[Congressional Record Volume 141, Number 168 (Friday, October 27, 1995)]
[Senate]
[Pages S16100-S16103]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 UNITED STATES-JAPAN AVIATION RELATIONS

  Mr. PRESSLER. Mr. President, I rise today to discuss the critically 
important issue of United States aviation relations with the Government 
of Japan.
  Last month, the United States commenced talks with the Japanese aimed 
at liberalizing the transpacific cargo market. This is a welcome 
development and I hope an agreement liberalizing cargo service 
opportunities can be reached by no later than March of next year--the 
mutually agreed upon timetable. Clearly, consumers of cargo services on 
both sides of the Pacific would be the big winners if such an agreement 
is struck. Talks on more contentious passenger carrier issues have not 
been scheduled.
  As should now be clear from the numerous floor statements I have made 
in this body in recent months, I have a keen interest in United States-
Japan aviation relations. As Chairman of the Committee on Commerce, 
Science, and Transportation, I will continue to make it a priority. At 
the outset of my remarks today, let me emphasize several related 
points. Although these remarks refer primarily to passenger carrier 
issues, they apply with equal force to cargo relations with the 
Japanese.
  First, from a long-term perspective and due to its key strategic 
location in the Asia-Pacific aviation market, aviation relations with 
the Japanese unquestionably are our single most important international 
aviation relationship. At the same time service opportunities in Japan 
are expanding, air service markets in Asian countries best accessed 
through Japanese gateway airports are growing at an astounding rate.
  Simply put, meaningful participation in the rapidly expanding Asia-
Pacific market is absolutely critical for the long-term profitability 
of our airline industry. For instance, the International Air Transport 
Association estimates that between 1993 and 2010 scheduled 
international passenger service in Vietnam will grow at an average 
annual rate of 17.3 percent. International air service opportunities in 
China are expected to grow at an annual rate of 12.6 percent over the 
same period. Overall, it is expected the Asia-Pacific market will 
account for approximately 50 percent of world air traffic by 2010.
  Second, geographic factors coupled with the limited range of 
commercial aircraft make it essential that carriers seeking to 
effectively serve these rapidly expanding Asia-Pacific markets can 
provide that service from Japan either directly or indirectly through a 
Japanese code-sharing partner. As distinguished from the bottleneck at 
London's Heathrow International Airport, overflight to markets beyond 
Japan is not an option since the distances to these markets from the 
United States are too great. Moreover, as shown by recent unsuccessful 
experiences, serving the Pacific-Asian market through other gateway 
countries does not appear to be a viable alternative.
  Third, aviation relations with Japan are a very important national 
trade issue and it is imperative they be treated as such. Indeed, 
discussion of air service opportunities to and beyond Japan is one of 
the United States' most important trade issues being discussed with any 
of our trading partners. The stakes in these talks are enormous. For 
example, the United States currently enjoys an approximately $5 billion 
net trade surplus with Japan for passenger air travel in the Asia-
Pacific market.
  I cannot emphasize strongly enough the importance of our current and 
future aviation negotiations with the Japanese. Handled properly, air 
service negotiations with the Japanese could enhance the ability of our 
passenger and cargo carriers to participate in the rapidly expanding 
Asia-Pacific market. Handled poorly, the adverse trade consequences 
could be colossal.
  Fourth, what the Japanese are seeking in these negotiations is not to 
level the playing field as they suggest. Let there be no mistake, the 
Japanese are seeking no less than to tilt the competitive playing field 
in such a way as to enable their less efficient carriers to compete 
more effectively against our carriers. Our passenger carriers serving 
the Asia-Pacific market have operating costs approximately half those 
of their Japanese counterparts.
  The Government of Japan claims the United States-Japan bilateral 
aviation agreement is fundamentally unfair and is solely responsible 
for the greater market share our passenger carriers enjoy on service 
between the United States and Japan. The facts do not support such a 
position. Just 10 years ago, under the very same bilateral agreement 
the Government of Japan now criticizes, Japanese carriers had a larger 
market share on transpacific routes than United States competitors. 
What is the truth? As a June 1994 report by Japan's Council for Civil 
Aviation noted, the fact is our carriers became more competitive by 
lowering operating costs while Japanese carriers continue to be high 
cost carriers.
