and all British carriers can compete openly across the transatlantic.
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In terms of access, it is heavily restricted by Bermuda 2; and in terms of fares, this double government approval process—which means that although our own Government might approve a lower fare, the British government can deny it, so it is as restrictive as anything that one can imagine.
Mr. SWEENEY. I note that in your testimony you recently said that you support the four possible remedies that have been proposed by Chairman Shuster and the committee.
Which, if any, specific courses of action, especially given your experience and your prior partnership with British Airways, would you recommend? Give us a sense of how you think we are best apt to go forward here.
Mr. WOLF. Well, I would support all four, the fourth one being the ultimate, which would be to renounce Bermuda 2. I frankly strongly urged that our Government renounce Bermuda 2 a little over a year ago. It is really not quite as harsh an act as it sounds; nothing happens the following day, and nothing happens thereafter unless one of the two governments moves to do something after a 12-month period of time.
The truth of the matter is, in the eyes of any rational person, Bermuda 2 is heavily weighted in favor of the U.K. Now, I don't suspect that we had dumb negotiators at that point in time; I am assuming that we got some other ''pearl'' in that negotiation. I don't know what it was; a submarine base in Scotland, I don't know. But if you look at the aviation agreement itself, it is substantially and heavily in their best interest. In other words, they have all the marbles, and from their perspective we are asking them to give us a couple of marbles back. And we have been asking this, now, for years.
Now, we can also justify it, because it is in the best interest of the consumer of both countries, and the best interest of business, but for whatever reason it hasn't happened. So we can piecemeal it and do one of the first three suggestions that have been proposed, or we can renounce the agreement, and then during that period of renunciation have a full negotiation which brings about, hopefully, a full and Open Skies, a lasting impact in the marketplace thereafter.
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Mr. SWEENEY. I thank you for your testimony. I look forward to meeting with you to discuss other issues.
Mr. WOLF. Yes.
Mr. SWEENEY. Thank you, Mr. Chairman.
Mr. DUNCAN. Thank you very much.
Mr. Lipinski?
Mr. LIPINSKI. Thank you very much, Mr. Chairman.
Mr. Wolf, nice to see you once again.
I had a question in my mind that I wanted to ask you; now it has popped out of my mind, but I have a question here in front of me, so I will read that question first of all, and maybe the original question will come back.
Mr. WOLF. At 58 years of age, I understand the ''popping out of your mind syndrome'' very well, but go right ahead.
Mr. LIPINSKI. I'm a little bit older than that, so they pop out even faster.
[Laughter.]
Mr. LIPINSKI. It is my understanding that while US Airways was granted operating authority from Charlotte to Gatwick in early 1998, the U.K. did not grant US Airways commercially-viable slots until sometime later. What was the effect of this long delay in granting of commercially-viable spots? What can be done to improve the situation?
Mr. WOLF. Well, the immediate effect was that it continued a monopoly authority for British Airways, who was flying Charlotte-Gatwick, and delayed our entry. I mean, it strikes me as being absolutely absurd, Congressman Lipinski, for us to negotiate for an authority to fly a route for a U.S. carrier—in this case between Charlotte and London, Gatwick Airport—and not simultaneously have the authority to land the airplane.
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In the case of the U.S., when we give operating authority to a foreign carrier or a foreign land to land at one of our two international slot-controlled airports, which are Kennedy and O'Hare, we automatically give that carrier the slots to land. In fact, we go so far as to take the slots away from U.S. carriers that are not available and give them to foreign carriers to land their airplanes.
In the case of the British, they tell us, ''Go get in line over there, past that other group, and you can get slots from them,'' and that delayed our start of service for about a year until we were able to get financially viable slots to land.
Mr. LIPINSKI. When we pass AIR–21, we won't have to have our carriers give up slots to foreign carriers any longer at those slot-controlled airports because they won't be slot-controlled much longer, but on top of that, immediately we won't have to do that because we have it in the legislation where there will be no American carriers giving up those slots for their summer sessions.
You were talking about renouncing the bilateral. The problem I have with renouncing the bilateral is that it places us in a position where everything is status quo. I mean, the U.K. has great advantage over us now; it seems to me that if we just come out and announce that we are renouncing the bilateral agreement, they may just want to stay in that position for even a longer period of time, and not move.
It seems to me that our actions would have to be much more punitive to them before they're going to be willing to sit down and really negotiate with us with any degree of being concerned about the situation.
Mr. WOLF. Well, I agree, renunciation in and of itself changes nothing. We are required by law to maintain the status quo for 12 months. During that 12-month period of time I would like to think that the parties would be motivated to having meaningful discussion. And if that didn't happen, at the end of 12 months we should not go forward with the renounciation unless we are prepared to take action, which we then could do unilaterally and legally, to reduce their service offering. And even if you took it to the extreme and they reciprocated and reduced some U.S. carrier service offerings, and we responded again; if you took it to the ultimate extreme and there was no air service between the two countries, which obviously is absurd, the truth of the matter is that all the U.S. carriers that fly to the U.K. could take those limited frequencies—and indeed, they are limited—and move them elsewhere and do rather well financially.
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It would be catastrophic for the U.K. carriers if they didn't have access to the largest market in the world. But again, I don't think it should ever come to that because we are two rational peoples who should be able to negotiate a reasonable Open Skies agreement.
Mr. LIPINSKI. Let me ask you one last question. Why is the United Kingdom such an important place for us to have all these landing rights? Why couldn't we just bypass them, ignore them, go to Paris, go to Frankfurt, find some other places in Europe to go to, go into Shannon and do all our transferring there and go on to Europe? Or even go into the U.K. itself?
Mr. WOLF. Well, I may not be the one to talk about the many merits of the country and the city, but London is the financial center of Europe. It is a glorious and very strong business center with a large population mass, with an endless number of attractive characteristics that are very attractive to Americans, as well as other peoples around the world. It is the most frequently visited point from our country if you are going across the Atlantic. People like to go there for a whole host of legitimate and very sound reasons. It's just a glorious city and a glorious country.
Many of them also then connect to go beyond. So it's a very strong connecting point. But the reasons that people want to go there, I think, are sort of endless and rather valid.
Mr. LIPINSKI. But the connection—why is that a better connecting point than any of the other cities which I have mentioned?
Mr. WOLF. Oh, I don't know that it is. In fact, even British Airways doesn't run a particularly strong connecting complex at Heathrow; they use it more as a point-to-point pattern of service. People go there because of the strong demand for going to the city. I go to visit my sister; I go for a couple other reasons, but——
Mr. LIPINSKI. Well, it's a great city. There's absolutely no question about that. I understand that. I just don't see why, you know, if they're going to be so stubborn in regards to this, with American ingenuity there has to be some way that we can get around what they're doing. As I say, to me, flying into another city in Europe, and then if British Airways or British Midland wants to fly us out of Paris back into London, that might be the way to handle the situation.
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Now, I don't know if it's economically feasible for American carriers to do something like that, but that might be one possibility. It seems to me that every time I fly to Europe on a CODEL we always wind up stopping in Shannon, so I guess the runway is long enough to accommodate pretty big planes. Maybe we could just fly into Shannon and then fly on to London.
Mr. WOLF. Well, I think that in the end we would conclude that the natural market between the U.S. and London is such a strong, vigorous market that we're not going to be able to put those people elsewhere in Europe and have them come back. I think our focus should really be how to get more services into the city, particularly into Heathrow, and take advantage of all the economic incentives that sort of come along with that increased capacity.
