Text: Mark L. Gerchick Deputy Assistant Secretary for Aviation and International Affairs Remarks before the Financial Times Conference London
The eyes of the aviation world today are fixed, of course, on the potential for an open skies relationship between the U.S. and U.K. I do hate to disappoint such a superb audience, and I include in that all of our friends in the financial press, but I have to adhere to our well-honored rule of avoiding substantive discussions of the specifics of negotiations during their pendency. I will try to shed some light on the U.S. view of open skies generally, but for those leaving the room now, please make sure you've filled out your speaker evaluation forms.
I would like to suggest that we move this morning beyond the deal du jour, big though it may be, and that we discuss the broader issue of the future of open skies on a global scale.
Whenever one talks of global phenomena, of course, the time frame must be extended - at least beyond next year. This isn't easy in the aviation world where the immediacy of the next quarterly report can dictate strategic decisions, and thinking beyond the year-end financials is regarded as positively visionary. But government policy-makers must try to look into the future, so that we do not miss opportunities today that can dictate success not just next year, but well into the next century. This is the situation we face in evaluating our open skies strategies. During the Clinton Administration, we have sought to take this long-term approach and this broader perspective. I am proud of the progress we have made to date as a result, not just in advancing the interests of the United States, but in fundamentally altering the fabric and direction of the global open skies debate.
More than any particular deal, the U.S. drive to promote and implement a philosophy of wholly open aviation markets will prove to be one of the Clinton Administration's most important legacies in international aviation economic policy. Together with progressive aviation partners throughout the world, we have been and remain fully engaged in the emerging philosophical contest over which economic and policy paradigm will prevail in the coming century.
There are two distinct choices. The first is one which promotes maximum economic freedom and open markets disciplined by active competition on price, service, and quality. The other espouses highly-regulated markets founded on protectionism and an anachronistic mercantilism, a path which we believe leads to a downward spiral of noncompetitiveness, subsidization, and increasingly self-defeating insularity. Europe is well on the way to choosing the first path, and the locus of the debate has already begun to shift to Asia, where the emerging powerhouse economies of the next century are beginning to confront their future economic direction.
Those of us engaged in U.S. aviation policy are optimistic about the ultimate outcome of this global open skies debate. The momentum toward open skies which is already passing the point of equilibrium in Europe will ultimately propel the rest of the aviation world into a new era of international aviation deregulation, finally eclipsing the outmoded managed trade principles reflected in the Chicago Convention 51 years ago.
The building momentum for open skies is of course not solely the result of U.S. policy. We did not invent aviation liberalization. The free market did. Many progressive aviation thinkers in Europe and elsewhere were prime movers in developing and implementing the Open Skies concept. But the movement for open skies globally owes much to the work of U.S. Transportation Secretary Pena. On taking office in 1993, Secretary Pena directed a focused re-examination of U.S. international aviation policy, which culminated in our first International Aviation Policy Statement in nearly 20 years. This statement defined our fundamental goals and the initiatives we would take to open aviation markets. In it, we announced that we would seek innovative pathways to achieve our liberalization objectives - including working to build coalitions of like-minded trading partners committed to the principles of free trade in aviation services. We would offer liberal agreements to a country or group of countries where justified either by economic considerations or by strategic factors, and we committed to developing new incentives to encourage market reform.
We have put those words into action. Last year alone, we completed two dozen significant new aviation bilaterals, and half of these are open skies agreements. After completing the U.S.-Canada Open Border Agreement - which alone generated an additional one million passengers and two billion dollars of new economic activity in its first year - our open skies policy focused on Europe.
We launched the Nine-Country Open Skies Initiative, opening the U.S. market virtually without restriction to a still-growing group of European nations. Our European initiative culminated this spring in President Clinton's signing with Chancellor Kohl of a new Open Skies Agreement with Germany - our second largest aviation market in Europe. With that agreement, the entire U.S. market is fully open to European nations accounting for nearly 40% of the European market. We are continuing to work on open skies with other nations in Central and Southern Europe. Particularly as global alliances develop and create incentives for the rest of Europe to move forward, we foresee the likelihood of fundamental and widespread liberalization of U.S. aviation relations with Europe in the relatively near future.
There are several reasons for the continuing shift of European aviation thinking toward open skies. First, the character of European carriers is changing as privatization, tougher management, and a needed halt to government subsidization makes many of these carriers stronger world competitors. Second, the rapid growth of global alliances has created significant incentives to adopt open skies. And we support this phenomenon where the alliances truly enhance consumer welfare and overall competition by expanding competitive service options for consumers, particularly in the thousands of so-called behind-behind markets. (We estimated for example that the Delta/Swissair/Austrian/Sabena Alliance would bring new on-line service to nearly 32,000 city pair markets.) The operational and economic flexibility afforded by Open Skies, including unrestricted codesharing rights, is essential to achieving the efficiencies of integrated multi-carrier operations that is the raison d'etre of these alliances.
