Statement of United States International Air Transportation Policy

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

[Docket No. 49844]

RIN 2105-AC19

Statement of United States International Air Transportation

Policy

AGENCY: Office of the Secretary, Department of Transportation.

ACTION: Request for comments on U.S. international air transportation

policy statement.

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SUMMARY: This notice sets forth a statement of U.S. international air

transportation policy. This notice is being published to provide

interested persons an opportunity to comment on the statement.

DATES: Comments must be received no later than December 16, 1994.

ADDRESSES: Comments should be sent to the Docket Clerk, Docket 49844,

Department of Transportation, 400 7th Street, S.W., Room 4107,

Washington, DC 20590. To facilitate consideration of the comments, we

ask commenters to file twelve copies of each comment. We encourage

commenters who wish to do so also to submit comments to the Department

through the Internet; our Internet address is

[email protected].\1\ Note, however, that at this time

the Department considers only the paper copies filed with the Docket

Clerk to be the official comments. Comments will be available for

inspection at this address from 9:00 a.m. to 5:00 p.m., Monday through

Friday. Commenters who wish the Department to acknowledge the receipt

of their comments should include a stamped, self-addressed postcard

with their comments. The Docket Clerk will date-stamp the postcard and

mail it back to the commenter.

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\1\Our X.400 e-mail address is S=dotdockets/OU1=qmail/O=hq/

p=gov+dot/a=attmail/c=us.

FOR FURTHER INFORMATION CONTACT: William Boyd, Office of International

Aviation, Office of the Assistant Secretary for Aviation and

International Affairs, U.S. Department of Transportation, 400 7th

Street SW, Room 6412, Washington, DC 20590, (202) 366-4870; or Patricia

N. Snyder, Office of International Law, Office of the General Counsel,

U.S. Department of Transportation, 400 7th Street SW, Room 10105,

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Washington, DC 20590. (202) 366-9179.

SUPPLEMENTARY INFORMATION: This statement of U.S. international air

transportation policy, which was developed by the Department of

Transportation in consultation with the Department of State and other

executive agencies, sets forth objectives and guidelines for use by

U.S. Government officials in carrying out U.S. international air

transportation policy. Before this statement is finalized, we will

carefully consider any comments that are received.

United States International Air Transportation Policy

Introduction

The availability of efficient international air transportation will

greatly enhance the future expansion of international commerce and the

development of the emerging global marketplace. Worldwide, travelers

and shippers are demanding more and better quality service to more

places. U.S. and foreign airlines are responding to this demand by

expanding traditional forms of service and by developing new and

innovative services. Increased demand and the variety of carrier

responses to it challenge the existing intergovernmental system's

ability to ensure the development of a competitive air transportation

system that meets the needs of the rapidly evolving, expanding and

increasingly integrated international aviation marketplace. In many

cases, existing bilateral agreements impede the growth of the

marketplace.

We must address the challenges presented by these rapid changes to

meet our future air transportation needs, and to provide our aviation

industry with the environment and the opportunities that will enable it

to grow and compete effectively in the world market. This policy

statement outlines our approach to addressing those challenges.

Our Goal: Safe, Affordable, Convenient and Efficient Air Service

for Consumers

As established in our last aviation policy statement in 1978, our

overall goal continues to be to foster safe, affordable, convenient and

efficient air service for consumers. We continue to believe that the

best way to achieve this goal is to rely on the marketplace and

unrestricted, fair competition to determine the variety, quality, and

price of air service. We believe that this approach will provide

consumers and shippers with more and better service options at costs

that reflect economically efficient operations and work best to:

Expand the international aviation market;

Increase airlines' opportunities to expand their

operations;

Increase productivity and high-quality job opportunities

within the aviation industry; and

Promote aerospace exports and general economic growth.