Mr. LIPINSKI. I concur with that. I'm just saying that I know how tough it has been to negotiate with the U.K. for a long period of time, ever since Bermuda 2. I think we really have to look at some other options and look at them very hard in the event that they continue to have this mentality.
We can do things legislatively, and I'm all for doing it legislatively, but when it comes down to it, if they want to pay the price for losing an awful lot of our people coming over there—I mean, they can keep their fortress for as long as they want. It can be very detrimental to them, but they can choose to do so, also.
But I thank you very much, sir.
Thank you, Mr. Chairman.
Mr. DUNCAN. Mr. Wolf, I support the four recommendations of Chairman Shuster and Mr. Oberstar, and I am pleased that you do as well, and I believe that a big majority of the Congress would also if required to do so.
But you describe in your statement U.S./U.K. aviation relations as being in a ''state of paralysis.'' But whenever we talk about doing things like Chairman Shuster and Mr. Oberstar have recommended, we have always had some people who say, ''Well, we can't do those kinds of things because that would put us into a trade war,'' or ''an aviation trade war.''
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How would you respond to people who might tell us that in the next few days or weeks?
Mr. WOLF. I think the first thing I would say is to remind them that the act of renunciation is precisely what the British government did relative to Bermuda I. They renounced the agreement, then we negotiated a new agreement.
Now, whether our negotiators were asleep during that process or not, I don't know, but in the end we got a new agreement, called Bermuda 2, which heavily favors the British and U.K. carriers. We have been woefully unsuccessful in having a rational discussion that points out the merit and the benefit of having an Open Skies—or even a substantially relaxed agreement. It benefits the consumer of the U.K., but for whatever reason we have not been successful in getting that concluded.
I think, worst case, if we renounced, we would demonstrate clearly that it is the policy of the Government of the United States to have Open Skies and open markets. The U.K. is our closest ally in most ways imaginable, and we're not angry with them. This is a business decision. This is in the best interest of the people of the United Kingdom, as well as the consumers of the United States. We are on the side of right. It should be done, and if we have to do it unilaterally, we should do it unilaterally.
Mr. DUNCAN. Well, I think every place we've entered into Open Skies agreements, it's been good for people on both sides. Air traffic has shot way up.
Is there anything else that you would recommend that we consider doing, other than these four recommendations of Chairman Shuster and Mr. Oberstar?
Mr. WOLF. Well, there are the three interim steps leading up to the fourth recommendation, which is renunciation.
I am a little concerned about the interim steps because, although we have the full legal right to do those and I think they would be attention-getters, I think they might be inclined to respond in kind. I can't speak for the British government, but they could view it as a ''tweak,'' and they may want to tweak back. That maybe would not be a very good start.
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I think we could have a very rational conversation about why we think we should renegotiate the entire agreement, and that is our intention. Our intention is to expand services, not to contract services; to expand economic opportunities for carriers of both countries; to provide an offering which will clearly lead to lower fares for consumers of both countries; and package some very nice—but also sincere and correct—words around why we are renouncing. And I would hope within the following week to start negotiations to enter into a new agreement.
I think it might be a better alternative than the interim steps—of which, by the way, there are probably a substantially larger number than the four that have been identified, before renunciation.
Mr. DUNCAN. Well, I want to reemphasize—you mentioned some statistics in your statement. Actually, we were given slightly worse statistics; not much, about the same. It says, ''Prior to Bermuda 2, U.S. airlines carried 59 percent of the passengers between the U.S. and the U.K. Since Bermuda 2, U.S. airlines' passenger market share has dropped dramatically and now stands at 37 percent,'' and that British Airways alone carries a higher percentage of passengers than all the U.S. airlines combined.
I am also told that we have given British Airways all the slots that they have requested at JFK and O'Hare, but they haven't done the same for us at Heathrow. There are many other examples I could give, but as I stated in my opening statement, I think most of the American people would be shocked if they knew that our most difficult aviation relations were with the British. And it seems to me that that has to change very, very quickly.
I thank you very much for being here with us today. You have been a very helpful and informative witness. Thank you very much.
Mr. WOLF. Thank you, Mr. Chairman, Chairman Shuster.
Mr. DUNCAN. Our next witness will be a man who has been here with us on many occasions, Mr. Frederick W. Smith, who is Chairman, President, and CEO of FedEx Corporation.
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Mr. Smith, it is an honor to have you back here with us again, and you may begin your testimony.
TESTIMONY OF FREDERICK W. SMITH, CHAIRMAN, PRESIDENT, AND CEO, FEDEX CORPORATION
Mr. SMITH. Well, thank you very much, Chairman Duncan and Chairman Shuster. On behalf of the 200,000-plus FedEx employees and associates, I am very happy to appear before you. I am very happy to appear with Secretary Slater, who has done an excellent job as the country's Secretary of Transportation, and my friend, Stephen Wolf, who is one of our country's outstanding aviation executives, and Sir Michael Bishop, who is an aviation pioneer and entrepreneur whom I have admired for many years.
Mr. Lipinski, good to see you.
I have submitted a written statement, so I will not read it. I was very gratified to hear that some Congressmen had actually read it, which was very flattering.
I have been in the industry for a long time, as was noted, before the industry was deregulated in 1977 when Bermuda 2 was actually negotiated. And as has been pointed out here today, it's a very bad deal for the United States. It's a bad deal because the circumstances which led to Bermuda 2 no longer exist: Cold War considerations, considerations of marginal financial viability, of state-owned British carriers, and so forth. But for whatever reason, the United States agreed to a new aviation treaty which took away most of the United States' beyond rights, but left completely unfettered British beyond rights. And I have discussed this here at this committee before and at the convention in Chicago.
During the 1960's and the 1970's, for some reason the United States let so-called ''Fifth Freedom Rights'' be delegitimatized, if that's the proper word for it. Somehow the U.S. Fifth Freedom Rights which we had negotiated with Japan and the United Kingdom came to be not protected and not supported by our own negotiators, where the beyond rights of the U.K. and the Japanese carriers were treated in a different way, particularly the British.
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Now, that's not what the intention of the Chicago treaty was. The Chicago treaty actually called the Fifth and Sixth Freedoms ''Fifth Freedoms and Anterior Fifth Freedoms.'' ''Sixth Freedoms'' was a term that was only developed many years later, and I suspect—although I have done a lot of research on this to try to find out why this was the case—I think that it was a conscious effort on the part of our aviation partners to delegitimatize that aspect of the aviation trading relationship.
Now, there is, of course, a big difference between Fifth and Sixth Freedom Rights. In Sixth Freedom Rights, the carrier in the home country is bringing traffic—at least for a short period of time—and landing it in his own home country, and moving it to the homeland of another trading country, where with Fifth Freedoms you are stopping in that country and picking up traffic and taking it to a third country.
Well, this is a very big issue in the United Kingdom, particularly for cargo, and it was a very big issue in Japan, which gets to your question to Stephen Wolf, Mr. Lipinski, of ''Why is it such a big deal?'' Because if you look at the great circle aviation routes, the shortest distance from the United States to Europe actually goes over the U.K. market.
So in our situation, what we were allowed to do was fly into the United Kingdom in the north for the electronics industry, which was our Prestwick service, and into the south, which is the most populous area in Europe, some 13 million people. And then as we flew on to our major hub in Paris—which was made possible, by the way, with that revised aviation agreement that Secretary Slater talked about—our problem was that we could only carry air for that portion of the traffic which we had off-loaded in the United Kingdom.
So over many years we have supported a cargo regime, whether it's for underbelly cargo or traditional airport-to-airport cargo operations or integrated express operations, where Fifths and Sixths were treated equally, and that's what we've been trying to do in the last several months.
