[Federal Register Volume 60, Number 85 (Wednesday, May 3, 1995)]
[Notices]
[Pages 21841-21845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10584]
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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: Notice.
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SUMMARY: This notice sets forth a statement of U.S. international air
transportation policy.
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, 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. It was first published in the Federal Register
on November 7, 1994 to enable interested persons to comment.1 On
January 6, 1995, the Department asked for comments on a related report
prepared for the Office of the Secretary titled ``A Study of
International Airline Code Sharing.''2 After reviewing the
comments received on the policy statement and on the code sharing
study, the Department of Transportation and other agencies have adopted
the following final international air transportation policy statement.
\1\An earlier statement of international air transportation
policy and our request for comments on the statement was published
at 59 FR 55523, Nov. 7, 1994.
\2\Our request for comments on the code sharing study was
published at 60 FR 2171, Jan. 6, 1995.
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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 civil and military 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;
Address the nation's defense air transportation needs; 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 [[Page 21842]] 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 [[Page 21843]] 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. In
addition, cooperative arrangements may affect the availability of civil
aircraft to meet emergency airlift requirements. Our national defense
establishment relies on U.S. civil aircraft committed to the Civil
Reserve Air Fleet program to respond to worldwide crises. As set forth
in our National Airlift Policy, the global mobility needs of our
national defense establishment, and ensuring that the nation's defense
air transportation needs are met during peace and contingency
operations, are important considerations.
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. Moreover, we recognize that the balance of benefits in any
particular alliance will depend on the specific structure of that
arrangement between the partners. 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' positions 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
[[Page 21844]] 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 with 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; and
--These opportunities should apply not only to scheduled passenger
services, but also to cargo and charter opportunities, because of their
growing importance to the world's economy. We have long recognized the
significant differences among these types of operations. In particular,
air cargo services have specific qualities and requirements that are
significantly different from the passenger market. We will continue to
follow our longstanding policy of seeking an open, liberal operating
environment to facilitate the establishment and expansion of efficient,
innovative and competitive air cargo services.
Recognize the importance of military and civil airlift
resources being able to meet defense mobilization and deployment
requirements in support of U.S. defense and foreign policies.
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 vision of liberalization 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, as we have done successfully with Canada.
Emphasize the importance of sound economic analysis based
on sufficient data 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' agreement to
liberal arrangements to the extent it is consistent with U.S. economic
and security interests.
Increase our efforts to reach out to Congress and
constituent groups, such as consumers, corporations with international
perspectives (aircraft manufacturers, telecommunications, travel and
tourism industries), cities, airports, 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 among U.S. government
agencies whose functions are to promote U.S. business and trade
interests (e.g., Departments of Commerce, State, and Transportation,
Office of the United States Trade Representative, and the Export/Import
Bank) as well as the Department of Defense, to ensure that we share a
single vision of the future global marketplace [[Page 21845]] while
meeting national security requirements.
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); trying to develop service opportunities for the
foreign airline to make service to the U.S. more economically
advantageous for it; and continuing 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 that
would come into effect 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 granting code-sharing authority on the Civil
Reserve Air Fleet program;
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: April 25, 1995.
Patrick V. Murphy,
Acting Assistant Secretary for Aviation and International Affairs,
Department of Transportation.
[FR Doc. 95-10584 Filed 5-2-95; 8:45 am]
BILLING CODE 4910-62-P