Changing Environment

Growing economic interdependence among nations--the

``globalization'' of the world economy--has expanded demand for

convenient, reliable and affordable international air service. Demand

for international service is growing faster than demand for U.S.

domestic service, and most major U.S. airlines are now providing and

planning to expand international operations. Between 1983 and 1993, the

international component of U.S. airlines' route networks, measured in

revenue passenger miles (RPMs), grew from around 16% to over 27%. U.S.

airline revenues from international air service nearly tripled from

$6.3 billion to $17.6 billion. Moreover, forecasts indicate that U.S.

carrier international traffic, measured by RPMs, will increase to

almost one-third of their total system traffic by the year 2000.

Just as important, the pattern of demand for international service

has changed considerably. First, the regional distribution of U.S.

carriers' international revenues has changed dramatically, as the

primary focus of carriers' expansion moved beyond Europe to meet new

demand in the emerging markets of Asia, the Pacific Rim and Latin

America. In 1983, the Atlantic accounted for 48% of our carriers'

international revenues, while the Pacific accounted for 32%. By 1993,

the Pacific had grown to 46% while the Atlantic was only 37%. The

fastest growing sectors of the international aviation market are new

and relatively undeveloped markets. During this same period, revenues

in the Pacific grew 286%, in Latin America 151% and in Europe 116%.

Second, from 1983 to 1993, the number of international aviation city-

pair markets in which U.S. airlines participate has grown by more than

a third, reflecting the major expansion of air service and carrier

networks throughout the world and the increased dispersion of demand.

Many of these city-pair markets are relatively small, generating only a

few passengers per day.

Towards a Globalized Aviation Industry

The rapid growth of demand for international air service and the

wider dispersion of traffic in city-pair markets are primary factors

influencing the development of the air service industry. Carriers are

increasingly finding that they cannot remain profitable unless they can

respond to this changed demand. To compete effectively, carriers today

must have unrestricted access to as many markets and passengers as

possible.

To meet demand and to improve their efficiency, many carriers are

developing international hub-and-spoke systems that permit them to

combine traffic flows from many routes (the ``spokes'') at a central

point (the ``hub'') and transport them to another point either directly

or through a hub in another region. Just as U.S. carriers developed

hub-and-spoke systems to tap the broad traffic pool in the domestic

market and to provide the most cost-efficient service for hundreds of

communities that could not support direct service, international air

carriers are developing world-wide hub-and-spoke systems to tap the

substantial pool of international city-pairs. Internationally, an even

larger portion of traffic moving over hub-and-spoke systems will

require the use of at least two hubs (e.g., a hub in both the U.S. and

Europe for a passenger moving from an interior U.S. point to a point

beyond the European hub). This increases the complexity and

interdependence of the components of the system (both the spokes and

hubs) and the importance of multinational traffic rights to the success

of the system.

As a result, carriers wishing to establish global networks require

a higher quality and quantity of supporting route authority than they

have sought in the past. Airlines will become increasingly concerned

with every market that enables them to flow passengers over any part of

their system network. These airlines will be looking for broad,

flexible authority to operate beyond and behind hub points, in addition

to the hub-to-hub market between two countries. At present, governments

operating in a bilateral context naturally focus on opportunities for

their respective carriers to serve the local market between their two

countries. In a bilateral context, services destined for or coming from

third countries receive less consideration. In the future, governments

will have to adjust their focus to bargain for the bundles of rights

that will permit airlines to develop global networks.

Carriers can either serve markets themselves (direct service) or

provide service through commercial arrangements with other carriers

(indirect service), whether on a traditional interline connecting basis

or under a closer commercial agreement between the carriers, such as

code sharing. Carriers will develop service products--single-plane, on-

line connecting, interline connecting, joint service--that respond to

the preferences of the traveling public as measured by passenger

willingness to pay for differences in the quality of service and that

take into account their cost structure and market strategy. To the

greatest extent possible, airlines should be free to set prices and

offer various service products in response to passenger preferences.

