International Aviation: DOT's Efforts to Promote U.S. Air Cargo Carriers' Interests
Released: 1996-10-18T00:00:00

Letter

Introduction

The importance of airborne trade to the U.S. economy has steadily increased over the last 20 years, and the international movement of goods by air is critical to many U.S. export industries. The international aviation market is, however, heavily regulated by bilateral agreements between countries, which often limit airlines’ traffic rights—the routes they can fly and the frequency with which they can fly those routes. The departments of Transportation (DOT) and State have traditionally negotiated these agreements as part of a comprehensive exchange covering both passenger and air cargo services. However, air cargo services have characteristics and needs that differ significantly from those of passenger services—most prominently the need to move and store cargo on the ground. When these needs are not met, the competitiveness of these services is compromised.

International Air Cargo Services Are Vital to U.S. Trade

International air cargo services play a vital role in facilitating U.S. trade.As shown in figure 1.1, since 1975 the airborne share of the value of U.S. exports has more than doubled, and the airborne share of imports has almost tripled. In 1995, the value of U.S. airborne trade reached $355 billion, accounting for 31 percent of U.S. exports and 23 percent of imports—or 27 percent of all U.S. trade. U.S. airlines generated about $3.9 billion in revenues from international freight operations that year, according to DOT’s data.

The development of global systems for producing and distributing goods and an attendant increase in the use of “just-in-time” inventory systems, which reduce the need to warehouse spare parts and finished products, have contributed, in part, to the growth of international air cargo services. Some analysts consider the efficiency of such supply chains to be an increasingly important competitive advantage in numerous industries. International air transport is critical to shippers who need speed and reliability. This means of transport is particularly appropriate for moving goods that (1) have high value-to-weight ratios, (2) are fragile, (3) are physically or economically perishable, and/or (4) are subject to unpredictable demand patterns. Almost 70 percent of the exports of U.S. computers and office equipment and over half of the exports of U.S. communications equipment moved by air in 1994.

From 1990 to 1995, airfreight traffic between the United States and foreign countries grew by 50 percent. This traffic accounted for approximately 38 percent of the world’s estimated total airfreight traffic in 1994, the last year for which data are available. The trade to and from Latin America almost doubled. Europe and the Asia/Pacific region are the largest air trade markets for the United States, accounting for about 70 percent of the country’s air trade by weight in 1995. Furthermore, according to the Boeing Commercial Airplane Group’s forecast for airfreight traffic,international markets offer the greatest opportunities for U.S. airlines to expand their freight operations—the rate of growth in almost all international airfreight markets is forecast to exceed that of the U.S. domestic market.

Air Cargo Industry Has Unique Operating Requirements

The international air cargo industry comprises three types of carriers: (1) integrated all-cargo carriers, such as Federal Express, that operate cargo-only aircraft and primarily offer express door-to-door delivery of shipments; (2) scheduled and charter all-cargo carriers that operate cargo-only aircraft and primarily offer airport-to-airport service; and (3) passenger/cargo carriers that carry cargo on board passenger aircraft but also may operate cargo-only aircraft, and primarily offer airport-to-airport delivery.

Air cargo services have significantly different operating requirements from passenger services. First, unlike most passengers, air cargo moves in one direction only. This frequently results in directional imbalances in the flow of cargo traffic. To operate economically, a cargo carrier must have the flexibility to alter routings to take advantage of changes in traffic flows. Because most cargo is inanimate, it is also less sensitive than passengers to the number of stops made en route, to the directness of routing, or to changes in aircraft. Nevertheless, speed is usually critical to competitive air cargo services. According to DOT, rights to serve destinations without restrictions, along with the ability to route services flexibly, are even more important for efficiency in cargo operations than in passenger operations. Finally, the movement and storage of air cargo on the ground are vital for cargo services. For express carriers offering door-to-door service, the ability to operate pickup and delivery service—that is, to have intermodal rights—is essential for competitiveness.

All-cargo carriers hauled almost 60 percent of the international freight carried by U.S. airlines—over 1.3 million tons in 1994. As shown in table 1.1, services by U.S. all-cargo airlines are particularly important in Latin America and the Asia/Pacific region, where they carried over 70 percent of the freight transported by U.S. airlines in 1994.

U.S. Airlines Enjoy Less Success in International Freight Markets Than in Passenger Markets

In 1994, U.S. airlines flew more scheduled international freight ton-miles—about 16 percent of the world total—than the airlines of any other country. Nonetheless, U.S. carriers have not competed as successfully in international freight markets as they have in international passenger markets. From 1990 through April 1995, U.S. airlines achieved a 40.7-percent share of the U.S. international freight market, on average. By comparison, U.S. passenger/cargo airlines averaged a 53.3-percent share of the U.S. international passenger market during the same period. Notably, according to DOT’s data for 1994, airlines from foreign countries other than those where the freight originated or was destined—so-called third-country carriers—obtained a 21-percent share of the traffic in the 20 leading U.S. international freight markets.