  Similarly, the Government of Japan claims our carriers have abused 
their beyond rights and unfairly dominate beyond markets. Again, a 
claim without merit. Currently, Japanese passenger carriers have a 34 
percent share of the Japan-Asia market while United States passenger 
carriers have just 13 percent of that market. Moreover, our cargo 
carriers have only approximately 14 percent of the Japan-Asia market. 
The facts speak for themselves.
  Having made these points--points I believe are critical to the United 
States-Japan air service relations debate--let me turn to the question 
of what our goal should be in current and future negotiations with the 
Japanese. Uncharacteristically, our carriers seem to speak with one 
voice in saying we need to seek to liberalize passenger and cargo 
carrier opportunities with the Japanese. There is disagreement, 
however, with regard to what strategy our negotiators should pursue to 
accomplish this goal.
  In recent weeks it has become readily apparent the debate regarding 
negotiating strategy will be shaped by two fundamentally different 
views. To better understand these views, one must remember that our 
carriers which currently serve Japan can be separated into two distinct 
groups based on the types of service they are authorized to provide.
  The first group of carriers are the so-called MOU carriers. These 
carriers--American Airlines, Delta Air Lines, Continental Airlines and 
United Parcel Service--are permitted by a Memorandum of Understanding 
signed in 1985 to provide service from specific cities in the United 
States to specific Japanese cities. MOU carriers cannot use Japan as a 
base of operation to directly serve emerging Asian markets beyond 
Japan. They can, however, participate in those markets through code-
sharing alliances with Japanese carriers. In fact, Delta's recently 
announced alliance with All Nippon Airways will permit it to do 
precisely that.
  The second group of carriers, whose rights are derived from the 
United States-Japan bilateral agreement signed in 1952, are permitted 
to fly to Japan, take on and unload passengers and/or cargo, and to fly 
on to cities throughout Asia. Unlike the MOU carriers, the so-called 
1952 carriers--Northwest Airlines, United Airlines and Federal Express 
Corp.--have beyond rights. Northwest was a party to the 1952 agreement. 
In 1985, United Airlines purchased its beyond rights from Pan Am in a 
$750 million transaction and Federal Express acquired the beyond rights 
of Tiger International, Inc. in a 1989 transaction valued at more than 
$1 billion.
  In a recent speech, Bob Crandall, the Chairman of American Airlines, 
set out a possible negotiating strategy for United States-Japan 
aviation relations. I anticipate other MOU carriers will embrace the 
strategy Mr. Crandall advocated and I therefore refer to it as the 
``MOU carrier approach.''
  Recognizing the Japanese are unlikely to grant beyond rights to MOU 
carriers, Mr. Crandall urged our negotiators to focus on increasing 
transpacific opportunities between the United States and Japan. In 
addition to 

[[Page S 16101]]
tapping expanding service opportunities in Japan itself, Mr. Crandall 
explained such an approach would enhance the ability of United States 
carriers to feed traffic into Asia-Pacific networks, including the 
planes of Japanese code-sharing partners who serve markets beyond 
Japan.
  What makes Mr. Crandall's speech notable is not so much his 
insightful view of the focus our negotiators should take. Rather, it is 
the strategy he recommends that is remarkable. In exchange for 
increased transpacific routes, Mr. Crandall recommends our negotiators 
should offer to cap the beyond rights of United Airlines and Northwest 
Airlines. As Mr. Crandall put it, ``[s]uch an agreement would trade 
beyond-Japan rights that Northwest and United do not use, and may never 
use, for authorities that American and other `have-not' U.S. carriers 
are prepared to operate today.'' I ask unanimous consent that a copy of 
Mr. Crandall's speech to which I have referred be printed in the Record 
at the conclusion of my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 1.)
  Mr. PRESSLER. Mr. President, not surprisingly, Stuart Oran, United 
Airlines' Executive Vice President for Corporate Affairs and General 
Counsel, recently offered a markedly different view of what our 
negotiating approach should be with the Japanese. I predict other 1952 
carriers will endorse Mr. Oran's view and therefore refer to it as the 
``1952 carrier approach.''
  According to Mr. Oran, it would be economic folly for the United 
States to cap the 1952 carriers' beyond rights and thereby prevent them 
from growing within the rapidly expanding Asia-Pacific market. In fact, 
Mr. Oran warned the United States would be playing into the Government 
of Japan's hands were we to follow the negotiating strategy Mr. 
Crandall recommends.
