Bilaterals The reasons underlying the long-running bilateral dispute between the US and Japan are little changed. But David Knibb explains that economic and political imperatives could well signal the end to what has become an uncomfortable impasse.The scene is a familiar one: a US airline proposes a route beyond Japan, Tokyo insists that it limit fifth freedom traffic, the airline refuses and accuses Tokyo of violating the bilateral. Washington agrees and insists that Tokyo honour the agreement, Tokyo retorts the agreement is outdated and must be renegotiated, Washington refuses to discuss negotiation until existing rights are respected, Tokyo declines and the sanction sabres begin to rattle. Just another airing for an increasingly tired script, or will it really lead to pistols at ten paces?

Last time it was United Airlines proposing to fly beyond Tokyo to Sydney. This time it is FedEx proposing several sectors, with Osaka/Kansai-Subic Bay at the top of its wishlist, backed by United seeking Kansai-Seoul rights. The US route demands may be new, but the issues are the same and the rhetoric is rehash. Only this time the outcome may be different, because both have hardened their positions and seem unwilling to settle for the stalemate that has characterised civil aviation's longest running bilateral dispute.

For nearly 20 years Tokyo has argued that the 1952 bilateral is imbalanced and outdated. Unlimited capacity across the Pacific and unlimited US rights beyond Tokyo and Osaka are the two main bones of contention. Washington has stood fast, extolling the benefits of liberalisation and refusing to yield to what it calls 'Tokyo's protectionist demands.' Washington's position is encapsulated in transportation secretary Federico Peña's motto for the new US international aviation policy which states: 'never backwards!'

Yet, Tokyo has scored some points:

1 The US now tacitly acknowledges that beyond rights belong only to the three US carriers recognised in the bilateral - Northwest, United, and FedEx, or their successors. Other US carriers serving Japan under newer memoranda of understanding (MOU airlines) may not fly beyond Japan.

2 The unlimited capacity granted both sides in the original bilateral applies only on routes specified in that bilateral. All other routes added by MOUs have capacity limits.

3 Since the mid-1970s Tokyo has insisted that US carriers limit fifth freedom traffic on new beyond routes to no more than 50 per cent. Northwest Airlines has tacitly accepted this. As a result, Tokyo has allowed Northwest to add new routes while United and FedEx maintain, with Washington's support, that such a limit contravenes the bilateral.

4 Recently, Tokyo extended this traffic limit to new capacity on existing routes beyond Japan.

5 US carriers are starting to accept Tokyo's view that they may not add routes under a procedure for filing schedule changes with Japan's Ministry of Foreign Affairs rather than its Ministry of Transport. Schedule changes are incontestable for six months, but Tokyo insists that new routes require advance approval.

But Japan sees these victories as little more than damage control. Overcapacity and US fifth freedoms remain so intractable that Koki Nagata, Japan Airlines vice president for corporate planning, recently termed them 'the America problem.' The Japanese, however, will not be drawn on which is the worse of the two evils. 'Overcapacity and fifth freedoms are equally important problems,' claims another JAL official. He points to the number of US airlines flying trans-Pacific - five compared to Japan's two - as aggravating the problem because each one adds capacity in an effort to enhance its own market share. An All Nippon Airways official complains: 'Even though only 12 per cent of all travellers between the US and Japan are US citizens, US airlines carried 66 per cent of all passengers last year.'

Nevertheless, fifth freedoms are the bigger issue. William Kutzke, a former US Department of Transportation lawyer, notes in his new book on US-Japan aviation history: 'The US-Japan agreement retains the most extensive network of economically viable beyond rights for two US passenger airlines and one cargo airline that the US has under any agreement.' Edward Oppler, deputy director of the DOT's international aviation office, conceded in a recent speech: 'The subject of fifth freedom rights probably has been the largest irritant in the US-Japan aviation relationship.'

Before Kansai airport opened last September, physical limits restricted US airlines to about 95 weekly flights beyond Japan. That limit is now gone.

Kosuke Shibata, director of the international air transport division at Japan's Ministry of Transport, concedes that US 'bilateral airlines' have these rights: 'We understand that under the bilateral agreement there is a right for the US carriers to operate unlimited beyond sectors.' However, the dispute is not over routes but traffic, argues Shibata. He cites Article 12 of the bilateral, which says services 'shall retain as their primary objective the provision of capacity adequate to the traffic demands between the country of which the airline providing such services is a national and the countries of ultimate destination of the traffic.' In other words, the primary objective should be third and fourth freedom traffic, says Shibata.

That same article permits fifth freedom traffic but only when it is subject to third and fourth freedom traffic needs, the requirements of through airline operation, and traffic requirements of the intermediate stop (Japan) 'after taking account of local and regional services.' Tokyo claims this last clause confirms that fifth freedom traffic ought not to impinge on 'local and regional services.'

Relying on the general rule of contract interpretation that any document must be read in its entirety and each clause read in relation to all others, Shibata contends that Article 12 limits the fifth freedom traffic US airlines may carry on their 'unlimited' beyond routes. These are the grounds on which Tokyo insists that US carriers restrict their fifth freedom traffic to no more than 50 per cent on sectors beyond Japan.

DOT officials refuse to discuss Washington's interpretation of Article 12 while the current dispute is pending. But reportedly, the US view is simply that Article 12 contains no quantitative limit on fifth freedom traffic.