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And to some degree, the relationship between the United States and the United Kingdom reminds me of the Peanuts cartoon. As you know, yesterday we lost a great American figure in the form of Mr. Schulz. Charlie Brown always wanted to play football, and Lucy would hold the ball and just as Charlie Brown thought he was going to play football, Lucy would pull the ball out from the kicking tee. Well, that goes on, of course, goes on time after time with the United Kingdom; Her Majesty's government just pulls the ball out, right when we think we're going to get a deal. In 1995, the so-called ''mini-deal,'' we were assured that we were going to have an open cargo regime, and then at the last minute passenger interests took precedence, and if we would just be quiet and go over on the side, then they would come back and fix cargo. In fact, there is testimony before this committee by Secretary Pena which essentially reflects that—not with as great specificity as I just gave you, but I can assure you, those were the private assurances that we got.
In any case, fast-forwarding five years, no progress. Last spring I went to the United Kingdom and met with the Deputy Prime Minister and gave him a letter, along with our long-serving Board member, Senator George Mitchell, and said, ''Look, we want to serve our worldwide customers. We can't serve them effectively.'' We have large constituencies in the United Kingdom which have been very vocal before their Parliament to grant FedEx these ''open-beyonds,'' and if we can't open-beyonds or at least authorize us to have beyond service from our northern gateway and serving the electronic industries up there, and our southern gateway, which is Stansted—and by the way, I would say parenthetically that we were one of the few carriers that ever went through from Heathrow, because it's a very unfriendly all-cargo operation and we moved to Stansted, unfortunately, which has become the U.K.'s ''hostage airport,'' which is not a very good situation for us.
But we gave them a document and made an extra bilateral application for open authorities from Prestwick and the southern part of the United Kingdom, and we made it very clear that if we couldn't get Open Skies, or at least open beyonds, for both of those, that we would not continue to serve the electronic industries in the north for the simple reason that this long-range flight equipment that we use is very expensive, and absent the ability to serve our southern U.K. customers with open traffic rights, we could have a much more profitable use of our equipment than serving Scotland, which has been served at a loss for many years and would still be not a particularly lucrative market, even with open beyonds.
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So they gave us the open beyonds out of Prestwick. They told us that there were a number of issues that U.K. carriers had that they felt were unfair, one of which was that U.K. carriers were not able to wet-lease to U.S. carriers, while the reciprocal was true. We agreed with their position. I personally spoke to Secretary Slater and FAA Administrator Garvey. They looked at it; they came up with a solution to that, which was in the public interest and did not compromise aviation safety. They wanted international Fifth Freedom authorities out of the United States; we did not object to that whatsoever. We are for Open Skies and cargo. And I again reiterated in the summer to Lord McDonald, the Transport Minister, that if we were not able to get open beyonds or this extra bilateral authority from our two gateways, that we simply would change our operating pattern.
For whatever reason, what seemed to us to be the setting for finally a deal on cargo operations, where Fifth Freedom capabilities of U.S. carriers were equivalent to Sixth Freedom capabilities of U.K. carriers, was on the horizon. The meetings were postponed, and then the Pittsburgh situation arose, and we immediately lapsed into a situation similar to what we had had in 1995. There was a determination on the part of our Government, I think, to solve the Pittsburgh problem; the cargo issues became secondary. Protectionist interest arose in the United Kingdom, particularly in the form of the British Cargo Airline Association, which are four small carriers, the most vocal of which makes its money out of being a charter agent for Russian airplanes—which, by the way, have been granted over 100 cabotage charters in the United States over the past year, and whose second major business line is to operate eight aircraft which are owned by a Dutch company—they became very vocal in opposing this deal, for whatever reason. I can only speculate why that was the case, because what the United States had offered British cargo carriers was a tremendous business opportunity with the open Fifths and the international wet-leasing capabilities.
The British Cargo Airline Association only represents four out of seventeen British cargo carriers. So I suspect—I don't know, but I think just the protectionist instincts took over, or whatever motivated them to do so against their own best interests of U.K. exporters and importers, who have been very vocal about this, that these express networks that FedEx and UPS are now offering are the lifeline of high-tech and high value-added trade.
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The comment was made twice here today that air cargo is only 2 percent of the tonnage of international trade, and 40 percent of the value. If you take out agricultural products, petroleum, and the NAFTA cross-border trade, it's much higher than that.
So the primary trading mechanism in the 21st century for the industrialized countries is the air cargo system, either the underbellies of combination aircraft, traditional airport-to-airport freighters, or, increasingly, the door-to-door express systems like we operate. And to sacrifice this kind of commercial interest on the U.S. part by subordinating it to one passenger route, particularly when I know this committee has made it very clear to the DOT that these cargo interests should at least be considered on a par with passenger interests—and to have Her Majesty's government take that position, quite frankly, I am mystified and at a loss. We made the decision that if, after these many years of serving the northern area through Prestwick, that if we weren't able to get some relief, we would shut this down. The negotiator for the British told our Regulatory Vice-President that they didn't believe us, so he gave him a letter which reiterated the letter I had given to Mr. Prescott, and said, ''We're going to shut it down.'' And the British in essence sent our folks packing, and the next morning, I think it was, we announced the shutdown of Prestwick. There has been a lot of press on this, as to how somehow we didn't tell everybody what we were doing. We'd be glad to submit the letters to the committee. Everybody knew what we were doing; I think they just misjudged the reaction and the realities of the situation.
So that's our situation. We support strong and forceful action to resolve the aviation treaty between the United States and the U.K. It is clearly not in the best interest of anyone except, as Steve Wolf said, ''entrenched U.K. interests.''
I marvel at the power of those interests to manipulate the government of the United Kingdom. There's nothing comparable that I've ever seen, certainly not in this country.
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So we are hopeful that the Department of Transportation, with the help of the Congress, will take forceful action to try to resolve this situation. All we want to do is pick up and reliably transport the cargo of our worldwide shippers, including very many of our very good customers in the United Kingdom. As Steve Wolf said, this is not an emotional issue; this is not an issue of the Stars and Stripes somehow being disrespected by the Union Jack or whatever the case may be. This is a business issue, and it ought to be solved in a business manner, which is to move towards a new and more productive agreement.
Thank you, Mr. Chairman.
Mr. DUNCAN. Well, thank you, Mr. Smith. I know that all the members of this subcommittee and the Congress want good trade relations, good aviation relations with the British, but I can tell you, the U.S., with only 4 percent of the world's population, purchases 25 percent of the world's goods. Our population is almost five and a half times that of the United Kingdom. They need access to our markets far more than we need access to theirs. They should keep that in mind.
But we want to back you up as much as possible and make this relationship as free and open as possible.
I want to go first for questions to Chairman Shuster.
Mr. SHUSTER. Thank you very much.
I think it is important to put on the record here that in several discussions with Secretary Slater I made it very, very clear—and he is likewise in agreement—that while the Pittsburgh issue is important, the national interest here goes far beyond Pittsburgh to both cargo and passenger. And to US Airways credit, they have stated, too, that they do not believe that their problem should be solved at the expense of the overall national interest. So any negotiations that the Department has, or any action that we should take here in the Congress, is going to be based not simply on the Pittsburgh situation, but based on what is best for aviation, both cargo and passenger.
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I am pleased to hear your statements, Mr. Smith. Do I take from what you're saying that renunciation is what you believe is an ultimate step, if we can't get resolution?
Mr. SMITH. Well, Mr. Chairman, we certainly support renunciation. I don't see where the United States really has any choice. Nobody wants to see the treaty renounced; but again, as Steve said, that's exactly what the British government did when they wanted to renegotiate the treaty.