Most international airfreight is carried by major foreign passenger/cargo airlines. In contrast to the U.S. domestic market, where integrated all-cargo carriers carry about 60 percent of the freight traffic, the majority of the world’s scheduled freight traffic is carried by passenger/cargo airlines—almost 60 percent in 1994, according to the Air Cargo Management Group, an air cargo consulting firm. The comparatively small U.S. share of international freight traffic is due, in part, to the greater emphasis foreign passenger/cargo airlines have traditionally placed on freight operations compared with U.S. passenger airlines. U.S. passenger/cargo airlines have historically viewed cargo services as a by-product of their passenger services, and all but one of these airlines had ceased operating cargo-only aircraft until this year. Northwest Airlines was the only major U.S. airline operating such aircraft in 1995, though both United Airlines and Continental Airline’s subsidiary, Continental Micronesia, recently announced plans to begin all-cargo services in the Asia/Pacific region. By contrast, many major foreign passenger/cargo airlines, such as KLM Royal Dutch Airlines, Air France, and Lufthansa, operate all-cargo aircraft or so-called “combi” aircraft, on which cargo is carried in the main compartment of the passenger aircraft in addition to the bellyholds.

Appendix I contains additional information on the status of the international airfreight industry.

DOT and the State Department Negotiate Bilateral Agreements and Try to Resolve Problems

Under a framework established by the Chicago Convention in 1944, international aviation is largely governed by bilateral agreements. Two countries negotiate the air transport services between them and award airlines traffic rights. In general, traffic rights determine (1) which routes can be served between the countries and between them and third countries; (2) what services airlines can provide (e.g. scheduled or charter); (3) how many airlines from each country can fly the routes; and, in some case (4) how frequently flights can be offered.

For the United States, the responsibility for developing international aviation policy and negotiating bilateral agreements resides with DOT and the State Department. Traditionally, these agencies have negotiated bilateral agreements as part of a comprehensive exchange of rights covering both passenger and cargo services. In 1989, DOT issued a statement of U.S. air cargo policy that established specific negotiating objectives designed to ensure the least restrictive operating environment for U.S. air cargo services. The 1989 statement reiterated DOT’s traditional policy of conducting comprehensive negotiations as the best means to accommodate the international interests of all-cargo airlines. DOT’s 1995 international aviation policy added the agency’s willingness to consider negotiating bilateral agreements that cover only cargo services. The State Department also helps develop aviation policy and is responsible for chairing negotiations with foreign governments and coordinating DOT’s actions with overall U.S. foreign policy.

Under 49 U.S.C., section 41310, the Secretaries of State and Transportation, as well as the heads of other agencies, are required to take all appropriate action to eliminate any discrimination or unfair competitive practices faced by U.S. airlines overseas. U.S. carriers can file formal complaints with DOT about such practices. DOT takes the lead in formulating policies and countermeasures to resolve such problems, which are regulatory obstacles, administrative inefficiencies, or restrictive practices that inhibit airlines from fully exercising the rights available to them under bilateral aviation agreements or that reduce the competitiveness of their services.

Objectives, Scope, and Methodology

Concerned about the international interests of U.S. all-cargo airlines, the Chairman of the Senate Committee on Commerce, Science, and Transportation and the Chairman and Ranking Minority Member of its Subcommittee on Aviation asked us to address the following questions:

What are the problems that all-cargo airlines face in doing business abroad, and what actions have the affected airlines and the U.S. government taken to resolve these problems?

To what extent has the U.S. government addressed air cargo issues in policymaking and during bilateral aviation negotiations, and what are the possibilities for separating negotiations of air cargo services from broader negotiations that include passenger services?

To identify the problems that U.S. all-cargo airlines face when operating abroad, we designed a questionnaire asking the airlines to catalog any such problems and assess their impact. The questionnaire was pretested with representatives of five all-cargo airlines. We then surveyed the 26 U.S. air carriers that, as of September 1995, operated cargo-only aircraft and were authorized by DOT to offer scheduled or charter international all-cargo services. We did not attempt to verify the existence of problems or their impact. As agreed with the requesters’ offices, we pledged that the airlines’ responses would be kept confidential. We received responses from 22 of the airlines, for a response rate of about 85 percent. The 22 airlines included 3 major airlines, 9 national airlines, and 9 regional airlines. These airlines carried about 60 percent of the freight carried by U.S. airlines in 1994. A copy of the questionnaire can be found in appendix IV.