Significant challenges face carriers wishing to develop

international networks using their own direct services. They need:

Substantial access not only to key hub cities overseas,

but also through and beyond them to numerous other cities, mostly in

third countries. This type of access is not readily obtainable in

today's bilateral system of negotiating air rights, since governments

can only exchange access rights to their own countries and cannot,

between themselves, deliver access to third countries, thus requiring

piecemeal negotiating efforts to build the necessary package of rights;

Access to a large number of gates and takeoff/landing

slots, frequently at some of the world's most congested airports. It

may become increasingly difficult for carriers to gain effective,

direct access to certain airport facilities, including some in the

United States;

Considerable financial resources to establish and sustain

commercially successful overseas hub systems; and

The ability to obtain infrastructure and establish market

presence in a new region quickly. Existing foreign investment laws can

effectively preclude airlines from entering new markets in one of the

most efficient means available: merger or acquisition.

Some carriers are taking on these challenges directly and are

striving to develop their own global systems of direct service. Other

carriers have chosen to side-step the obstacles, turning instead to a

new network-building technique: cross-border marketing alliances that

link traffic flows between established hub-and-spoke systems in key

cities of the Western Hemisphere, Europe and Asia. Some of these

alliances involve cross ownership, while others do not. Under this

strategy, the linking of hubs requires indirect market access through

code-sharing or other cooperative marketing arrangements. Although code

sharing has become a widely-used marketing device for airlines and is

currently the most prevalent form of commercial arrangement, further

evolution of the industry and its regulatory environment may lead to

new marketing practices that could supplement or supplant code sharing.

Code sharing and other cooperative marketing arrangements can

provide a cost-efficient way for carriers to enter new markets, expand

their systems and obtain additional flow traffic to support their other

operations by using existing facilities and scheduled operations.

Because these cooperative arrangements can give the airline partners

new or additional access to more markets, the partners will gain

traffic, some stimulated by the new service, and some diverted from

incumbents. In this way, cooperative arrangements can enhance the

competitive positions of both partners in such a relationship.

Increased international code-sharing and other cooperative

arrangements can benefit consumers by increasing international service

options and enhancing competition between carriers, particularly for

traffic to or from cities behind major gateways. By stimulating

traffic, the increased competition and service options should expand

the overall international market and increase overall opportunities for

the aviation industry. U.S. airlines should be major beneficiaries of

this expansion and the concomitant increased service opportunities,

given their competitive advantages.

Moreover, code sharing should also enhance domestic competition.

Many international passengers traveling to or from U.S. interior cities

use domestic services for some portion of their international journey.

Code sharing should increase competition among domestic carriers to

carry those passengers on the domestic segment of their international

journey.

Although we expect the expansion of cooperative arrangements to be

largely beneficial, there may be some negative effects. The greater

traffic access of participants may give them considerable competitive

muscle, and we may need to watch for harmful effects on competition.

Global systems and the growing use of code sharing may put

significant competitive pressure on carriers whose strategy does not

include participation in such systems or in code-sharing alliances, or

whose options to participate may be limited due to the lack of

potential partners. Such carriers will have to develop other commercial

responses to compete effectively. We expect these pressures and

responses to lead to a restructuring of service and airlines, similar

to the U.S. domestic experience in the 1980s. Overall, cities and

consumers will probably enjoy improved service and access to the

international transportation system, although some cities may have

fewer or less convenient service options in some markets than they have

today. Similarly, although some airlines will grow and prosper, others

will not. Overall, this evolution should expand the level and quality

of international air service for consumers.

Code-sharing arrangements are designed to address the preference of

passengers and shippers for on-line service from beginning to end

through coordinated scheduling, baggage- and cargo-handling, and other

elements of single-carrier service. However, innovative service

products, such as code sharing, can only respond to consumer

preferences accurately, and thereby enable the marketplace to function

efficiently, if consumers make choices based on full information.

Therefore, we must ensure that airlines give consumers clear

information about the characteristics of their service product, and

that consumers can distinguish between code sharing and other forms of

service.