  To illustrate the point that trading away the beyond rights held by 
1952 carriers would be tantamount to ceding the Pacific-Asian market to 
Japanese and other foreign carriers, Mr. Oran described a recent study 
by Booz Allen & Hamilton which United Airlines commissioned. That 
study, which assessed the value of beyond rights in Japan to the United 
States economy, concluded ``the U.S. would suffer a trade loss in 
excess of $100 billion over the next twenty years--the bulk of which 
would be transferred to Japan'' if the United States agreed to 
surrender our passenger carriers' beyond rights. Mr. Oran characterized 
the approach Mr. Crandall recommends as a ``sucker deal that would put 
all U.S. businesses at a permanent disadvantage in the exploding Asian 
market.'' I ask unanimous consent that a copy of Mr. Oran's speech be 
printed in the Record at the conclusion of my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See exhibit 2.)
  Mr. PRESSLER. Mr. President, as the debate between MOU carriers and 
1952 carriers intensifies, I look forward to learning more about each 
position and urge my colleagues to do the same. For example, I am 
anxious to see economic analysis from the MOU carriers regarding their 
claim that trading our passenger carriers' beyond rights in Japan for 
increased transpacific opportunities would be in the best economic 
interest of our Nation. I hope any such study or report would address 
the findings of the Booz Allen study.
  With respect to the 1952 carriers, I am particularly curious what 
leverage, short of trading existing rights, we have to offer the 
Japanese in exchange for new transpacific routes. For instance, as 
United States carriers form alliances with Japanese carriers, will the 
Government of Japan have a self-interested motive to increase 
transpacific routes to maximize the feed of passengers originating in 
the United States onto Japanese carriers who code-share with our 
carriers?
  Of course, the impact each approach has on consumers must be given 
great weight. I look forward to learning from MOU carriers and 1952 
carriers what effect the approaches they advocate will have on consumer 
choice and the fares that consumers pay.
  As I have said repeatedly, I believe our international aviation 
policy decisions should be based on a careful weighing of national 
economic benefits and costs. Simply put, the goal of international 
aviation policy should be to maximize national wealth. In light of our 
more than $65 billion trade deficit with Japan, it is absolutely 
essential that approach be the guiding principle in current and future 
aviation negotiations with the Japanese.

                                Exhibit

                     Remarks by Robert L. Crandall

       Thank you, Bruce, and good afternoon, Ladies and Gentlemen. 
     It's a pleasure to be here and as always, I am pleased to 
     have an opportunity to talk with you about the ever-changing 
     * * * and always challenging * * * business of international 
     aviation.
       I'd like to spend our time together today on the subject of 
     bilateral negotiations, an aspect of our usually fast-paced 
     industry about which most of the news has to do with what's 
     not happening, as some either drag on, and on, and on, and 
     on--and others simply don't take place at all.
       Bilateral aviation discussions between the U.S. and other 
     countries are invariably intense and difficult, for a variety 
     of reasons. One of the most important is that the United 
     States is a very large country, with many competing 
     airlines--which typically offer various competing agendas to 
     U.S. negotiators. Conversely, most other countries are, at 
     least by comparison to the U.S., relatively small and, in 
     most cases, have only one international airline.
       The result is that in most bilateral situations, our 
     opponents have far more focused goals than we do.
       With respect to Japan, a country with which the U.S. has 
     been unwilling even to launch passenger negotiations, the 
     situation is similar, but modestly different. Japan is a very 
     consensual society and although there are two international 
     airlines, both are willing to accept administrative 
     guidance--or something akin to it--from their government. In 
     the U.S., on the other hand, there is little consensus on any 
     aspect of international aviation and no agreement whatever as 
     to either the tactics or strategy our Government should 
     pursue with respect to Japan. Northwest and United, which 
     have extensive rights, are vehemently opposed to changes 
     while carriers like American, Delta and Continental, which 
     have few rights to Japan and little access to the rest of 
     Asia, think dramatic change is clearly called for.
       And passions run high, for access to Japan, and the rest of 
     Asia, is critically important to every internationally 
     oriented U.S. carrier. To compete effectively here in the 
     United States, each such carrier seeks to build the strength 
     of its route network by maximizing the number of origination-
     and-destination combinations it can offer its customers--and 
     each wishes to include as many international points as 
     possible.
       From Americans' perspective, the U.S. Government's 
     unwillingness to open passenger negotiations with Japan, and 
     our consequent inability to gain any meaningful access to the 
     huge and fast-growing Asian market, is extraordinarily 
     frustrating. That is particularly so since we think 
     substantial progress could be made--if only our Government 
     would act in accordance with its own, very recently 
     articulated international aviation policy statement--a point 
     I'll come back to in a minute.