But I would like to amplify on that just a bit. The reason I dwelled on the Chicago convention and the history of the Fifth and the Sixth Freedom rights, one of the things that happened to the United States over a number of years is that they let trading partners renounce aviation treaties; and then, after the year period happened, they did not equate the Fifth and the Sixth Freedom traffic rights. I believe that the only reason—and I know that Mr. Oberstar remembers this, and I suspect you do—the only reason that we moved more constructively toward a relationship with Japan was when the USDOT said for the very first time in modern history, ''If this treaty is renounced, then we're going to treat Fifth and Sixth Freedom opportunities as mirror images of one another,'' which is exactly what the people in the 44 Convention intended. Again, they actually call them the same thing, Fifths and Anterior Fifths.
So the point is, in any sort of renunciation, at the end of the period of time, the way the United States Government should deal with the cargo issues—I'll leave it to the passenger experts to deal with the passenger issues—it should simply preclude Sixth Freedom traffic from passing through the United Kingdom into the United States. That's American trade. The fact that it may be switching planes in London is irrelevant. It's an American purchaser or seller, selling something to Germany or Turkey or Italy or France or whatever the case may be, that just happens to go through London.
So if there is no interest in having an open cargo regime where we can compete, in essence for the same traffic that they can compete for, then once the renunciation period is over then those Sixth Freedom opportunities should be restricted and made equivalent only to Fifth Freedom opportunities.
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So as long as the United States is prepared to equate Fifths for Sixths, we would certainly support renunciation, if that's what you decide to do.
Mr. SHUSTER. When are you pulling out of Prestwick, and where are you going to go?
Mr. SMITH. Well, as I mentioned before, we don't go out and buy $100 million all-cargo air transports to sort of just have sitting over on the tarmac, to use if somebody wants us to do something 30 days from now. There are very long lead times in planning flights and schedules.
So we told the British government in writing on at least two occasions that if we were not able to get Open Skies, or at least open authorities, from an airport in the north and an airport in the south, we would have to make a call to move that equipment because we could have a much more economical use of that equipment elsewhere. We have been losing money in Prestwick for 10 years to accommodate our electronics shippers, so it was strictly an economics decision.
Mr. SHUSTER. So you haven't announced when you're going to pull out?
Mr. SMITH. Oh, no, we've announced it, and much to our chagrin we have told many of our long-serving Scottish employees, ''The decision to cease service to Prestwick has been made, and that decision will be carried out.''
Mr. SHUSTER. My question is, when is it going to be carried out?
Mr. SMITH. We had to give the employees April 3rd.
Mr. SHUSTER. April 3rd. So we're not talking theoretically?
Mr. SMITH. No, no. That decision has been made. And, of course, we want to serve our Scottish customers in Silicon Glen and we would try to accommodate them in some way, and hopefully if there is an Open Skies or an all-cargo agreement, we will be able to do something else. But the decision to cease service to Prestwick is made and will not be reversed.
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Mr. SHUSTER. And where will you go instead?
Mr. SMITH. I don't know exactly where we would put that equipment, Mr. Chairman; I mean, our operational people would have to tell you. It's just deployed in our system where we can make money with it rather than sitting there and flying air between the United Kingdom and our hub in Paris.
Mr. SHUSTER. Thank you very much.
Mr. DUNCAN. Thank you, Mr. Chairman.
Mr. Oberstar?
Mr. OBERSTAR. Thank you, Mr. Chairman.
An excellent statement, Mr. Smith. I really appreciate your perspective on these matters and the front-line experience that you've had, both in the U.K. and the Japan markets. You have had to deal with two of our toughest negotiating and trading partners and been very successful.
Would cargo be better served in a separate negotiation, one separate from the current passenger flap?
Mr. SMITH. Well, I've certainly felt that to be the case, Mr. Oberstar, for a long time, because, as I gave examples in my remarks, we've just been through over and over again where we think we have something worked out and everybody is ready to move forward, and then a passenger issue comes up and the cargo issue gets pushed aside.
Mr. OBERSTAR. Why was cargo thrown into the mix in this?
Mr. SMITH. I don't know. I didn't get a chance to go out, like Mr. Lipinski said, to talk to the Secretary on the way out, but it wasn't necessary. I've talked to him about it so many times, and every one of his predecessors for the past 25 years. I don't know. I think at the end of the day the passenger side of the business is perhaps more glamorous. The importance of our business, I think, is very misunderstood. I repeatedly tell people those numbers about 2 percent of the tonnage and 40 percent of the trade, and they are astounded. They are absolutely astounded. For whatever reason, the cargo issues do play second fiddle to the passenger issues.
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Mr. OBERSTAR. That's why we passed legislation in 1987. I chaired the Investigations and Oversight Subcommittee; we highlighted the cargo trading issues, and the authorizing committee on a bipartisan basis moved a bill to establish a principle that cargo rights should be negotiated separately from passenger rights. We found they were all too often being traded away as ''leftovers.''
Mr. SMITH. Yes.
Mr. OBERSTAR. In fact, cargo is the fastest growing sector of international trade, and air cargo is growing faster than passenger service——
Mr. SMITH. It is.
Mr. OBERSTAR.—and we ought to recognize the enormous opportunities for our carriers.
Mr. SMITH. Well, Mr. Chairman, you have been an indefatigable champion of the industry for many, many years. You and the members of the committee who are sitting up there know these issues cold, and we appreciate it. And why, with that kind of Congressional leadership, this has happened time and time again, I can't give you a good answer, and I suspect you have the same bewilderment as I do from time to time.
Mr. OBERSTAR. Well, we are going to continue to press the Department to separate the cargo issue out and get a separate discussion going.
In your prepared remarks you raised the question of wet-leasing, and you rightly described how the British negotiators threw a number of—a bundle, you called it—cabotage, ownership, control, wet-leasing, and Fly America.
How significant is this wet-leasing issue? In what ways are foreign carriers disadvantaged in the U.S. marketplace by our restrictions on wet-leasing?
Mr. SMITH. As I mentioned a moment ago, and as you well know, there are four different segments of the air cargo business. There is the cargo that is carried in the underbellies of passenger airplanes or in combination airplanes, passengers and cargo together. There are the all-cargo operations that are operated by passenger or combination carriers. There are the traditional airport-to-airport all-freight operations, which are becoming increasingly rare; there are only two or three of those carriers left in the world. And then there's the integrated express operations like ourselves, UPS, DHL, and TNT.
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There has arisen a major segment of the aviation industry which is called the ACMI carriers, which stands for Aircrew, Maintenance, Insurance, and Aircraft, where an entity like Atlas or Gemini own all-cargo airplanes, then they operate them for passenger carriers, with the passenger carriers taking the risk of the cargo load and the fuel risk. And they have been very successful in this, particularly Atlas. Atlas operates flights for British carriers; in fact, I think I'm correct that either Atlas or Gemini operates an agreement for British Airways. They also do for China Airlines and Malaysian and what have you.
Our aviation regulations do not permit a U.S. carrier like Delta, if it wanted to, to have a reciprocal arrangement with a British carrier to wet-lease a British freighter in international air transport. And when we first started talking about this to the British government they said, ''Look, there's two big issues that we have; if we give you Fifths''—meaning the U.S. industry—''then we want Fifths.'' And the Secretary told you that they were willing to grant those.