To examine the actions taken by U.S. all-cargo airlines and the U.S. government to resolve the airlines’ problems abroad, the questionnaire asked respondents to describe their efforts to settle the problems and evaluate the assistance they received from DOT and the State Department, if any was requested. We also interviewed officials from DOT’s Office of International Aviation and the State Department’s offices of Aviation Programs and Policy and Aviation Negotiations.

To describe the disposition of cargo issues during policymaking and bilateral aviation negotiations, we reviewed relevant documents from DOT and the State Department, including DOT’s May 1989 statement of air cargo policy and April 1995 statement of international aviation policy, and spoke with DOT and State Department officials. We also reviewed applicable laws and reviewed U.S. aviation agreements concluded between January 1989 and March 1996. In addition, we reviewed the detailed notes of aviation negotiations recorded by representatives of the Air Transport Association (ATA) who were present at the discussions. We also interviewed DOT and State Department officials about aviation policymaking and bilateral negotiations. Our questionnaire asked survey respondents to evaluate the performance of these agencies in meeting their needs. Finally, we interviewed representatives of individual U.S. all-cargo and passenger/cargo airlines, the Air Freight Association (AFA), ATA, and the National Air Carrier Association (NACA).

To examine the possibilities for negotiating air cargo services separately from broader negotiations that include passenger services, our questionnaire asked respondents for their views. For this issue, we also interviewed officials representing the U.S. government, U.S. airlines, foreign governments, the European Union, and aviation trade associations.

We also provided copies of a draft of this report to the departments of Transportation and State for their review and comment.

Our work was conducted from August 1995 through September 1996 in accordance with generally accepted government auditing standards.

U.S. All-Cargo Airlines Report Problems in Doing Business Abroad

U.S. all-cargo airlines reported that they encounter many of the same types of problems in doing business at overseas airports that we identified in a prior study. The most significant problems, such as delays in clearing cargo through customs, are related to the regulation of aviation and international trade by foreign government agencies. The vast majority of these problems, which make U.S. carriers less effective competitors in the international marketplace, occur at airports located in Latin America and the Asia/Pacific region. The U.S. all-cargo carriers noted that they often accept these problems as a cost of operating at the airports involved or attempt to resolve them without the U.S. government’s assistance in an effort to preserve good relations with the host country. Foreign airlines also face problems in doing business in the United States. However, foreign airlines have reported fewer problems doing business here than U.S. airlines have reported having abroad. In cases in which DOT’s or the State Department’s assistance was requested, most all-cargo airlines indicated that they were generally satisfied with the agencies’ efforts. Nevertheless, some all-cargo airlines indicated that they were not aware of DOT’s or the State Department’s ability to provide assistance. Finally, DOT’s gathering of information on doing-business problems has not been comprehensive because the agency has not notified all all-cargo airlines of its efforts.

Carriers Report a Wide Range of Obstacles

As we earlier found with major U.S. passenger/cargo airlines, U.S. all-cargo airlines report a variety of obstacles in doing business abroad that raise their costs and impair their operating efficiency. The 22 airlines that responded to our survey of U.S. international all-cargo carriers reported experiencing such problems at 107 foreign airports. The respondents indicated that these problems significantly affected their operations at 81 of these airports, many of which are located in 9 of the top 10 U.S. international airfreight markets for 1994. These problems include (1) regulation by foreign governments, such as delays in clearing cargo through customs; (2) restrictive policies and inadequate services at foreign airports; (3) restrictions on ground-handling operations, such as limitations on loading and unloading cargo; and (4) limitations on how airlines can market their services in local markets. These problems affect airlines of all sizes providing both scheduled and charter services, although they may have a greater economic impact on small airlines. According to DOT officials, however, many of the problems cited by the survey respondents did not reflect discrimination against U.S. airlines but affected all airlines operating at the airport.

Appendix II summarizes the 22 U.S. all-cargo airlines’ reports of significant problems in doing business and the number of airports at which they occur.

Regulation by Foreign Governments Limits Market Access and Raises Operating Costs

The problems cited most often by airlines involve regulation by foreign aviation authorities and regulation by government agencies that have no direct jurisdiction over aviation but do have rules affecting all-cargo airlines’ operations. These regulatory impediments, cited by 13 airlines at 50 of the 81 airports at which airlines reported significant problems, were identified as occurring more frequently in Latin America and the Asia/Pacific region than in other regions. Problems involving regulation by aviation authorities include burdensome administrative requirements and delays in obtaining flight permits. Problems stemming from the actions of agencies with no direct jurisdiction over aviation include delays in clearing cargo through customs and restrictions on the ability of U.S. airlines to operate trucks for pickup and delivery services.