In addition to the two types of global networks (sole-carrier

systems and joint carrier systems), there will continue to be a role

for air services outside of global networks. The U.S. experience with

deregulation indicates that--absent legal barriers to entry--

specialized competitors will enter the market and discipline the

pricing and service behavior of the larger network operators. The

introduction of technologically advanced aircraft such as the B-767,

the MD-11 and the B-777 make direct service on longer or thinner routes

economically viable. Moreover, airlines can viably serve heavily

traveled routes with point-to-point service.

In short, as indicated by our domestic experience, a variety of

service forms--global networks with carriers participating either as

the sole provider or as participant in a joint network, and regional

niche carriers--can exist in the international aviation market and the

competition among these services will enhance consumer benefits through

efficient operations and low fares. Thus, our international aviation

strategy should provide opportunities for all of these forms of service

so that we realize the benefits from maximum competition among them.

Our airlines are well positioned to be primary participants in all

aspects of the future global marketplace. In recent years, our largest

domestic carriers have become our primary international carriers,

replacing specialized international operators. After operating in a

deregulated domestic market for more than 15 years, our carriers have

developed operating efficiencies that give them a cost advantage over

their major foreign competitors. Moreover, the financial positions of

our carriers are improving due to their cost-cutting measures and

improving economic conditions. Coupled with their cost efficiencies,

their improving financial status will further enhance their competitive

capabilities. Over time, however, trends toward privatization and

increased productivity of major foreign competitors may affect the

current cost advantage U.S. airlines enjoy. We must try to provide our

carriers with the flexible rights and economic environment that will

enable them to respond to the dynamics of the marketplace.

Intergovernment Aviation Relations

International air services between two nations have traditionally

been conducted pursuant to bilateral agreements. The U.S. National

Commission To Ensure a Strong Competitive Airline Industry and the

European Union's Comite des Sages for Air Transport have both

recognized that the bilateral system is limited in its ability to

encompass the broad, multinational market access required by the new

global operating systems. Consequently, progress in developing global

networks has been and will be extremely fragmented and may preclude or

limit the development of efficient operations. We must consider

alternative forums for international aviation negotiations and

agreements in which we can obtain the necessary broad access rights. We

should examine the feasibility of achieving multilateral air service

agreements among trading partners. Although such negotiations may be

more complex and difficult because of the number of parties involved,

they should be undertaken when they present a reasonable prospect for

further liberalization.

Moreover, some governments are taking steps to enhance their

airlines' position both by restricting the development of new,

competitive services and by trying to overcome, through government

fiat, their carriers' cost disadvantages that make it difficult for

them to compete against U.S. airlines in a free market. These efforts

underlie many of the disputes we face in international negotiations

today.

Such countries are responding to the highly competitive integrated

and global air transportation market, in which their airlines may not

be fully prepared to compete. Most foreign airlines are only beginning

to adapt to the more competitive operating environment through such

mechanisms as streamlining costs and realigning their operations to

achieve greater productivity and operating economies. For state-owned

airlines, privatization is an important initial step as it will lead

those airlines to develop cost-efficient operations and, in the longer

term, to expand their markets. These governments also may be reacting

to the U.S. airlines' recent operating successes in the international

aviation market, which are largely attributable to the U.S. airlines'

productivity and competitive gains.

Some national governments continue to give their national airlines

financial aid. Some also distort the marketplace by permitting their

national airlines to maintain ground-handling and other monopolies, by

denying airlines access to necessary airport facilities, or by allowing

user fees that equalize cost differentials between carriers. These

actions distort competition and deprive the aviation system and

consumers of the benefits that greater cost efficiency and lower prices

would encourage. In the long run, these efforts will work against the

overall best interest of the world economy. Moreover, they will be

unsuccessful in providing long-term protection against the developing

global aviation systems because no individual government can control

all facets of its airlines' marketplace.