And secondarily, the FAA looked at its regulations and agreed that U.K. carriers that are fully certificated by the British certification authority should also be permitted to wet-lease, and they were prepared to offer that to the British industry. And it was on that basis that we thought, as late as September or October, that we had a much more liberalized agreement. It was only later that they came in and said, ''Oh, by the way, we've changed our minds. We now want cabotage in the United States.'' That's not going to happen; it's against statute, as the Secretary said. We want to solve the Buy America thing and I want to solve the ownership issues.
We don't have any objection to any of those, but they cut across issues far beyond the all-cargo sector. So they just threw them in there, I think, at the end of the day, quite frankly, to scuttle the deal.
Mr. OBERSTAR. Well, I think even if they got cabotage, they wouldn't use it.
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Mr. SMITH. Well, I agree with you. That's why I said we don't have any objections to them having it. They want to come over and compete here? Be my guest.
Mr. OBERSTAR. It's a straw issue, but you have somewhat clarified the wet-lease issue. That is not a straw issue in and of itself.
Mr. SMITH. No, no, not at all. It's a real issue, and the USDOT and FAA were prepared to address it. That's why I think this was so shortsighted for British interests. To say that you could have open Fifth Freedom beyonds from the United States of America worldwide, which meant a British carrier could come into the United States of America, drop off cargo and take it to wherever else they had authority—to Brazil or Japan or Australia or what have you—and also that they could be involved in this very profitable ACMI international wet-leasing—to not do that, we were astounded. It was a wonderful deal for British all-cargo interests.
I am mystified. I don't know why they did what they did.
Mr. OBERSTAR. Thank you very much, Mr. Smith. It's always a pleasure to have you with us.
Mr. SMITH. Thank you.
Mr. DUNCAN. Thank you.
Mr. Sweeney?
Mr. SWEENEY. Thank you, Mr. Chairman.
Mr. Smith, let me say first, thank you for your testimony. I must say that many of us are continually impressed by the direction of your company, and that's due to your leadership, so congratulations.
You mentioned in your testimony—you talked about the fact that 2 percent of tonnage equals 40 percent of volume. What's the economic impact if we are successful in achieving an Open Skies agreement?
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Mr. SMITH. Well, we've done some econometric analyses. I mean, the effects of opening this thing up would clearly be measured in the many millions of dollars for us and other U.S. all-cargo carriers. As I just explained to Mr. Oberstar, I think it would have been worth many, many millions of dollars in new revenues for British all-cargo carriers if they were truly interested in competing. What they are all interested in doing is like the devil in Paradise Lost, being a king in a smaller place. I'm not equivocating the United Kingdom with hell, which is what the devil wanted in Paradise Lost; he wanted to be the king down there rather than a slave in heaven.
But the point of this, all kidding aside, is that the air cargo market is the primary facilitator of modern high-tech, high value-added trade: computers, electronics, pharmaceuticals, surgical instruments, aircraft parts, auto parts, intellectually-developed fashion goods, gourmet foods. All of those move by air.
So the point is that a liberalized regime creates jobs that avail themselves of those types of items being produced. The much bigger issue was the number of British companies who wanted to have Federal Express express services in order to be able to more effectively sell and source to and from the United States.
So measured that way, the value of this thing was in the hundreds and hundreds of millions of dollars, and worth many thousands of jobs.
Let me give you just one example of this. I mentioned that we had opened a hub at Charles DeGaulle Airport in Paris, which we are very happy with. The United Kingdom was never even considered for such a hub. It was only because of the new agreement that we had with France, and we have said on the record that that hub in Paris will produce, someplace in the next five to seven years, 3,000 to 4,000 incremental jobs, and there will be hundreds of companies that will locate next to that hub, just as there were exporters that located in the early part of the 20th century next to the port cities.
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So to take all those opportunities away for whatever this small protectionist interest is, or to use it, as Mr. Oberstar said, as some sort of a trading chip, I can't imagine. But it's worth hundreds of millions of dollars for both trading partners.
Mr. SWEENEY. You are actually making the point I was going to try to make in my next question, and that is—your company has already acknowledged that you're withdrawing from Prestwick?
Mr. SMITH. Yes.
Mr. SWEENEY. What's the economic impact on Prestwick?
Mr. SMITH. Well, I can't answer that. There's an exporting association up there called Speed that has been very, very active in this with the British Parliament and with the Scottish Minister and so forth, saying, ''This is hugely important to Silicon Glen because this is the way we get our components and the way we go to market.'' And there has been a fair amount of information on that. We will try to pull together some of those specifics and send them to you.
Mr. SWEENEY. That might serve to help motivate the British government to change its position.
Mr. SMITH. They are aware of all of those. All of those have been submitted to the British government.
Mr. SWEENEY. Finally, I believe you mentioned in your testimony that Stansted as well is a place that you may be pulling out of. What's the decision?
Mr. SMITH. We would not pull out of Stansted. London is too big a market for us to have to serve—here is the way we have to serve southern England now. We fly our big, wide-bodied cargo airplanes from the U.K. into Stansted, and at Stansted we offload the cargo for the United Kingdom, and then we fly air for the cargo offloaded, at the expense of tens of thousands of gallons of fuel, over to our hub in Paris or on to our other beyond points in the Middle East and so forth.
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Then underneath that flight, we have to charter an EU carrier—and it won't be a BCCA carrier, that's the one thing I can promise you, because it can be any EU carrier—so they fly right under our wide-body and carry the traffic that we would have put on our airplane, and we take it over to Paris where we have open authorities, and it moves on through the FedEx system to Malaysia or Japan or China or wherever the case may be.
So not only is it wasteful, it's just downright silly, because all it is is a tax on the importers and the exporters of the United Kingdom for reasons that still are not clear to me.
Mr. SWEENEY. I thank you for your testimony.
Mr. DUNCAN. Thank you very much.
Mr. Lipinski?
Mr. LIPINSKI. Mr. Smith, before I get into any other questions, when you were just giving this example over here you said that your wide-body flies into Stansted from the U.K. You meant from the United States?
Mr. SMITH. I meant from the U.S. Thank you very much for correcting me. Yes, from the United States.
Mr. LIPINSKI. I thought that's what you meant.
I have always said that you are so successful in negotiating things for Federal Express that, in regards to aviation policy in this country, we should appoint you as an Honorary Deputy Secretary of State and send you out to negotiate some of these arrangements. But obviously, even you seem to be having some problems in regard to getting things done, at least in the United Kingdom.
But I appreciate your being here today very much. It's always very educational to hear you talk about the cargo industry and the aviation industry.
I want to ask you a question, though. I have a dispatch here from Reuters, the news agency, and they are talking here that FedEx is interested in being the launch carrier for the A3XX. Is this true?
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Mr. SMITH. FedEx has told both Boeing and Airbus that we need a freighter larger than the MD–11, which is our current airplane. Boeing has a 747–400 stretch freighter; in fact, they were at our headquarters last Wednesday. They have not made the decision to launch it. We have urged them to launch it. Airbus said they plan to launch the A3XX this year, and they are going to offer a freighter version of that.
So we are definitely interested in a bigger freighter. Obviously, we would prefer that both of them offer one, then we would make the best commercial choice.
Mr. LIPINSKI. The price would be better if they both offered one?
Mr. SMITH. Of course.
Mr. LIPINSKI. You obviously believe, at least with FedEx, that there is a need for this kind of jumbo plane. Do you think that there is sufficient market out there beyond FedEx for this type of plane? I mean, it seems like Airbus believes that there is, and apparently you can utilize it, but it seems like there are so many others that don't believe that there is a need for a plane that big.