Regulation by Foreign Aviation Authorities

Burdensome legal and administrative requirements were deemed a significant problem by six airlines. These airlines contend that these requirements limit their flexibility to serve their customers and raise their operating costs at 25 foreign airports, increasing the costs that they then must pass on to their customers. For example, one airline complained that the aviation authorities of one Latin American country required it to purchase liability insurance from one of the country’s national insurance companies for its aircraft operating on routes to that country, even though the aircraft was already insured by a U.S. company. Likewise, two of these airlines maintain that foreign governments in Latin America and the Asia/Pacific region require excessive documentation from carriers before allowing them to inaugurate service at their airports, imposing a burden in terms of both personnel costs and management oversight. In addition, these requirements, airlines report, can be applied in a discriminatory manner by foreign government agencies to reduce the competitiveness of the U.S. airlines’ services.

According to 10 of the airlines, foreign governments also frequently limit access to their markets by refusing to grant the U.S. airlines the authority to operate on routes authorized by bilateral agreements (cited as affecting operations at 17 airports) and by delaying the issuance of permits to overfly their territory or serve their airports (cited as affecting operations at 15 airports). These problems were cited at airports in 5 of the 10 largest U.S. international airfreight markets in 1994. U.S. airlines contend that foreign governments take such actions to protect their national airlines from competition from U.S. carriers. According to some all-cargo airlines, difficulty in obtaining flight permits, although also a problem for scheduled airlines, is particularly troublesome for all-cargo airlines offering charter services because they often must operate flights on short notice to meet the needs of their customers. According to the charter airlines we surveyed, some countries in Latin America require notice of proposed charters far in advance of when the airlines typically receive requests for flights. The airlines said that if they cannot obtain the appropriate authorization in sufficient time before a proposed flight, they frequently lose the business to competing, often local airlines, thereby losing revenues and dissatisfying customers.

Seven all-cargo carriers also report that curfews banning airlines from operating during night hours at 10 key airports in Latin America, Europe, Canada, and the Asia/Pacific region limit their ability to provide their customers with adequate levels of service. According to two of these airlines, curfews disproportionately affect all-cargo carriers because these airlines typically operate during night hours in order to meet delivery deadlines. Prohibitions against night operations, according to these airlines, reduce all-cargo airlines’ flexibility to schedule their flights. These curfews affect all the airlines operating at the airports, including the national carriers of the host countries. DOT officials noted, however, that U.S. and foreign airlines complain about similar curfews at airports in the United States.

Regulation by Other Government Agencies

Eight airlines characterized problems stemming from the actions of government agencies at 22 airports, mostly in Latin America and the Asia/Pacific region, that have no direct jurisdiction over aviation as adversely affecting their operations to a significant extent. Most of these agencies are responsible for regulating trucking or administering international trade.

Chief among the problems cited are restrictions on U.S. carriers’ ability to operate trucks for pickup and delivery services and delays in clearing cargo through customs. According to three U.S. all-cargo airlines, several countries require that locally owned companies pick up and deliver or transport freight shipments. Such restrictions, according to the airlines, limit their ability to provide time-sensitive delivery of packages, or deliver packages at all, at 12 foreign airports. For example, one airline reported that one Latin American government prohibits foreign companies from operating trucks with a capacity of more than 4 1/2 tons, reserving that sector of the market for its nationals. Because the airline cannot use a larger vehicle to transport shipments, its delivery of time-sensitive shipments slows and the airline’s cost of operations increases. Five airlines also reported difficulties and delays in clearing customs at 10 airports. For example, one airline attributed the slow handling of time-sensitive shipments and excessive costs to the airports’ having too few customs inspectors and cumbersome clearance processes. Such delays frustrate one of the primary purposes of air cargo transportation—speedy delivery. DOT officials noted that problems in clearing customs tend to be nondiscriminatory and also affect local airlines.

According to U.S. airlines, the cumulative effect of such problems is to reduce their operating efficiency and make their services less competitive with those of foreign airlines. In November 1994, we reported that many of the problems deriving from regulation by foreign government agencies with no direct jurisdiction over aviation often arise from the country’s overall trade policies.

High Airport Fees Raise Airlines’ Operating Costs

Fourteen airlines reported problems linked to airports’ policies and services. These included problems such as discriminatory or excessive landing fees, discriminatory payment terms for airports’ services, and discriminatory or excessive fuel prices. For example, two airlines reported paying landing fees they considered excessive or discriminatory at the airports of one Latin American country. One airline complained that it must pay about $3,000 for landing services at these airports, while fees for equivalent services for the same type of aircraft at airports in nearby countries range between $750 to $1,500. In addition, the other airline contends that these high fees are discriminatory because that country’s national carriers pay about $2,000 less in fees than U.S. and other foreign airlines pay. Both airlines stated that the high fees impose a financial burden on their operations and render their services less competitive than the national airlines’. Survey respondents alleged similar problems at a total of 48 foreign airports, mostly in Latin America and the Asia/Pacific region.