Moreover, Washington argues that Japanese sixth freedom traffic is equivalent to US fifth freedom traffic. 'Japanese airlines carry extensive traffic between Asian points and the United States via Japan. I submit that the competitive effects of both are virtually the same,' says DOT's Oppler.

But the Japanese counter to this is put simply by one JAL official: 'Where do you end the argument? US airlines can pick up Japanese in Japan, fly them to the US and beyond to South America. We can't do that.' Shibata goes further, arguing that Japanese rights from 'Asia to Japan are not covered by the bilateral. That is the same case for US carriers flying from Europe to the US. That is outside the bilateral.' The Japanese view Washington's sixth freedom claims as nothing more than a smokescreen.

Because Tokyo has never specifically addressed cargo before in attempting to limit fifth freedom traffic, one consensus held that the hard stance on FedEx was designed to force Washington to renegotiate the bilateral. But that seems unlikely, in view of Washington's consistent refusal to negotiate before existing rights - as it perceives them - are honoured.

Moreover, Tokyo seems particularly troubled by FedEx's proposal. 'They are trying to have a special type of hub at Subic Bay,' Shibata claims. 'According to our information, they are proposing an operation purely internal in the Asia region. That will cause a problem for the Japanese carriers and for Asian carriers. That's why we are quite keen about this issue.'

Several scenarios are possible. First, either side could back down. FedEx could emulate Northwest by tacitly accepting a limit on its fifth freedom traffic, or Tokyo could drop its demand for such a limit.

FedEx could sidestep the issue. It already flies from the US to Subic Bay via Taipei and could boost capacity on that route. Of course, that does not generate Japanese traffic, and that is the problem for any US carrier bypassing Japan. United's chairman Gerald Greenwald has threatened to find another Asian hub, and new air corridors over Russia's far east and China can cut the flying time to other parts of Asia. But bypassing Japan will mean losing lucrative traffic.

FedEx could also test the definition of 'beyond' by making Subic Bay an intermediate stop between the US and Kansai, which the bilateral clearly allows. But Tokyo is unlikely to be impressed by aeropolitical semantics.

If history repeats itself, negotiators will make a 'mini deal'. After tit-for-tat sanction threats, FedEx will scale back its demands in exchange for limited approval. Japanese cargo carriers might gain some co-terminal rights in the US, but the underlying dispute will remain unresolved.

But this time history may not repeat itself. Washington could surprise everyone and agree to talks. American, Delta and Continental, the 'MOU' airlines, are pressing for substantive talks in the hope they can gain access to Kansai. Today, only 'bilateral airlines' enjoy that access.

Instead of an agreement, however, the more likely scenario is that talks on a 'mini deal' will fail, DOT will press ahead with sanctions, and Tokyo will respond by renouncing the agreement. Twelve months later the US-Japan bilateral would itself be history.

The latter possibility should be taken seriously because this dispute arises at a time when US patience with Japan is running thin. Washington claims its tough sanction threats forced Tokyo into a settlement on car parts. Photographic products could be the next trade target.

The DOT is also under pressure to give no quarter to Japan. It has already come under uncharacteristic scrutiny from Congress for its recent 'mini-deal' with the UK. To avoid a repeat of charges that it buckled under to British recalcitrance, the DOT may flex its muscles toward Tokyo simply to prove it's no pushover.

The Republican-controlled US Congress is also taking a more active interest in international aviation. The Senate Aviation Sub-

committee wants to review DOT data used for the on-going talks with the UK. The Senate Commerce, Science, and Transportation Committee chairman wrote to President Bill Clinton claiming that Japan has 'routinely ignored' the US-Japan bilateral, and urged the president to 'take whatever steps you deem necessary' to compel Tokyo's compliance. A JAL official worries that 'a hard line towards Japan doesn't make any enemies now for American politicians. It's a popular domestic move.'

But Tokyo is also under growing pressure to stand firm. With falling exports and rising bad debts, Japan's economy is sinking. The appreciating yen is crippling its airlines by inflating costs and allowing rivals to undercut their fares.

Clearly, Tokyo is frustrated that nearly 20 years of trying to renegotiate the US bilateral has produced nothing. 'We are not demanding any 50-50 share,' says the MOT's Shibata. 'We are demanding equal opportunity with equal footing.' Yet, Washington's unwillingness to discuss that makes Tokyo less reticent to consider wiping the slate clean.

JAL is now openly claiming the bilateral should be renounced. 'Cancelling an air agreement is not so dramatic an act,' JAL's Nagata told Airline Business. 'When all else fails, it may be the right step to take.'

And Tokyo seems unwilling to accept a repeat of Washington's actions last year when the DOT delayed for nine months a seemingly routine JAL request for Sendai-Honolulu flights. The DOT's action stemmed from complaints by FedEx and United that Tokyo had not approved their unconditional fifth freedom routes. If Washington imposes sanctions again that suspend any Japanese airline flights, 'we would, after attempting countermeasures, consider renunciation very seriously,' warns a senior Japanese official. 'If this were a peace treaty or something like that, very severe cause would be required,' he adds. 'But this air services agreement only relates to economic activities. No specific offence is needed to denounce it.'

For the first time in nearly 20 years both sides may yet find due cause to rewrite the script with pistols drawn.

Source: Airline Business