Reporter's Notebook: Aviation Officials Debate Alliances, Open Skies Policy

<I>Phoenix</I> - In a three-day debate here last month, airline executives and regulators from around the world attacked the United States' practice of granting antitrust immunity to partner airlines in exchange for "open skies" bilaterals, while voices rising in defense of U.S. policy were quiet and few.

Meanwhile, continued politicking over the American Airlines-British Airways alliance and speculation on the future of such alliances added to the highlights of the Phoenix International Aviation Symposium.

"Antitrust laws are not being enforced under this administration, and the national press has been totally silent regarding mergers," said former Senate Commerce Committee chairman Larry Pressler. "In the next five or six years, antitrust-immunized agreements will become unglued under criticism, but for now it's a method for liberalizing markets." And economist Clifford Winston of the Washington, D.C.-based Brookings Institution, said, "I do not believe alliances and code sharing will remain once the world is deregulated."

While continuing to defend his carrier's plans to ally with American, British Airways' vice president of government and industry affairs in Washington, Anthony Fortnam, outlined the essentials of the debate. The conventional theory, he said, is that while immunized alliances benefit consumers through seamless, extended networks, the danger is that they could reduce competition, increasing prices and lowering service quality. So far, deals struck between the United States and several European countries, including Holland and Germany, have not produced more competition--and some have even reduced it, Fortnam said.

"Is there evidence that consumers like alliances?" he asked. "There isn't a lot yet, though KLM and Northwest have attracted more passengers. Is there evidence that consumers are getting stiffed? In our detailed analysis, there is no evidence of prices rising in those markets." Asked what BA would do if AA-BA is not approved, Fortnam said, "I think we could scrape by. Global alliances can be very tricky, and one can't simply leap around promiscuously."

Addressing U.S. policies, several air industry executives, mainly specialists in international and governmental relations, said the U.S. version of open skies is designed essentially for the benefit of American carriers. They also decried the Fly America and Airmail programs, which restrict the transport of U.S. government employees and mail to U.S. carriers.

Critics said two possibilities exist for mitigating that complaint: allowing foreign investment of more than 49 percent in American carriers, and allowing cabotage--the ability of a carrier to operate between points within a country in which it is not based. While cabotage and majority investment are now legal within the European Union, critics called U.S. negotiators "protectionist" in their insistence to keep these two issues off the table.

"The U.S. is principally interested in traffic rights," said Frederik Sorensen, director of air transport policy for the European Union. "But ownership is clearly one of the important restrictions which limit air transport from becoming a normal economic activity."

The Department of Transportation's assistant secretary for aviation and international affairs, Charles Hunnicut, defended the United States on cabotage by saying that it is not a relevant issue in forwarding the open skies agenda, and that he does not expect foreign airlines to enter the U.S. market. The U.S. point of view is that code sharing is the way to get into the American market, he said.

Phoenix-based attorney Marvin Cohen, who is experienced in bilateral negotiations, noted that Singapore Airlines "drops half their passengers in Honolulu, then goes on to San Francisco or L.A. without picking up any more. From a world resource perspective, cabotage makes no sense whatsoever." Pressler added that "U.S. organized labor plays an immense role in terms of protectionism."

Additional criticism of U.S. policy came from the deputy director general of Japan's Ministry of Transport, Jiro Hanyu, who is now attempting to negotiate a new Japan-U.S. bilateral with Hunnicut. Hanyu was particularly concerned about the potential for U.S. airlines to subsidize international competition with revenues from their domestic operations, markets that dwarf the domestic networks of all other nations.

While noting that he supports liberalization, Hanyu said, "I believe fair competition under the U.S. open skies model is impossible. It is quite obvious that the level of market concentration becomes higher when free competition is allowed. Open skies exacerbates the oligopolistic situation in international aviation."

Hanyu said he does not believe that there is a mechanism in place under antitrust immunization to safeguard against predatory pricing and capacity dumping--particularly when legal action on such practices takes place an average of 6.7 years "after illegal activities and unrecoverable damages have been inflicted."

Participants also debated the "ifs" and "whens" of open skies in the Asia-Pacific region--with most agreeing the movement will be a slow one. Speakers cited several reasons for that premise, namely the unequal levels of commercial development among Asian countries, diverse policies toward liberalized trading and a preponderance of state-owned carriers.

"Until they first establish open skies among themselves, most Asian countries won't be ready for the same with North America or Europe," said Germal Singh Khera, manager of international relations for Malaysian Airlines. "Until then, liberalization will be phased in."

Still, three countries--Singapore, Taiwan and Brunei--recently signed open skies with the United States, and Malaysia, Korea and New Zealand are expected to do so soon.