Ground-Handling Restrictions Degrade the Quality of Airlines’ Services

Thirteen U.S. airlines responding to our survey reported problems with ground-handling at 31 foreign airports, most of which are located in Latin America and the Asia/Pacific region. Ground-handling is a significant element of operations, affecting airlines’ costs and ability to compete effectively and to serve customers. U.S. airline representatives stated that such restrictions raise operating costs, lower the quality of airlines’ services, and reduce efficiency.

Problems with cargo-handling include restrictions on airlines’ ability to load or unload cargo themselves, discriminatory or excessive cargo-handling fees at those airports where airlines are prohibited from performing this task themselves, and inadequate warehouse facilities. U.S. carriers particularly object to being forced to use monopoly handling agents—frequently the local carrier against whom they compete—because they contend that such agents provide less efficient, reliable, and responsive service than they could provide themselves. For example, one airline complained that the government-owned monopoly ground-handling agent at the airports of one Asian country it served gives priority services to national aircraft at all times and that the workers providing the services do not work as efficiently for foreign airlines as for national airlines. Cargo carriers want the freedom to perform their own ground-handling services or to contract for them among several competing agents.

Inadequate warehouse facilities at foreign airports also pose problems, according to two U.S. all-cargo airlines. One U.S. airline reported that the government’s warehouses at a Latin American airport are very disorganized because they lack space, equipment, and trained personnel. The problems include not separating stored cargo according to the airline, not designating an area for dangerous goods, not having proper weighing equipment, and not designating a storage area for live animals. Because of these problems, the airline reported that it had to pay numerous claims for lost and damaged cargo and that various delays in departures had occurred. This airline further stated that all foreign airlines are affected by this problem.

Restrictions on Local Marketing and Distribution Hamper Competitiveness

Restrictions on how all-cargo airlines can market their services and distribute their freight within local markets also affect the airlines’ ability to operate efficiently. Four U.S. cargo airlines characterized such problems at 13 airports as significantly affecting their operations. These problems include restrictions on local advertising and the number of sales offices and on the number and type of personnel the airlines can employ. For example, one airline complained that it could not obtain adequate office space at the airports it serves in one Latin American country. According to this airline, the airports lack infrastructure, so the airport authorities lease only a very limited amount of space to the airlines, on a “first-come, first-served” basis. As a result, the airline reported, it cannot establish adequate sales offices at the airports and is impeded in its ability to solicit business. In an Asian country, a U.S. airline reported that the government required it to use the government-owned forwarders to distribute its freight at the two airports it served. According to the affected airline, both forwarders provided poor service, charged high fees, and required the airline to pay a commission of 5 percent on its revenue at both airports. This created a financial burden for the airline, and it eventually sold its operating authority to this country.

Foreign Airlines Also Face Problems in Doing Business in the United States

Foreign airlines also complain of problems in doing business in the United States. The most common problems cited by foreign airlines in our November 1994 report were excessive costs and inadequate facilities and services at U.S. airports. Officials from another foreign airline noted that foreign carriers are subject to a number of U.S. local sales and income taxes, while U.S. airlines are exempt from such taxes in several foreign countries. Two foreign airlines that we spoke with believe that the U.S. Customs Service lacks the personnel to expeditiously process cargo at Miami International Airport, the primary U.S. gateway for trade with Latin America. These airlines also complained about inadequate security at the Miami airport’s warehouses. However, foreign airlines have reported experiencing fewer problems in the United States than U.S. airlines have reported experiencing overseas.

Most U.S. All-Cargo Airlines Do Not Seek the Government’s Help in Resolving Problems

Like U.S. passenger/cargo airlines, U.S. all-cargo airlines that have problems doing business abroad can request assistance from both DOT and the State Department to resolve them. However, 18 of the 22 all-cargo carriers responding to our survey explained that they generally have not requested the U.S. government’s assistance; rather, they have attempted to develop their own solutions to the problems or treated any additional expense caused by the problems as a cost of providing service at those locations. Most of the 10 airlines that did request assistance from either DOT or the State Department indicated that they were generally satisfied with the aid they received. Some airlines reported that they were unaware of the assistance that DOT and the State Department could offer but would like guidance on how to request such assistance in the future. Recently, DOT established a database to monitor the problems U.S. airlines experience in doing business abroad. However, because DOT relied on two industry associations to notify their members of its efforts, many carriers that were not members of these associations were unaware of the initiative and have therefore provided no information.