Mr. SMITH. Well, I am firmly convinced there is a need for a plane that big, certainly in the cargo business. One of our biggest issues, Mr. Lipinski, is the lack of space on airports—or slots—in many locations. At Boston, for instance, right now we're looking out over the future; there's not another cargo gate on the airport. At Stansted, which we went into some years ago to get out of the congestion at Heathrow, it is now quite a busy airport. At O'Hare, as you know, it is slot-restricted and the space is limited.
So in those major markets—Paris, London, Frankfurt, Tokyo, Osaka, Hong Kong, just go on down the list—there is a market for a larger aircraft in the 21st century, assuming you believe that air transportation is going to continue to grow, and we are very confident that that is true for international air express.
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So we need a bigger airplane just because we can't just keep adding frequencies, and there is no real frequency dimension to our business; I mean, you don't care whether we leave Chicago at 7:00, 8:00, 10:00, whatever the case may be, as long as we get your shipment to wherever it is that we've told you we're going to get it the next day.
So for our business there is definitely a need for a larger airplane, and I think, as an industry observer who has been around a long time, that there definitely is a requirement for a larger aircraft. And I have urged the CEO of Boeing to recognize that. I know that they have a slightly different viewpoint of it, but they have a 747 stretched airplane on which they haven't authorized launch yet, but they have definitely completed the fundamental engineering for it, and Airbus is sort of in the same boat.
Mr. LIPINSKI. Well, it would seem to me that you are prepared to be the launch carrier for A3XX. This certainly gives great impetus to Airbus building that. And Boeing certainly should be well aware of that, because right now Airbus is—to put it in the language of the street—eating Boeing's lunch, and if they were to get this type of plane on the market also, Boeing is going to be in even greater difficulty than they are at the present time.
Mr. SMITH. But, you know, I have to tell you, I really have been surprised about Boeing's position on this because in the case of FedEx and Boeing, they have a great advantage because they are dealing with a derivative airplane rather than an all-new airplane, and that means that they could deliver a stretched airplane to us considerably earlier, and they have to put far less nonrecurring costs into building such an airplane. And it would undoubtedly be configured so that the same pilots that can fly the 747–400 can fly it.
So I'm not sure why they haven't gone forward. We told Boeing the same thing. We said, ''Whoever will launch one of these airplanes, we will be a launch customer of a freighter version, depending on who offers it to us first.''
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Mr. LIPINSKI. Thank you very much.
Mr. DUNCAN. Mr. Smith, I know in my reading in preparation for this hearing that many people are amazed at the influence British Airways has over the Blair government. But I also know that the British environmental movement is supposedly very strong with the Blair government, and perhaps you should try to get them involved with you because certainly it's very wasteful, huge amounts of fuel, and it creates a lot of additional air pollution to fly all that air because of those rules that you accurately described as silly and wasteful. At any rate, that's just a thought.
But let me say that I appreciate your being here. I continue to think that you are one of the most outstanding and informative witnesses that we've ever had in front of this subcommittee, and I thank you for being with us.
Mr. SMITH. I hope you will tell that Ms. Danner that with just one time out, we would have been talking about being the champions this year instead of them.
[Laughter.]
Mr. DUNCAN. Right. I will tell her.
Mr. DUNCAN. Our next witness is Sir Michael Bishop, who is Chairman of British Midland Airways Corporation.
Sir Michael, we are certainly pleased to have you here with us, and you may proceed with your testimony.
TESTIMONY OF SIR MICHAEL BISHOP, O.B.E., CHAIRMAN, BRITISH MIDLAND AIRWAYS CORPORATION
Mr. BISHOP. Thank you, sir. Good afternoon, Mr. Chairman, Congressmen. May I thank you first of all for the courtesy and the invitation to give evidence this afternoon, and I also thank the Congressmen for the personal courtesy to me of receiving me in their offices from time to time, and indeed, for the assistance and courtesy which we receive from U.S. officials and Secretary Slater as we have been pursuing our case to enter service on the North American market.
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It is probably not the day for a Brit to be giving evidence on the Hill, and I now clearly understand how early settlers here felt when they had to circle the wagons and wait for the shots to come through the roof.
As the son of an Australian father, I know all too well of the frustrations and annoyance which the old country engenders from time to time on territories where, in the distant past, it formerly held some influence.
I have submitted testimony to the committee and I would like to just merely highlight, in addition to that, some of the points.
I have a special interest in approaching the North American market, and the U.S. market in particular. In 1978 I bought British Midland from a British financial institution who could not raise the finance to buy this business through the U.K. financial markets, but I borrowed the money personally from a U.S. dentist, the late Dr. Robert Beecham of Newport Beach in California, who had great confidence in me to build up an airline in Britain, and indeed, in the future of the U.S.-British trade relationship, and I am sure that in his memory he would be distressed to know of the acrimony which the present hearings have engendered.
In short, I really want to focus on the fact that British Midland has for many years been the champion of competition in the U.K. and Europe, and to assure you that we are in the same position to give that incentive to operate transatlantic services and follow a similar business model. In short, we are ready, we are willing, and we are able to start these services, but are precluded from doing so by the arrangements which have been highlighted at some length in the hearings this afternoon.
I think it is important to say that I believe there are key economic benefits which will accrue to the consumers and the passengers, both here and in the United Kingdom, through a completely liberalized transatlantic air service agreement.
A number of speakers this afternoon have pointed to the paradox that here we have two countries, the United Kingdom and the United States, who in their own territories have extremely liberal markets, and in their adjacent territories, but have failed to find agreement to trade between their own countries on the same basis. And it is particularly extraordinary that these are the two countries that have the closest ties together in language and business philosophy, and particularly in shared global political priorities.
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We at British Midland were the first carrier to challenge British Airways on domestic trunk routes within Britain, and we now account for 40 percent of all those passengers. We also were pioneers in liberalization and deregulation of services from the United Kingdom to Europe, and have led the way in code-sharing strategy, which currently we have 19 code partners, considerably more than many far larger carriers.
I believe that the experience on transatlantic routes would be the same as we have all achieved, both those carriers within the United States and those carriers in Europe which have been able to benefit from European deregulation. We know that markets would vastly increase from Open Skies. We know in particular that there would much more competitive business, travel fares and leisure fares, improved service quality, greater frequency, more capacity, and in particular, access to many more destinations.
We know from our experience in deregulation that all these benefits accrue to our passengers, and we want to see them accrue to passengers who use the North Atlantic and transatlantic routes between the United Kingdom and the United States. It is now nearly two years since we made our first application to come on the North Atlantic routes, and here we are, at a particular moment in time, when all our expectations have been dampened by the events of the past four weeks.
I think it is important to say that we are extremely disappointed at the progress to overhaul Bermuda 2, which has lagged behind other countries with which Open Skies agreements have been reached. We have put forward a number of initiatives to break this impasse, including an exemption. We also launched a campaign to highlight these issues, called ''Make the Air Fair,'' which was to highlight the high cost of business travel to and from the U.S. to the U.K. because of the lack of liberalization.
I would also like to say that it is ironic that while the airlines of our two countries are restricted in their ability to compete on this market, the U.K. has granted foreign airlines—such as Olympic Airways of Greece, Pakistan International, and even Aeroflot, and only four days after the recent collapse of the talks, Air India—additional rights to operate from the United Kingdom, and from Heathrow in particular, to the United States. We find this an inconceivable issue to have occurred in light of the failure of the recent talks. Four airlines have been given Fifth Freedom rights out of the United Kingdom in preference to the introduction of new British or more new U.S. carriers.
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I think that has been an extremely unfortunate development, that those Fifth Freedoms have been granted in preference to British carriers and U.S. carriers, and certainly in our case it has precluded jobs being created in the U.K. which otherwise would have been the case had we come onto the route.