       Let me take a moment first to examine the stakes of the 
     game. As I think everyone here probably understands, service 
     rights to Japan are the indispensable key to participation in 
     Asian markets, for several reasons:
       One is that today's aircraft do not have the range to fly 
     from most major U.S. hubs to most Asian capitals. Thus, U.S. 
     carriers without the right to use Japan's airports as 
     intermediate hubs are simply unable to participate in the 
     U.S. Asia market.
       While the Japanese probably will not grant U.S. carriers 
     like American and Delta the beyond rights we need to solve 
     this problem directly, it seems quite likely that if we had 
     adequate rights across the North Pacific, we could 
     participate in Asia by means of code-sharing agreements with 
     Japanese carriers. Thus, we think additional transpacific 
     rights and the key to broadened American participation in 
     Asia's aviation future.
       Second, Japan is Asia's pre-eminent economic power, by a 
     wide margin. Given its dominance, a very high percentage of 
     those traveling to and from Asia want to include Japan in 
     their itineraries. As a consequence, Tokyo and Osaka are the 
     only cities that can effectively serve as intermediate points 
     between the major U.S. hubs and the principal cities of 
     Asia--a point with which even the incumbent U.S. carriers 
     agree.
       In addition to being an essential component of any global 
     network, there is lots of evidence that Japan is woefully 
     underserved from the United States. Consider these facts:
       Although Japan has a larger economy than Germany, the U.K. 
     and France combined, fewer U.S. cities have nonstop service 
     to Japan than to any one of those countries.
       Fares between the U.S. and Japan--on a revenue-per-
     passenger-mile basis--average 29% more than fares between the 
     same U.S. cities and the principal cities of Europe.
       Despite being badly underserved, the U.S.-Japan market 
     numbers 1.0 million passengers per year and is the world's 
     second largest intercontinental market, exceeded in size only 
     by that between the U.S. and the U.K. one can only imagine 
     how large it will be when it is properly served!
       Unfortunately, it is not clear it ever will be, for our 
     aviation relationship with Japan is prey to two severely 
     complicating factors:

[[Page S 16102]]

       The first is the unique route rights established by the 
     U.S.-Japan aviation bilateral, which dates from 1952 and 
     enables two U.S. carriers--Northwest and United--to exercise 
     virtually unrestricted authority to fly from almost anywhere 
     in the U.S. to Japan--and beyond Japan to other points in 
     Asia. To illustrate that point, let me point out that during 
     the last 18 months, Northwest has added more new flights to 
     Japan than American operates in total.
       The beyond rights held by United and Northwest are 
     startlingly different from those granted by any other nation 
     to third-country carriers and have enabled Northwest and 
     United to build cohesive Asian networks and establish hubs on 
     both sides of the Pacific. Using this structure, the two 
     carriers can thus participate in all four types of network 
     traffic: First * * * between gateways--from Chicago to Tokyo, 
     for example: Second * * * from behind a U.S. gateway to the 
     foreign gateway--from Cleveland to Tokyo, via Chicago. Third 
     * * * from a U.S. gateway to beyond the foreign gateway--from 
     Los Angeles to Bangkok, via Tokyo.
       And finally: From behind a U.S. gateway to beyond a foreign 
     gateway--as in from Boston to Singapore, via Detroit and 
     Tokyo.
       Their fifth freedom rights also allow Northwest and United 
     to carry large amounts of traffic between Japan and other 
     points in Asia, thus depriving the Japanese carriers of 
     traffic they regard as theirs, and complicating Japan's 
     aviation relationships with some of its Pacific neighbors--
     notably China, Thailand, and Australia.
       Not surprisingly, both the Japanese Government and the 
     Japanese airlines regard these arrangements as unbalanced--
     and by the standards of international aviation, they are, 
     indeed, unbalanced.
       Other U.S. carriers have much more limited rights. While 
     the 1952 agreement permits both countries to designate 
     multiple airlines, Japan has essentially ignored that proviso 
     for nearly 20 years. Since 1982, Japan has consented to only 
     three very limited grants of additional routes, each 
     memorialized in a memorandum of understanding. The net effect 
     has been to create two classes of U.S. airlines serving 
     Japan:
       The two so-called ``1952 agreement'' carriers, which have 
     very broad rights, and three other airlines--American, 
     Continental and Delta--known collectively as the ``M.O.U. 
     carriers''--each of which is subject to substantial 
     restrictions on routes and frequencies, and none of which can 
     operate beyond Japan.