U.S. All-Cargo Airlines Attempt to Resolve Problems Themselves

U.S. all-cargo airlines reported they were more likely to try to resolve their problems in doing business themselves or to take no action rather than ask the U.S. government to intervene. The U.S. all-cargo airlines that have attempted to resolve their problems themselves have been only slightly successful, resolving 20 of 117 such cases. However, the settlements achieved were not always optimal from the airlines’ viewpoint. For example, one airline operating at a European airport negotiated a reduction in some landing fees that the carrier considered excessive, but other landing fees at the same airport remain high. Other attempts to resolve problems have been unsuccessful. One airline reported that after trying unsuccessfully to resolve its problems in obtaining flight permits, clearing cargo through customs, and complying with burdensome legal requirements at a Latin American airport, it decided to stop operating at that airport. Another airline, which was unable to resolve significant operating and marketing problems at two airports in an Asian country, sold its rights to fly to those airports.

Some Airlines View Problems as Beyond the Scope of the U.S. Government

Some U.S. all-cargo airlines have not requested DOT’s or the State Department’s intervention because (1) they view the U.S. government’s role as limited to intervening in matters involving violations of bilateral agreements only; (2) they believe requesting the U.S. government’s intervention would be too costly or time-consuming; or (3) they have been unaware that the assistance is available. Like several U.S. passenger/cargo airlines, many U.S. all-cargo airlines do not believe it is practical for airlines to rely on the U.S. government to resolve the daily difficulties of operating in foreign countries. In addition, according to DOT and State Department officials, many U.S. airlines do not seek the U.S. government’s assistance because they believe such government involvement might harm relations with the host country.

Some airlines do not request the U.S. government’s assistance to resolve problems because they usually view the problems as local or unique to the airports in question. These airlines prefer not to involve DOT or the State Department in problems they view as not involving a breach of obligations under a bilateral agreement. One airline explained that it generally attempts to work with local airport officials, the International Air Transport Association (IATA), the International Civil Aviation Organization (ICAO), and other carriers to remove many of these impediments to doing business. This carrier believes that the bilateral process is not an appropriate forum for resolving many of the problems that are specific to all-cargo airlines’ operations because the process is structured to address the needs of passenger services.

Like U.S. passenger/cargo airlines, many all-cargo airlines do not view the formal process for filing complaints about operating problems as a cost-effective way to resolve them. They consider the formal process of requesting the U.S. government’s intervention to be too costly or time-consuming. This view is especially common among the small and mid-size airlines that have limited resources to devote to filing complaints under 49 U.S.C., section 41310, the statute under which airlines file formal complaints with DOT about their problems in doing business abroad. Of the 28 complaints filed under the statute since 1989, only 6 were filed by all-cargo carriers. According to one airline, it is also costly to request DOT’s assistance because the agency asks the airline to collect and present to it all the necessary evidence concerning a problem before the agency will attempt to address the problem. DOT officials responded that they must have reasonable assurance of a problem’s validity, as well as detailed facts, before intervening with a foreign government on a formal basis. DOT officials told us that although the number of formal complaints is small, DOT spends a great deal of time attempting to resolve complaints informally.

Some airline officials were also unaware of the processes for requesting DOT’s or the State Department’s assistance to help solve problems in doing business abroad. Officials of three airlines—one small charter, one large regional, and one national airline—stated that they were unfamiliar with how to request the U.S. government’s aid but would appreciate any information on how to do so. Officials at two of these airlines were not even aware that such assistance was available from the U.S. government. Neither DOT nor the State Department systematically provides the airlines with information on the assistance it provides or guidance on the procedures to be followed in obtaining the assistance.

Finally, DOT and State Department officials, including DOT’s Assistant Director for Negotiations and the State Department’s Director of the Office of Aviation Negotiations, believe that many U.S. airlines are reluctant to request their aid in resolving problems because the airlines think that the U.S. government’s involvement will be perceived by the host country as confrontational. According to DOT officials, most U.S. airlines prefer using cooperative methods to resolve problems out of fear that a foreign government will retaliate or a desire to preserve good relations with the host country.

Recently, in response to a recommendation we made in our 1994 report, DOT began to collect information on the status, nature, and severity of U.S. airlines’ problems in doing business abroad and established a consolidated database on such problems to ensure that they are prioritized and given attention. However, DOT did not notify all U.S. all-cargo airlines of the system. Instead, DOT worked through the Air Transport Association (ATA) and the National Air Carrier Association (NACA) to notify their members of the database and to request information on current doing-business problems. Only 9 of the 22 air cargo carriers that responded to our survey, however, are members of either association. As a result, the airlines that are not members—mostly regional airlines—were unaware of DOT’s efforts and have provided no information. Consequently, DOT’s gathering of information about and monitoring of doing-business problems have not been as comprehensive as they could have been.