However, I am very hopeful that our two governments will be able to agree on a significant step forward, and that they will be able to negotiate an introduction of much-needed competition to this market for the benefit of consumers and carriers alike.
Thank you.
Mr. DUNCAN. Thank you very much, Mr. Bishop.
I will go for first questions to Chairman Shuster.
Mr. SHUSTER. Thank you very much.
Sir Michael, I believe your testimony is of extraordinary importance to us because it clearly demonstrates that we are not simply arguing for something purely in U.S. interests.
You are one of the most highly respected—and your firm, one of the most highly respected as well—in Great Britain, and for you to come here and express those very well thought-out views indicates that indeed it is not only in the U.S. interests, but in the British long-term interests as well. So I thank you very much for that.
I yield back my time.
Mr. DUNCAN. Thank you very much, Chairman Shuster.
Mr. Oberstar?
Mr. OBERSTAR. Thank you, Mr. Chairman.
I certainly concur with Chairman Shuster's observation, that yours is most important testimony, and I applaud your courage in coming over here to testify on a matter of such importance to Her Majesty's government. We hope that it will not result in any recriminations against you when you return.
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In your testimony you mentioned that companies in the U.K. are paying 76 percent more for business fares to New York than to countries elsewhere in the EU. If British Midland is admitted to the elite company of carriers serving that transatlantic market, do you plan to become the Freddie Laker of 21st century aviation?
[Laughter.]
Mr. BISHOP. Well, I wouldn't claim that crown. He was a real pioneer in our industry.
But certainly, I would undertake that we would do on the North Atlantic market exactly as we have done in our domestic and European business, and that is to bring new and innovative fares into the market, which would have the overall effect of reducing the cost of business travel. I think that's a most important undertaking to give, and one which we commit to.
I would also, if I may, like to add to my testimony in the sense that since my testimony was drafted yesterday, I requested the British Secretary of State for Trade and Industry to launch an investigation into the code-share arrangements between British Airways and American Airlines which is currently before the Department of Transportation in the U.S. It represents significant competitions for us in relating to our planned service to Chicago, and particularly, because it reinforces the points which were made earlier in testimony, because it is a very large combined market share which both British Airways and American Airlines would hold in any new arrangements they have.
Mr. OBERSTAR. Clearly, British Airways does not welcome—is not applauding your entry into that market. But they have trained their animosity on U.S. carriers and pretended to the British government that if the access the U.S. is seeking for U.S. carriers is indeed negotiated, that they—British Airways—will have to cut 8,000 jobs at Heathrow because they will lose so much market access. But won't they lose some market to British Midland? Or will your entry into the market grow the market, rather than be seen as simply a zero sum gain, ''you enter, they lose''?
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Mr. BISHOP. Again, I can only recall from experience that every new market that we have entered over the last 25 years has led to the growth of the market, to the growth of the jobs available in the industry, and also to the satisfaction of the consumers. I could give you a very brief example.
The representations which British Airways have made to the British government that have been quoted in our press recently are exactly the same ones that they made in 1982 when they tried to prevent me from entering the U.K. domestic market, when they held a monopoly on the U.K. domestic routes. They said that it would be the end of the world as we now knew it if a competitor were to come onto this particular route. Well, interestingly, within six months of our starting the London-Glasgow shuttle service, British Airways were carrying the same number of passengers that they were carrying before we entered the route, and we had actually achieved 30 percent of the market. So the market had grown very, very significantly indeed, and I suspect that this story, which has been reported in the press, about job losses falls into the same category of lobbying, which has been deployed on earlier occasions.
I think that British Airways, for their own quite proper commercial reasons—which I am certainly not here to criticize them; in particular, I think they are a very fine and aggressive competitor with a good product and an excellent brand—but I don't think they should detract from newcomers coming into the market. They have made a commercial decision themselves to reduce their capacity on the Atlantic by 12 percent; that clearly means there should be headroom for new carriers to come into the market.
I also feel that the issues which were referred to in testimony and comments earlier, that there are—I think, Congressman, that you yourself raised the issue of losses in other areas of their activity—I don't think that some transatlantic routes should be used as a mask to cover problems in other parts of their business. These should be seen on a stand-alone basis.
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Mr. OBERSTAR. Well, very clearly—and I very much appreciate your corroboration of my comment earlier. This reducing capacity, that's certainly not because their competition is beating them out; they have the upper hand in the marketplace. They're doing it because they have losses elsewhere, and they have to retrench. I just don't see why the British government isn't—one of the oldest free enterprise governments in the world—isn't an advocate for a wider market. Why do they continue to see—maybe you shouldn't answer that question; I simply ask it, but I don't want to put you at risk—why do they see British Airways as their client carrier?
Mr. BISHOP. Well, I can't answer on behalf of the British government.
Mr. OBERSTAR. You shouldn't.
Mr. BISHOP. It would be very improper of me to do so. But I can speak from experience of my own interface with British Airways over the last 30 years, and it is not confined to this present administration by any means. It happened in earlier administrations with different governments. British Airways has been very successful over the last 30 years in persuading governments of all parties that what is in the best interests of British Airways is in the best interests of British civil aviation. I think that carriers like British Midland and Virgin Atlantic and the numerous non-scheduled carriers that we have in the new low-cost areas have shown that what is in the best interest of British civil aviation is to have a diverse and competitive market, and I think that it is almost—without doubt—that carriers other than British Airways have created more new jobs and have given greater consumer satisfaction by the expansion of their services than British Airways themselves have been able to generate with their own expansion.
So I think that having a diverse market and competition has not just benefitted the consumer; it has actually grown the British airline industry enormously, and I cannot see why there should be any special pleadings for one individual carrier. I would hope that the British government would equally represent all carriers in international negotiations, and it is a disappointment, particularly in the most recent negotiations that Secretary Slater referred to, that something that clearly had been discussed between officials on both sides was abandoned at a very late stage in the proceedings, clearly on a very abrupt basis, which not unnaturally—as one has heard today from Congressmen and from witnesses—has given unnecessary offense here in the United States.
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Mr. OBERSTAR. Well, your observation about the attitude of British Airways calls to mind the very similar pronouncement by the Chairman of the Board of General Motors a few decades ago, ''What's good for General Motors is good for America,'' he condescendingly pronounced. And it turned out he was wrong, and we fondly remember those observations.
I just think that our experience in every international market has been that open access grows the market for all predecessor entrants—participants in that market—as well as new entrants. And your participation, British Midland's participation, in the transatlantic market will grow that market as well, and we ought to do all we can to provide access through a wisely-and broadly-negotiated agreement.
I recall just a few years ago, in 1992, in a meeting in Paris with Pierre L'Gaugon, who was then the Director of French Civil Aviation, that Mr. L'Gaugon said, ''We are being badly treated by the United States. We have to defend Air France, and we are going to renounce the bilateral. Only 325,000 passengers are possible in this market.'' So they renounced the bilateral, and we proceeded month-to-month accommodation agreements. Comity and reciprocity, it is called. And a year later I met with Director L'Gaugon and I said, ''Well, what do you think?'' He said, ''You see? I told you. Only 325,000 people would serve in this market.'' I said, ''Of course. That's all you allowed. It's never going to go up if that's all you're going to permit in the marketplace.''
Well, we have the equivalent of that mindset today in the U.S./U.K. agreement. The British government says, ''That's all that's going to happen in this marketplace,'' and that's all that does happen.
We now have a new bilateral with France, and it is growing by leaps and bounds, and we ought to do the same.