       Now as we all know, airlines are network businesses. To 
     optimize traffic flows, each of the major U.S. carriers 
     operates a number of hubs, which it uses to provide nonstop 
     service to as many places as economically feasible in order 
     to maximize the number of origin-destination markets it can 
     offer its customers. The fact that only two U.S. carriers can 
     offer customers in the United States a variety of Asian 
     destinations has significant, adverse competitive 
     consequences for those who can't.
       The other factor complicating our aviation relationship 
     with Japan is the unwillingness of the U.S. Government to 
     apply its recently articulated statement of international 
     aviation policy to relationships with that country. Our 
     government's international air transportation policy 
     statement, issued last April, clearly enunciates the most 
     important U.S. policy objective as--and I quote--to 
     ``increase the variety of price and service options available 
     to consumers.'' A second objective is to--and here I am 
     quoting again--``provide carriers with unrestricted 
     opportunities to develop types of services and systems based 
     on their assessment of marketplace demand.''
       Unfortunately, the U.S. has declined to pursue those 
     objectives in its aviation negotiations with Japan. 
     Apparently mesmerized by the notion that the beyond rights 
     held by Northwest and United are uniquely valuable, the U.S. 
     has adopted a civil aviation policy toward Japan that seems 
     intended to protect the economic interests of two carriers--
     and let competition, competitors and consumers take the 
     hindmost.
       In my view, ladies and gentlemen, that's bad policy--and 
     particularly so since it stands in sharp contrast to our 
     government's aggressive application of pro-consumer policies 
     in other negotiations.
       Moreover, this pattern of protectionism is not new. 
     Successive U.S. Transportation Secretaries have pledged to 
     eliminate the disparity between the have-not carriers and the 
     Northwest/United duopoly.
       In 1985, D.O.T. premised its approval for United's 
     acquisition of Pan Am's Pacific routes on United being made 
     ineligible for new Japan routes in future D.O.T. proceedings.
       During the 1989 U.S.-Japan negotiations, then-Secretary Sam 
     Skinner gave as one of his objectives: ``The enhancement of 
     the operating rights of the so-called M.O.U.-carriers.''
       When it instituted the 1990 U.S.-Japan route proceeding, 
     D.O.T. said it would base awards on--I am quoting now--``The 
     overall structure and level of competition in the U.S.-Japan 
     market,'' end of quote--and would also give weight, and again 
     I quote, ``To expanded service by those with only limited 
     U.S.-Japan authority''--unquote.
       All those promises notwithstanding, our Government's 
     actions in recent years have only enhanced the market 
     domination of the United-Northwest duopoly. In the 1990 
     proceeding, our Government granted the most important new 
     route--Chicago-Tokyo--to United, and then proceeded to give 
     two of the remaining routes to airlines unable or unwilling 
     to fly them--which promptly sold them to Northwest. The 
     bottom line: three of the six routes available in 1990 ended 
     up in the hands of the Northwest/United duopoly--despite 
     D.O.T.'s promise to strengthen the M.O.U. carriers.
       So here we sit. Since deregulation--which sometimes seems 
     like just yesterday, but which actually occurred 17 years ago 
     this month--we have transformed American from a domestic 
     airline to a global competitor--but we remain shut out of 
     Asia. Delta and Continental have had equally little success.
       It is time for a change--and if the U.S. will apply its 
     stated international aviation policy, we think change is 
     possible. For more than a year now, the Japanese Government 
     has been signaling a willingness to expand service between 
     the U.S. and Japan, and to work out arrangements to rebalance 
     our relationship. We believe Japan's Government recognizes 
     that it cannot realistically hope to withdraw the beyond 
     rights Northwest and United already operate--but that it does 
     want to constrain the further growth of their beyond 
     operations.
       In our view, a U.S.-Japan agreement premised on limiting 
     the expansion of beyond operations by the duopolists, in 
     exchange for a substantial increase in operating rights 
     between various U.S. cities and Tokyo and Osaka, would be 
     good for consumers, good for competition within the U.S. and 
     across the North Pacific, good for the U.S. trade balance 
     with Asia overall, and fully consistent with the D.O.T's 
     international aviation policy statement.