U.S. Government Has Resolved Some Problems, but Most Are Unresolved

For those problems for which all-cargo airlines requested the U.S. government’s assistance, DOT and the State Department had some success, according to survey respondents. The 10 all-cargo airlines that reported turning to the U.S. government for help told us of 14 cases in which the government completely or partially resolved the doing-business problem in question. However, the airlines also reported 32 cases in which the situation remained unchanged after the U.S. government intervened. Nonetheless, 7 of the 10 airlines were generally satisfied with the assistance they received from DOT or the State Department, even if the assistance provided did not resolve the problem.

As we reported in November 1994, DOT and the State Department are more successful in resolving issues that come under bilateral agreements or issues that DOT has determined denied U.S. airlines a fair and equal opportunity to compete. For example, one cargo airline reported that during recent bilateral negotiations with a European country, U.S. negotiators were successful in including in the bilateral agreement a statement that prevents that country from arbitrarily assessing landing fees. The U.S. government also intervened successfully on behalf of an all-cargo airline that reported experiencing cargo-handling restrictions and discriminatory cargo-handling fees at airports in an Asian country. In response to a formal complaint, the U.S. government imposed sanctions on the foreign government, and the foreign government ceased its discriminatory practices.

According to carriers responding to our questionnaire, DOT and the State Department have had less success in resolving problems that are not covered by specific, detailed provisions in bilateral agreements or that do not represent discrimination against U.S. airlines. For example, according to one U.S. airline, the departments were not able to resolve restrictions that limited the airline’s operations to the less commercially desirable of a foreign city’s two airports. According to another airline, DOT and the State Department have been negotiating for 2 years with a Latin American country to drop a restriction that reserves for national companies and denies to others the right to transport international freight shipments in vehicles with a capacity of more than 4-1/2 tons. Some survey respondents said that their problems remain unresolved: Charter airlines, for example, continue to have difficulty obtaining flight permits at Latin American airports.

DOT and the State Department Face Constraints in Resolving Problems

As we previously reported, DOT and the State Department must consider numerous factors, including the severity of the problem and the United States’ aviation trade relationship with the country involved, in attempting to resolve U.S. airlines’ doing-business problems. At these agencies’ disposal are several statutory and regulatory tools that authorize retaliatory measures. For example, the United States may deny the schedule of flights to the United States proposed by a country’s carriers or may impose other sanctions. Such stern measures have limited application, however, in addressing practices that do not clearly violate bilateral accords or discriminate against U.S. carriers. DOT interprets its authority under 49 U.S.C., section 41310, as requiring a finding of a violation of a bilateral accord or other instance of unfair or discriminatory treatment before it may impose sanctions. We found in our November 1994 report that efforts by DOT and the State Department to resolve the range of doing-business problems that do not overtly discriminate against U.S. carriers are complicated by several constraints, such as the need to negotiate with foreign governments that are often protecting their own carriers from increasing U.S. competition.

Conclusions

According to U.S. all-cargo airlines, their success is limited by a range of problems in doing business at key airports in Latin America and the Asia/Pacific region. Such obstacles increase carriers’ operating costs and can erode the competitiveness of their services. Although most U.S. all-cargo airlines are satisfied with the assistance they have received from DOT and the State Department in resolving their problems, two airlines were unaware of the assistance that the agencies could offer. Neither agency has systematically provided the airlines with information on the assistance available or guidance on obtaining access to it. In response to a recommendation in our prior report, DOT began to collect and analyze information on U.S. airlines’ problems in an effort to monitor the status, nature, and severity of such problems. However, because DOT has not collected information directly from the airlines, many U.S. all-cargo carriers are unaware of its efforts and have not provided any information. As a result, DOT still cannot effectively establish priorities and strategies to address the most serious and pervasive problems.

Recommendations

We recommend that the Secretary of Transportation develop and distribute to all U.S. airlines information on the assistance available and guidance on the procedures to be followed in requesting aid from the U.S. government in resolving problems in doing business abroad and extend DOT’s current effort to collect information on the status and severity of U.S. airlines’ problems in doing business abroad to include all U.S. all-cargo airlines that operate internationally.

Agency Comments

We provided a draft of this report to the departments of Transportation and State for their review and comment, and they generally agreed with our conclusions and recommendations.

DOT and the State Department Have Advanced Air Cargo Issues, but All-Cargo Carriers Advocate Dedicated Negotiations

U.S. delegations have discussed air cargo issues to some extent in their negotiations with more than three-quarters of the countries with which bilateral talks have been held since 1989. Aviation agreements reached during this period have generally expanded the opportunities for U.S. all-cargo carriers and, in some cases, have liberalized cargo services before passenger services. Nevertheless, restrictions persist. As a remedy, most U.S. all-cargo airlines advocate separating negotiations of cargo rights from broader negotiations that include passenger services.