U.S. Objectives

We have outlined above our expectations about the future of the

world air transportation industry and the role of U.S. airlines. We

expect that international operations will depend more on traffic flows

from multiple countries. In light of our goals, recent developments in

the market and industry, and the positions and actions of our trading

partners, we have designed our international aviation strategy to meet

the following objectives:

Increase the variety of price and service options

available to consumers.

Enhance the access of U.S. cities to the international air

transportation system.

Provide carriers with unrestricted opportunities to

develop types of service and systems based on their assessment of

marketplace demand:

--These opportunities should include unrestricted rights for airlines

to operate between international gateways by way of any point and

beyond to any point, at the discretion of airline management. Carriers

should be able to pursue both direct service using their own equipment

and indirect service through commercial relationships with other

carriers;

--Service opportunities should not be restricted in any manner, such as

restrictions on frequencies, capacity or equipment, so that carriers

may provide levels of service commensurate to market demand;

--Carriers' ability to set prices should also be unrestricted to create

maximum incentives for cost efficiencies and to provide consumers with

the benefits of price competition and lower fares;

--These opportunities should apply not only to scheduled services, but

also to cargo and charter opportunities, because of their growing

importance to the world's economy.

Ensure that competition is fair and the playing field is

level by eliminating marketplace distortions, such as government

subsidies, restrictions on carriers' ability to conduct their own

operations and ground-handling, and unequal access to infrastructure,

facilities, or marketing channels.

Encourage the development of the most cost-effective and

productive air transportation industry that will be best equipped to

compete in the global aviation marketplace at all levels and with all

types of service:

--Infrastructure needs should be addressed and unnecessary regulatory

barriers eliminated.

--Privately held airlines have better incentives to reduce costs and

respond to public demand. Therefore, as we have in the past, we will be

supportive of governments wishing to privatize their airlines so that

their privatization efforts will be successful; and

--Reduce barriers to the creation of global aviation systems such as

limitations on cross-border investments wherever possible.

Plan of Action

We recognize that considerable time and effort will be required to

achieve an open aviation regime worldwide. We can get there by making a

concerted effort to eliminate the obstacles to that regime and by

taking a more strategic and long-term approach to our overall

international aviation policies. At a minimum, we must increase our

focus on emerging markets and their contribution to global networks;

build a coalition of like-minded trading partners committed to the

principles of free trade in aviation services; work closely with our

trading partners to address their concerns; develop new incentives for

encouraging market reform, such as increased opportunities for cross-

border investment in airlines; and devise alternatives to the bilateral

aviation system for achieving our objectives. We are launching our new

initiatives to create freer trade in aviation services by taking the

following steps:

Extend invitations to enter into open aviation agreements

to a group of countries that share our liberalization vision and offer

important flow traffic potential for our carriers even though they may

have limited Third and Fourth Freedom traffic potential. This would

assist the development of global systems and increase the momentum for

further worldwide liberalization.

Give priority to building aviation relationships between

the United States and potential growth areas in Asia, South America and

Central Europe. This recognizes the importance of these trading

partners and the need to provide air transportation to support those

developing trade markets. It will also make available new markets to

build global networks.

Renew efforts to achieve liberal agreements with trading

partners with which our aviation relationships lag behind those of our

general trade advancements, such as Canada and the United Kingdom.

Emphasize the importance of economic analysis in

developing policies and strategies for achieving our overall aviation

goals. This will enable us to remain focused on the overall strategic

objectives, understand developments in the industry and market, and

plan for the future.

Seek changes in U.S. airline foreign investment law, if

necessary, to enable us to obtain our trading partners' agreements to

liberal arrangements.

Increase our efforts to reach out to Congress and

constituent groups, such as consumers, multinational corporations

(aircraft manufacturers, telecommunications, travel and hotel

industries), cities, airlines, labor and travel agents to learn their

anticipated needs over a 3-5 year period. This will provide us with

valuable information for developing our positions, as well as enlisting

their support in pushing for greater liberalization.