       Such an agreement would trade beyond-Japan rights that 
     Northwest and United do not now use, and may never use, for 
     authorities that American and other ``have-not'' U.S. 
     carriers are prepared to operate today. These new U.S.-Japan 
     services would have many favorable effects: (1) more 
     competition within the U.S., (2) more competition, and lower 
     prices, across the North Pacific, (3) more travel, by more 
     visitors, to and within the U.S., with all the attendant 
     increased employment and wealth creation such increases 
     create, (4) and more orders for U.S.-built aircraft.
       In addition to seeking a rational accommodation with Japan, 
     which will provide more transpacific opportunities for more 
     U.S. carriers, the U.S. can--and should--act affirmatively to 
     optimize the value of its route rights with other Asian 
     countries. For example, the use of Japan as an intermediate 
     point has long been a bone of contention between the U.S. and 
     China--and thus, our negotiators have had little success in 
     modifying the U.S.-China bilateral.
       China's Government wants nonstop service--which American 
     and others stand ready to provide--but has not been willing 
     to allow any new U.S. carriers to provide it so long as 
     Northwest and United insist on serving their country via 
     Tokyo.
       By accepting China's position that a Japanese intermediate 
     point may not be used in U.S.-China service, the U.S. would 
     improve its aviation relationships with both Japan and China. 
     Bettering both flight links and other relationships with 
     China, with which the U.S. already has a huge and growing 
     trade deficit--and whose future seems limitless--is clearly 
     very important--and everyone wants a better relationship with 
     Japan.
       Aviation disagreements do not defy resolution. Countries 
     that dislike bilaterals enough eventually renounce them--as 
     the U.K., France, Italy, Peru, Thailand, India and others 
     have done with respect to the U.S. at one time or another. In 
     a comparative sense, Japan certainly has a far more 
     legitimate complaint than the U.K. had in 1976, when it 
     renounced Bermuda I.
       Japan has already begun to restrict various rights held by 
     U.S. carriers and the recently launched U.S.-Japan cargo 
     negotiations are making little if any progress. In my view, 
     the U.S. would be wise to initiate comprehensive negotiations 
     now. Although proceeding under provocation is not ordinarily 
     an advisable course, I do not see how U.S. interests are well 
     served by protecting doupolies at the expense of reason, 
     consumers and competition.
       This is especially true since the Japanese Government 
     apparently seeks more comprehensive discussions, which would 
     lead us to believe that mutual accommodation is likely. 
     Assuming the U.S. is willing to adopt a stance consistent 
     with its international aviation policy statement, as it has 
     in other bilateral negotiations, we believe the time is right 
     for a settlement consistent with the best interests of all 
     parties.
       A passage from Shakespeare's ``Julius Caesar'' says it far 
     more eloquently than I can:

     There is a tide in the affairs of men,
     Which, taken at the flood, leads on to fortune;
     Omitted, all the voyage of their life
     Is bound in shallows and in miseries.
     On such a full sea are we now afloat,
     And we must take the current when it serves . . .

                               Exhibit 2

                       Remarks by Stuart I. Oran

       Good morning. It's a pleasure to be with you today.
       I am delighted to have this opportunity to talk about 
     United's vision of aviation in the next century--global 
     networks providing seamless service for our customers.
       Perhaps we can look to the telecommunications industry for 
     a model of our vision for the future of global aviation. 
     There, U.S. 

[[Page S 16103]]
     companies have developed a truly global service network. You can pick 
     up your phone and call anywhere in the world, yet deal only 
     with one of a number of companies. This network, which we 
     take for granted, is the product of carefully integrated 
     systems, cross-border alliances, realistic government 
     regulation and forward thinking telecommunications companies.
       We believe that consumers are entitled to that kind of ease 
     and convenience from airlines as well. A passenger should be 
     able to deal with a single carrier for an itinerary that 
     takes him anywhere in the world. To do this, we need a 
     network of alliances--of rights and beyond rights--for 
     carriers.
       Everyone understand the importance of beyond rights of 
     networks today, but they didn't in 1976, when Bermuda II was 
     under discussion.
       Ambassdor Alan Boyd of the U.K. offered testimony to the 
     House Subcommittee on Aviation on the need to renegotiate the 
     Bermuda I Agreement of 1952, calling it unfair to the U.K. He 
     told committee members that under the agreement, U.S. airline 
     revenues were twice those of the U.K. And he concluded that 
     the only way to rectify the disparity was to rewrite the 
     Bermuda Agreement substantially.