Third, and from a regulatory standpoint, true open skies is also recognized as essential to ensure that alliances will be subject to the competitive discipline that can only come through new market entry and likely new entry. Open skies is a necessary but (as we lawyers like to say) not sufficient condition for the U.S. to grant immunity from U.S. antitrust laws. And in that regard, let me add parenthetically that open skies requires not only markets that are open de jure but markets that are also open de facto - so that new entrants as well as incumbents have free rein to compete and discipline market power, including at congested airports.
These same considerations are increasingly likely to create conditions favorable to deregulation of the skies of Asia - a market which IATA projects will comprise an actual majority of all of the world's scheduled passenger traffic in only 14 years. Over the last five years, in fact, the passenger growth rate between the U.S. and Asia nearly doubled that between the U.S. and Europe.
A major challenge of U.S. aviation policy is, therefore, ensuring that the philosophy of open aviation markets prevails as the template for Asia, just as it is coming to be in Europe. Our focus on broad liberalization of Asian aviation markets - not just on our sometimes difficult relations with Japan - is consistent with President Clinton's strong emphasis on expanding and opening opportunities in various sectors for worldwide trade among the so-called "big emerging economies" of Asia.
We have been busy pursuing these objectives in the transportation sector. Secretary Pena spent nearly three weeks in East Asia late last year meeting with transport ministers and aviation officials of eight economies, and other DOT officials have made repeated visits to Asian capitals over the past year. We convened the first-ever meeting of Asia/Pacific Transport Ministers under the aegis of the Asian Pacific Economic Cooperation forum, and we and our colleagues in the U.S. State Department have spent many hours in policy development on the future of U.S.-Asian aviation relations into the next century.
My friend Richard Stirland, the director of the Orient Airlines Association, is fond of reminding me of Kipling's well-known admonition "A fool lies here who tried to hurry the East." Taking this to heart, we have so far directed our Asian efforts toward expanding and liberalizing our relations with those Asian nations with which we had only restrictive agreements. We succeeded last year in restoring our important aviation relations with Thailand; we signed a new stand-alone agreement with Hong Kong (which is to remain in force after reversion); and we completed new agreements with China and India. We also signed a new agreement with the Philippines that provides for market growth and a transition to a more open regime, and a first-ever agreement with Macau, whose new airport, virtually within eyesight of China, may prove to be an important facility, particularly for cargo. And just this month we signed a new liberal agreement with Pakistan.
We are now taking the next steps toward open aviation markets in Asia. We have begun exploratory discussions with our market-oriented aviation partners in Asia, economies with whom we already have relatively liberal agreements, on the possibility of undertaking full Open Skies agreements. We have provided them copies of the U.S. Model Open Skies agreement, which they are now reviewing. The economies involved include Korea, Malaysia, New Zealand, Singapore, and Taiwan, and the list could grow.
We have not begun formal negotiations or extended open skies offers, but over the last weeks we have worked through diplomatic channels and through direct contacts between U.S. and foreign transportation officials to raise informally with the relevant Asian officials the possibilities for moving toward open skies. Given the exploratory nature of these discussions, I can say little more right now than that each of these economies is actively considering the possibilities for open skies, and that we have had positive responses, albeit preliminary and informal from some important quarters.
This is hardly surprising to us, based on our previous experience with market-oriented Asian aviation leaders and governments, particularly those with increasingly competitive carriers which are willing and eager to compete on a global scale. They understand that, especially in Asia, aviation functions as a primary bridge between peoples and nations, and a vital stimulus for the dramatic rise in trade, tourism, cross-border investment, high-tech manufacturing, and other industries. These nations recognize, conversely, that restrictive aviation regimes curtail competition, growth, and innovation, while denying consumers and communities the opportunity for better service, greater travel options, and lower fares.
One issue of great importance to us in evaluating the prospects for any U.S. offer of open skies in Asia is, as it was in Europe, the prospect of developing a "critical mass" grouping of open skies countries. Recognizing the obvious geographic and other differences between Europe and Asia, the analysis of "critical mass" may well differ between the two regions. but one can envision a significant number of growing Asian economies engaged in open skies with the U.S., and also enjoying liberal aviation relations with each other. The potential economic benefits of such a regime for all of its participants could grow exponentially as additional open skies aviation nations are added to the mix. As in Europe, the growth of international alliances dependent on unrestricted codesharing and fifth freedom rights, along with the potential for close integration with potential antitrust immunity, may well create strong incentives in this direction.
We know that Japan and, perhaps, some other Asian nations, object to our open market approach, fearing that their carriers will not succeed in a fully competitive environment. But our purpose is to work with those nations which are prepared to take bold steps toward liberalization, so as to demonstrate the prospects for an environment of free competition in air services in which carriers of Asia and of the U.S. can thrive. Our open skies partners in Europe have succeeded in creating such an environment. If the experience of the Dutch is any example, these countries will benefit greatly from the growth of integrated alliances, the expansion of air traffic, and the increase in service options that open skies has brought about.
So our approach to Asia is meant to be inclusive, not exclusive of any country. It is not a tactic somehow designed, in the hyperbole of one recent news article, to "surround and conquer" Japan. (If you will permit an aside, Japan is a hugely important trading partner and ally, and martial metaphors are inappropriate to describe the commercial disagreements between friendly nations.) This somewhat simplistic analysis fails to do justice to the stand-alone economic importance of the emerging economies of Asia and the huge growth of the Asia Pacific market - a market which is expected to double in the period from 1993 to 2005.
