Airline Vs. Airline In A War Over `Open Skies'

U.S. Airlines bicker about how hard to press Japan

It's classic trade-war rhetoric. One side accuses the other of orchestrating a slick PR campaign designed to inflame nationalism. The other derides its opponents' stance and says the long-term health of an entire industry is at stake.

But there's a twist. The two sides aren't feuding nations. They're different camps within the U.S. airline industry bickering over how the Clinton Administration should negotiate a new aviation pact with Japan. Northwest Airlines Inc. is squaring off against U.S. rivals, including American, Continental, and United, in a lobbying war that will define the market for one of the most lucrative air routes in the world (table). Passengers on those routes are expected to double in number over the next dozen years as Asia becomes the destination for more than half the world's flights.

Northwest, the dominant U.S. player in the market, is pushing Washington to insist on an all-out open-skies agreement that would allow U.S. carriers to build more routes from Japan to other Asian destinations--something the Japanese have begun to restrict. But United Airlines Inc., the No.2 U.S. carrier, is lining up with other airlines that see an incremental opening of air routes to Japan as the best deal now, one that would let them start expanding transpacific operations immediately.

RISING TENSIONS. Northwest warns that Japan would use a compromise deal to resist fully opening its skies in the future. Negotiators are set to sit down again on Sept. 22 in Tokyo, and airline executives and U.S. officials say the two countries are close to a compromise that would significantly enlarge the $10 billion market--but stop well short of the "open skies" that Northwest is pushing. If U.S. negotiators "stubbornly insist on open skies, there will be no progress," warns Jiro Hanyu, deputy director general of Japan's Civil Aviation Bureau.

Northwest's best hope may be the rising wave of U.S.-Japan trade tensions, which could make it tougher for President Clinton to compromise. With the U.S.'s monthly trade deficit with Japan swelling beyond $4 billion, tensions are rising. On Sept. 4, Washington slapped fees on Japanese container ships in retaliation for Japanese restrictions on U.S. vessels. On Sept. 9, Treasury Secretary Robert E. Rubin said that Japan faced "a substantial challenge" to boost its economy through domestic demand rather than through exports--a warning that roiled currency markets. Air travel, in which the U.S. enjoys a $5 billion annual trade surplus, ranks as "the single biggest trade dispute we have with Japan," says a U.S. official.

U.S.-Japanese air travel is governed by a 1952 agreement, updated periodically, that gave virtually unrestricted access to Northwest, Japan Airlines, and Pan American. In 1985, United bought Pan Am's routes--but it's forbidden from offering a large number of flights from its Chicago and Denver hubs. Most other carriers have almost no access. Delta Air Lines Inc., for example, can't fly from its Atlanta hub to Japan and flies fewer than two flights a day from the U.S. to Tokyo. The result: Northwest, JAL, and United fly more than 75% of round trips between the two countries.

But the impetus for the current round of talks came not from Northwest's rivals but from Federal Express Corp., which wants to ship packages between Japan and China. Beijing gave FedEx the go-ahead for service starting on Jan. 1, and FedEx wants Tokyo's approval so the company can start marketing. Airline execs say Japan is holding approval of the FedEx plan hostage to a new landing-rights deal.

Northwest is the most visible campaigner on the landing-rights issue. It has taken out full-page newspaper ads calling an interim deal a "sellout" that would jeopardize other industries. And it has lined up Midwestern senators and the CEOs of General Motors Corp. and Chrysler Corp. in its lobbying effort. "We're making as much noise as possible to make it as uncomfortable as possible for U.S. negotiators to capitulate," says Northwest CEO John Dasburg.

Competitors dismiss Northwest's stance as a way to preserve its Japan franchise, from which it gets 30% of its $9.9 billion in annual revenue. It's "just their way of saying, `We like the status quo,"' says Continental Airlines Inc. President Gregory D. Brenneman. Says Cyril D. Murphy, United's vice-president for international affairs: "Northwest is resorting to rather unseemly emotional appeals."

The compromise being discussed would give United and Japan's All Nippon Airways the same kind of rights enjoyed by Northwest and JAL. Other U.S. carriers could see their weekly flights double. "The question is whether you're going to take the deal that is achievable and very valuable for the U.S.," says David A. Schwarte, American's managing director for international affairs, "or whether you forgo that, hoping to attain a deal you know you'll never reach."

More contentious are discussions over U.S. airlines' rights to land in Japan, pick up new passengers and cargo, and fly on to other Asian nations. Japanese regulators have limited flights through Japan into Asia's emerging economies.

But to tap into lucrative Japan routes, most U.S. carriers seem ready to forgo some of those rights. They also hope "beyond" rights will matter less if Japan and the U.S. allow more "code-sharing"--the practice of listing connecting flights from separate airlines under one carrier's code in reservation systems. That would leave both U.S. and Japanese carriers scrambling for partners. So even a compromise will heat up the airlines' battle for the Pacific.

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