       Ambassador Boyd was correct on one point--a significant 
     revenue imbalance did exist between the U.K. and the U.S. But 
     the reason for the imbalance had little to do with route 
     assignments or agreements. It had to do with competitive 
     market forces and the then inability of a bloated, protected, 
     government-owned British Airways to compete. How times have 
     changed.
       Unfortunately, Congress and government regulators went 
     along with Ambassador Boyd.
       The results, as we know too well today, was Bermuda II. 
     That new agreement created dramatic structural advantages for 
     the U.K. out of a growing European market. Since then, the 
     U.S. market share between the U.K. and the U.S. had dropped 
     25%. But even more important, that agreement effectively 
     locked the U.S. carriers out of the key connecting complex in 
     Europe--Heathrow. In effect, U.S. carriers were punished for 
     their efficiency. We've spent the past 19 years trying to 
     correct the Bermuda II mistakes.
       I recount this today not to rub new salt into old wounds, 
     but to look at the lessons of the European market. We would 
     like to make sure that history does not repeat itself--this 
     time in Asia.
       For nearly 25 years, the 1952 Japan Air Service Agreement 
     enabled competitive parity between U.S. and Japanese 
     carriers. It was not until 1986, when United acquired Pan 
     Am's rights in the Pacific, that the parity began to 
     dissolve. The reason was simple--United took the necessary 
     and often painful steps to becoming more efficient in the 
     newly deregulated U.S. market. Meanwhile, the Japanese 
     carriers, operating in a highly protected environment, 
     avoided similar changes. The result today is that Japanese 
     costs are considerably higher than those of their U.S. 
     competitors.
       Let me underscore just how much higher those costs are. We 
     commissioned Booz-Allen & Hamilton to conduct a major study--
     to be released today--on the value of Asian beyond rights to 
     the U.S. economy. Among their key findings was that Japanese 
     carriers' cost are now roughly double that of U.S. 
     carriers at comparable stage lengths.
       The fact that the Japanese flights are more expensive is 
     not lost on the traveling public. Because of our efficiency, 
     we have developed fares and schedules preferred by the 
     Japanese consumers. As a result, the parity that long existed 
     between U.S. and Japanese carriers is gone. Today, U.S. 
     carriers provide 61% of the capacity serving Japan and the 
     U.S. enjoys a $4.8 billion net trade surplus with Japan for 
     passenger air travel in Asia.
       Rather than respond to this competitive challenge by 
     restructuring their airlines--a change that is unavoidable at 
     some point and that will benefit the Japanese people in the 
     long run--the Japan Ministry of Transportation (MOT) has 
     chosen instead to vilify the 1952 Air Service Agreement. 
     Their claim is that the `52 agreement is unfair and gives the 
     U.S. a competitive advantage.
       Does this sound familiar? Like the British did in the 
     `70's, the MOT is blaming the agreement rather than their own 
     protectionist aviation policies for their declining 
     transpacific market share.
       So MOT has decided not to honor the `52 agreement. Most 
     recently, the MOT has denied a request by United Airlines to 
     begin flights between Osaka and Seoul, despite our right to 
     fly unlimited routes between Japan into Asia. By denying this 
     request, the MOT is abrogating the treaty, and attempting to 
     force the U.S. to negotiate for a right its carriers already 
     have. To add insult to injury, JAL is at the same time 
     seeking to expand flights from Sendai to Honolulu. We are 
     asking the Department of Transportation today to deny any 
     increase in JAL's service until our Osaka-Seoul business plan 
     has been approved by MOT.
       MOT's position ignores an important lesson we learned with 
     British Air and Bermuda I. Competitive positions are not 
     static. Of course, the Japanese carriers will improve 
     efficiency over time as they continue to cut costs and 
     improve service. For the U.S. to overreact now, and surrender 
     critical U.S. carrier beyond rights, would be a sucker deal 
     that would put all U.S. businesses at a permanent 
     disadvantage in the exploding Asian market.
       I can not underscore this important idea strongly enough. 
     Ultimately, this is not just about United. It's about trade 
     and MOT's approach to trade disputes in the aviation sector. 
     It's about Japan's drive to monopolize the U.S.-Asia and 
     Japan-Asia markets. In this case, MOT believes it can 
     unilaterally interpret or simply ignore agreements with 
     impunity when it suits them. And they have little regard for 
     the damage this strategy causes to international 
     relationships, or the havoc it wreaks on the marketplace.