As aviation policy makers, we ignore these markets at our peril. By the year 2000 - in some three years - Japan will represent only about one quarter of the total international scheduled passenger traffic for the Asia Pacific region, with a declining share. We cannot allow a myopic preoccupation with Japan - as important as that market is and will remain - to divert our attention from the rest of Asia.
Even aside from market growth, the importance of Asia to U.S. carriers, and of U.S. markets to Asian carriers, can only increase. The advent of significant technological improvements - extended range aircraft, superjumbos, improved long-haul efficiencies - will have profound effects on trade and traffic patterns, and the potential creation and growth of Asian hubs. (Many of you represent world leaders in these technologies.) The growth of global alliances, facilitated by unrestricted code-sharing, is likely to encourage much greater interest on both shores of the Pacific in expanded service in the years to come.
So, rather than seeking to isolate Japan, we would enthusiastically welcome a U.S.-Japan open skies agreement. But it would be disingenuous to suggest that our interest in promoting open skies in Asia has nothing to do with our profound disagreement with much of the outmoded and protectionist thinking in Japan and elsewhere about international aviation. In fact, a key impetus in our consideration of open skies in Asia is the strategic importance of ensuring that the future model for Asian aviation is open, pro-competitive, and market-oriented, rather than based on the protectionism or appeals to regional insularity that have emanated from Japan in recent months. A demonstrated U.S. commitment to an open regime - even where the greatest economic benefits to the U.S. may not be fully realized in the short term - may be justified by its impact on shaping the debate in Asia, just as the initial U.S. offers of open skies to the Dutch and to the nine smaller European countries had a large catalytic effect over the last two years.
Regrettably, we have heard a good deal of the philosophy of gradualism and protectionism in recent months. At a meeting earlier this year in Kyoto, Japanese officials sought to develop a protectionist consensus among Asian economies, at a convocation that excluded the U.S. and Canada, as well as Taiwan and Hong Kong. To similar effect was a Japanese carrier presentation at a recent IATA meeting, which decried "The America Problem" in Asian markets. And there are disturbing indications that Japan may be working to exclude competitive aviation services from its commitment made with all leaders of the Asia Pacific Economic Conference nations in November 1994, to the goal of free and open trade and investment in the region by 2010. We have encountered similar protectionist thinking at the OECD, where Japan has vigorously dissented from a major international study on aviation that strongly endorses further liberalization.
In fairness to our friends in Japan, protectionism in aviation is not a view universally held in that country, nor is Japan by any means the sole source of these sentiments. Without naming names, it is even entirely possible that there are one or two in this audience who adhere to a similar point of view. Indeed, one senior British negotiator last fall advised me only half-jokingly that, in his view, the absurdly restrictive U.S.-U.K. bilateral, the infamous Bermuda II, was "spun of gold." This warm regard for Bermuda II may be understandable, given the extraordinary profits it has produced for carriers in this country, but it comes at the expense of consumers, shippers, new entrants, and many other economic interests. So perhaps it is spun of fool's gold that in the end will lose much of its luster.
All of us have a great stake in seeing that these protectionist views, regardless of their source, do not retard the growth of free and competitive air services as we move into the next century of international aviation. Economic freedom is the best engine of economic growth. And, in the end, only a global regime of open skies among nations will bring the greatest and most lasting benefits to the consumers, carriers, and economies of all of our nations. Such broad strategic considerations will of course continue to play an important role in U.S. policy in Asia and elsewhere.
In closing, allow me to say a few words about what we mean when we speak of Open Skies. Few words are needed, since the concept is quite straightforward. We mean simply this: the elimination of government restrictions on the competitive international operations of airlines (save for safety and security, of course.) Our model U.S. Open Skies Agreement document is, as it should be, a model of brevity, at least as these things go - less than 15 pages, excluding appendices.
No more verbiage than that is really needed, since the fundamental elements are not complicated. They can easily be summarized right here: unlimited traffic rights (as long as connected to the home country), unlimited fifth freedom (or "beyond") rights, unlimited airline designations, unlimited frequency and capacity on all routes, unlimited code-sharing rights, liberal charter arrangements, full cargo liberalization, and no restrictions, substantive or procedural, on the complete freedom of pricing that is essential to advance the important consumer benefits of competitive low prices. Open skies also means pro-competitive provisions for self-handling, commercial opportunities, intermodal activities, and computerized reservation systems. All of these elements are essential components of open skies. There should be nothing mysterious about this, as it is the essential model and template for all of our twelve open skies agreements in Europe to date.
In our European Open Skies initiative, we have viewed these elements together as an indivisible package, lest restrictions in one area undermine the overall economic freedom that is the hallmark of open skies and that generates its consumer and economic benefits. There is, in our view, no such thing as "regulated open skies," "mostly open skies," or "partly open skies." These are contradictions in terms. The point is simply this - that consumers and providers of air transportation services benefit when operation and commercial decisions are left to the market. We intend to continue to pursue this path here in Europe, in Asia, and around the globe.