Establish stronger connections with U.S. government

agencies whose functions are to promote U.S. business and trade

interests (e.g., Department of Commerce and the Export/Import Bank) to

ensure that we share a single vision of the future global marketplace.

Given the diverse positions of our trading partners and their

varying degrees of willingness to liberalize aviation relations, we

must also have a strategy for dealing with countries that are not

prepared or willing to join us in moving quickly to an unrestricted air

service regime. Our approach is a practical one: it proposes to advance

the liberalization of air service regimes as far as our partners are

willing to go, and to withhold benefits from those countries that are

not willing to move forward. Specifically, we will pursue the following

strategy:

1. We will offer liberal agreements to a country or group of

countries if it can be justified economically or strategically. We will

view economic value more broadly than we have in the past, in terms of

both direct and indirect access and in terms of potential future

development. Moreover, there may be strategic value in adopting liberal

agreements with smaller countries where doing so puts competitive

pressure on neighboring countries to follow suit.

2. We recognize that some countries believe that they can resist

the trend of economic forces and continue to control access to their

markets tightly. We believe that they cannot, and that attempts to do

so will ultimately fail. Nevertheless, we will work with these

countries to develop alternatives that address their immediate concerns

where this will advance our international aviation policy objectives.

We will examine alternative approaches that may include departing from

established methods of negotiation (perhaps negotiations with two or

more trading partners); try to develop service opportunities for the

foreign airline to make service to the U.S. more economically

advantageous for it; and continue our efforts to help those governments

and their constituencies appreciate the benefits that unrestricted air

services can bring to their economies and industries.

While we work with such countries, we can consider, in the interim,

transitional or sectoral agreements.

Transitional agreements--Under this approach, we would agree to a

specified phased removal of restrictions and liberalization of the air

service market. This approach contemplates that both sides would agree,

from the beginning, to a completely liberalized air service regime at

the end of a certain period of time.

Sectoral agreements--Traditionally, aviation agreements have

covered all elements of air transportation between two countries.

However, as a first step, we can consider agreements that eliminate

restrictions only on services in specific aviation sectors, such as air

cargo or charter services.

3. For countries that are not willing to advance liberalization of

the market, we will maintain maximum leverage to achieve our

procompetitive objectives. We can limit their airlines' access to the

U.S. market and restrict commercial relations with U.S. airlines. When

airlines request authority to serve restricted bilateral markets that

is not provided for under an international agreement, we will consider

their requests on a case-by-case basis in light of all our policy

objectives, including, inter alia:

Whether approval will increase the variety of pricing and

service options available to consumers;

Whether approval will improve the access of cities,

shippers and travelers to the international air transportation system;

The effect of the proposed transaction on the U.S. airline

industry and its employees. In this regard, we will ascribe greater

value to code-sharing arrangements where U.S. airlines provide the

long-haul operations. We will also recognize the greater economic value

of such arrangements where the services connect one hub to another; and

Whether the transaction will advance our goals of

eliminating operating and market restrictions and achieving

liberalization.

If aviation partners fail to observe existing U.S. bilateral

rights, or discriminate against U.S. airlines, we will act vigorously,

through all appropriate means, to defend our rights and protect our

airlines.

Conclusion

We are living through a period in which international aviation

rules must change. Privatization, competition, and globalization are

trends fueled by economic and political forces that will ultimately

prevail. Governments and airlines that embrace these trends will far

outpace those that do not. The U.S. government will be among those that

embrace the future.

(Authority Citation: 49 U.S.C. 40101, 40113, 41102, 41302, and

41310.)

Dated: October 31, 1994.

Patrick V. Murphy,

Acting Assistant Secretary for Aviation and International Affairs,

Department of Transportation.

[FR Doc. 94-27450 Filed 11-4-94; 8:45 am]

BILLING CODE 4910-62-P