       And just how much havoc will MOT cause? According to Booz-
     Allen, if the U.S. gives up its beyond rights as MOT wants, 
     Japan would receive a virtual monopoly on U.S.-Asian routs 
     through Japan; Japanese carriers would gain up to $5 billion 
     in present value from the earnings stream lost by U.S. 
     carriers, and the U.S. would suffer a trade loss in excess of 
     $100 billion over the next twenty years, the bulk of which 
     would be transferred to Japan--$100 billion.
       Let me describe some more of the consequences of MOT's 
     strategy.
       MOT's strategy will hurt the U.S. economy.--If MOT succeeds 
     in blocking U.S. beyond rights, the Booz-Allen estimates of a 
     cumulative trade loss of $100 billion dollars is actually 
     conservative. That impact would be compounded by the 
     multiplier effect on U.S. jobs and economic activity. As a 
     result, the entire U.S. economy would feel the sting of MOT's 
     aviation whip.
       MOT's strategy will hurt consumers.--Booz-Allen predicts 
     that if the U.S. carriers lost all or any of their rights to 
     carry passengers beyond Japan to other Asian cities, capacity 
     will drop and fares will increase. Consumers will lose 
     service alternatives, not only between the U.S. and Japan, 
     but to other Asian cities as well. Travelers will pay more 
     and get less.
       MOT's strategy hurts U.S.-Japanese relations.--Their plan 
     makes a mockery of the 1952 Air Service Agreement. If MOT is 
     allowed to dishonor the 1952 accord, how can it be trusted to 
     respect other bilateral agreements? And we certainly can't 
     expand their routes into and beyond the United States if they 
     won't honor existing treaties.
       MOT's strategy will impose a stranglehold over Asian 
     aviation.--MOT is trying to position Japan as the gatekeeper 
     of Asia, by controlling traffic both into and out of the 
     continent. If it is successful in hobbling U.S. carriers, 
     it will then turn its attention to the other competition, 
     the Asian Carriers. In short order, we would see a steady 
     stream of Asian carriers--Chinese, Indonesian, Korean, 
     Malay, Taiwanese, Thai and Singaporean--forced to beg MOT 
     for beyond rights to North and South America. And without 
     the counterweight of U.S. competition, Asian carriers 
     would become prey in their home markets to the predatory 
     Japanese airlines.
       MOT's strategy hurts U.S. carriers.--U.S. carriers will 
     lose the right to grow in Asia--the region projected to have 
     the highest growth in air passenger transportation over the 
     next 15 years.
       How does United see the preferred course for the future?
       Using Europe as a model, we see 4 or 5 major alliances 
     forming the core of services in Asia, with many niche players 
     finding important roles. There is no reason why this model 
     can't be a win-win situation for everyone in Asia. The 
     alliances into which United has entered are designed to 
     achieve a global network, including Asia. We have no problem 
     with others entering the same kind of alliances, for example, 
     the two principal Japanese carriers with U.S. carriers--
     because we believe that when equitably administered, we can 
     beat the competition.
       But first, MOT must honor the existing terms of the 1952 
     accord. This must be a prerequisite for passenger talks.
       Once all parties involved agree to respect the 1952 pact, 
     we would encourage the U.S. Department of Transportation to 
     develop a detailed economic analysis of Japanese aviation and 
     its relationship to U.S. carrier competitiveness in Asia. We 
     would urge that DOT use that analysis as a starting point for 
     negotiations with MOT.
       Japan's carriers may today be overpriced and unresponsive 
     to consumers' needs just as British Airways was 20 years ago. 
     But the solution is not to lock up the skies and give Tokyo 
     the key. To do so would simply recreate the mistakes of 
     Bermuda II.
       The solution to this dispute must respect the principle of 
     open competition. We see it working in Europe, where 
     competitive alliances provide a blueprint for global 
     aviation.
       The solution must acknowledge that competitive position are 
     not static. One way or another, Japan's carriers will have to 
     modernize and those changes will affect their standing in the 
     air travel marketplace.
       And above all, the solution to this dispute must honor 
     existing agreements before creating new ones.
       Going back to our telecommunications analogy, we want to 
     provide a ``seamless'' journey for passengers. With a 
     progressive, sound, and resolute U.S. approach to 
     international aviation matters, we believe that this goal can 
     be achieved on a global basis. But as long as we allow one 
     nation to control international air space, there can be no 
     global aviation. Not today. And certainly not in the year 
     2010.
       Thank you. I look forward to your questions.

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