I thank you very much for our courage in being here, for your innovation in international air transportation, and for your willingness to forge ahead.
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As a final observation, you have observed the British Parliament, and now you have observed the U.S. Congress. We must seem quite tame.
[Laughter.]
Mr. BISHOP. I'm sure you can have teeth when you want to, sir.
Mr. OBERSTAR. Thank you very much.
Mr. DUNCAN. Mr. Lipinski?
Mr. LIPINSKI. Thank you, Mr. Chairman.
Sir Michael, I want to thank you for stopping in and visiting with me earlier today, and I certainly appreciate your coming over here into this hostile territory.
I just have one question for you. You mentioned in your testimony that British Midland put forth a number of initiatives to break the impasse in the U.S./U.K. Open Skies discussion. Can you give us a few examples of some of the initiatives that you put forward?
Mr. BISHOP. Well, first of all, we asked the U.S. Government if we could have an exemption from the Bermuda 2 agreement, with their consent, to introduce two daily flights from Heathrow to New York. Clearly, there were issues in granting that which would be unacceptable in their sole form to U.S. interests, and therefore that kind of initiative developed subsequently into a package, a mini-deal, being developed which included U.S. carriers and which addressed the issues which the subcommittee has been looking at this afternoon. And that dialogue on both sides resulted in the proposal of the mini-deal which was abandoned in the talks a few weeks ago.
So it has been by having dialogue and suggesting ideas to negotiators on both sides as to how we could move forward, that the mini-deal—not just the input that British Midland gave, but the input from other carriers gave—as to how a way forward could be addressed. That's why, as I said earlier, I am disappointed that despite that input and the innovation that we brought to it, that it wasn't felt possible for our government to consummate that agreement.
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Mr. LIPINSKI. Could you give us some of the elements, though, of the mini-deal that you proposed?
Mr. BISHOP. Well, we have asked only—from our own point of view—for services to the U.S. But U.S. carriers have had their own requests, and they all came together in the form of a package between both sets of negotiators.
Mr. LIPINSKI. But the only elements of the deal you put forward were the ones that directly affected British Midland?
Mr. BISHOP. Well, yes, formally. Of course, informally we suggested how reciprocity might be developed, and that appeared in the form of the mini-deal. In fact, I am reminded quite properly that it should be put on the record that the mini-deal included the introduction of two U.S. carriers into Heathrow in reciprocity for our own new services.
Mr. LIPINSKI. OK. Thank you.
Once again, I appreciate your coming here today. This, as you know, is an enormously important issue to all the members of the committee, and your testimony, along with the testimony of the other three individuals, has been very helpful in us trying to formulate what we may have to put into AIR–21 if there is no progress made in regard to the negotiations between the Department of Transportation here and the U.K.
Thank you very much, sir.
Mr. BISHOP. Thank you very much indeed.
Mr. DUNCAN. Thank you very much, Mr. Lipinski.
Sir Michael, can you tell me, is there any particular reason why your company has encountered problems with or lack of support from the British government? Or do you feel it has?
Mr. BISHOP. I think this was mentioned earlier. I think that there have been priorities in the past in the way in which all British governments—not the present one—have viewed the granting of traffic rights of all overseas countries outside of the EU, and there has been a pattern where the priority of that has resulted in the granting of licenses to British Airways rather than to those carriers. Certainly, Freddie Laker's name was mentioned earlier; he had exactly the same problems in the 1970's. Richard Branson, who had developed an excellent product and airline, had equal difficulties with a British Conservative government in the 1980's. When there was fierce lobbying, he had to go through the same baptism of fire to build his business up, as Freddie Laker did, and as we are experiencing now. This is not something that is confined to any one particular administration; it has gone through the whole history of the development of long-haul airlines.
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Mr. DUNCAN. Well, as I told you in our earlier meeting, I met several times with Mr. Branson and Sir Freddie Laker.
I should know this, but I don't. What size is your company in comparison to British Airways?
Mr. BISHOP. Well, we carry approximately 7 million passengers a year; British Airways carry over 40 million. But Virgin Atlantic carries about half the number of passengers that we do. We are about twice the size of Virgin Atlantic in terms of the number of passengers carried. And we have 13 percent of all the slots at Heathrow Airport. Our main operational base is at Heathrow; we have the largest number of slots, after British Airways themselves. Virgin Atlantic has about 2 percent of the slots, and the largest carrier after us has about 5 percent. So we have a significant operation at London Heathrow, which is our main operational base. We currently have 60 airplanes.
Mr. DUNCAN. Well, that certainly is a significant operation, to have 7 million passengers, but I do know that all over the world and here in this country, in whatever industry, the big giants seem to get the most favorable treatment from the government, especially in comparison to much smaller operations. It shouldn't be that way, but it just seems to be that that's the way it is.
Could you comment on potential steps that you believe might find favor with your government, or things that they might be willing to do to break this impasse?
Mr. BISHOP. As I say, it isn't something where I can speak on anybody's behalf except on my own on this occasion.
I would say that I think, as Secretary Slater mentioned in his own testimony, he was given an undertaking by the British government of a move towards liberalization and deregulation, which I think has made the latest episode all the more difficult to understand. Indeed, I think the meeting he referred to was reported quite widely in the British press, and they made a joint statement of their intent to move toward liberalization and eventually towards Open Skies. And I think that what probably is consistently holding up this issue is a misunderstanding which has become a deal-breaker, of the appetite for both British Airways and Virgin Atlantic to exercise cabotage rights in the United States, which we know by statue cannot in fact be granted. All the commercial evidence for both of these carriers is—in the case of British Airways, if they secure a code-sharing arrangement, a partnership arrangement with American Airlines, it would be hard to conceive why they would want to operate and set up a domestic airline in the United States. One of the reasons that they are losing money in their main operation at the moment is that they have significant loss-making units operating in Germany, France, and Britain for short-haul domestic operations, services similar to what they say they want to operate in the United States, which are losing significant amounts of money.
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Richard Branson has been on the record very openly that he has had very considerable difficulties in setting up and making profitable a short-haul, low-cost airline based on mainland Europe.
So the experiences of both those airlines in operating the kind of routes they say they want to operate on cabotage in the United States would not lead me to believe that commercially it is something that others would want to pursue, yet it's being given as one of the reasons why we can't proceed towards liberalization and Open Skies. I think it's a complete red herring.
Mr. DUNCAN. Reference was made earlier to the more than 70 percent discrepancy or premium that British business travelers have to pay, and I can tell you I was given a quote from a recent London Times article on this situation in which the Times said, ''Competition is not a consideration, and the consumer barely gets a look in.'' And I think that almost everyone who really studies this realizes that the British consumer would be a great beneficiary—would probably be the main beneficiary—of a liberalization or a more open arrangement between our two countries. And I echo the statement by Mr. Oberstar; I hope that you don't suffer any retaliation or repercussions for having come here, but actually you shouldn't, because what you are attempting to do is help the British consumer in a very substantial way.
Mr. BISHOP. Yes. I really appreciate your comments and our thoughts. I might have to apply for asylum, of course, at 9:00 o'clock.
[Laughter.]
Mr. DUNCAN. We would be very glad to have you.
I am told that you have come all the way from Australia to be here, and I very much appreciate that. It has been a great honor to have you here with us today, and we're going to keep on working on this. If you have any other suggestions or thoughts, I know that all the members of this committee would appreciate hearing from you, particularly Chairman Shuster, Mr. Oberstar, Mr. Lipinski, and myself.
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So we thank you very much for being with us, and with that, that will conclude what I think has been a very informative hearing today.
[Whereupon, at 6:03 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]
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