Separate discussions about air cargo services could allow negotiators to focus on all-cargo airlines’ unique operating requirements, according to airline representatives and DOT and State Department officials. Some all-cargo airlines also believe that such discussions could ensure that progress on cargo services is not delayed because of disputes about passenger issues. In addition, several industry observers believe that successful negotiations on cargo issues could create momentum to achieve progress on contentious passenger issues in several U.S. aviation relationships. Airline representatives and DOT and State Department officials also point out several obstacles to such an approach. Most foreign countries do not have major international all-cargo airlines. Instead, they have passenger/cargo airlines. In these countries, the governments might be unable to separate negotiations of air cargo and passenger services. Furthermore, U.S. negotiators would be unable to reciprocally exchange cargo rights for passenger rights, which could lessen their flexibility in negotiations and make it difficult for them to obtain the maximum benefits for U.S. all-cargo airlines. Finally, DOT and State Department officials caution that routinely holding separate cargo negotiations could impose a financial burden on the offices responsible for conducting them.

Cargo Issues Have Been Addressed With Most Countries Since 1989, but Restrictions Persist

DOT and State Department officials acknowledge that passenger issues historically have received more attention than cargo issues during bilateral aviation negotiations, primarily because, according to the DOT officials, passenger issues are more numerous and arise more frequently. However, these officials assert that the U.S. government has addressed cargo issues as they have arisen and has paid markedly greater attention to the interests of all-cargo airlines over the past several years, citing their success in liberalizing cargo services with several countries. State Department officials attributed this increased attention, in part, to (1) the growing importance of U.S. air trade with the countries of Latin America and the Asia/Pacific region and (2) the emergence of Federal Express and United Parcel Service alongside U.S. passenger/cargo carriers as major competitors in the international market.

Our analysis of DOT’s and the Air Transport Association’s (ATA) records showed that the United States conducted formal aviation negotiations with 56 foreign governments between January 1989, the year that DOT issued its air cargo policy statement, and March 1996. U.S. officials discussed air cargo issues in at least one negotiating session in talks with 44 of these governments. However, most negotiating sessions focused on passenger issues; about one-third of the more than 300 individual sessions dealt with air cargo issues. According to DOT officials, passenger issues receive more attention than cargo issues during negotiations because they arise more frequently. The officials said that foreign countries frequently focus on passenger issues and such issues are the principal reason talks are held. They noted that certain kinds of disagreements that continue to arise in the passenger context, such as pricing issues, have not been raised with respect to cargo for many years.

During this period, the United States amended or inaugurated 74 aviation agreements. Thirty-two of these agreements contained specific provisions governing all-cargo services. Of these, 18 agreements specify separate routes for all-cargo services and 21 agreements define the intermodal rights available to airlines. The United States has also signed “open skies” agreements with 12 European countries, under which most bilateral restrictions are eliminated, and an agreement with Canada substantially liberalizing the transborder aviation market. Finally, in March 1996, the United States successfully completed negotiations with Japan that dealt exclusively with air cargo services.

Our analysis showed that air cargo issues were addressed in the majority of the negotiating rounds with 20 countries: Argentina, Brazil, China, Fiji, Greece, Guatemala, Hong Kong, India, Indonesia, Korea, Macau, Malaysia, Mexico, Nicaragua, Peru, the Philippines, Saudi Arabia, Singapore, Spain, and Thailand. U.S. negotiators reached agreements with most of these countries that generally expanded service opportunities for U.S. all-cargo airlines. For example, the agreement concluded with the Philippines in 1995 (1) increased the number of routes for all-cargo services and the number of U.S. airlines allowed to operate on those routes, (2) granted U.S. carriers the unrestricted right to change the type of aircraft for flights beyond the Philippines, and (3) ensured that U.S. airlines could operate pickup and delivery services in the Philippines. These service enhancements gave Federal Express the operating freedom necessary to establish a viable hub at Subic Bay.

Still, 24 of the 32 U.S. agreements or amendments negotiated since 1989 that incorporated provisions on cargo services contained various restrictions on these services. Currently, aviation agreements governing cargo services in 7 of the 20 leading international airfreight markets for the United States—including the two largest markets, Japan and the United Kingdom—directly restrict the operations of U.S. all-cargo carriers. These seven restricted markets accounted for about one-third of the U.S. international freight traffic in 1994. Restrictions include limits on (1) the number of airlines allowed to operate on all-cargo routes, (2) the ability of U.S. airlines to carry freight to and beyond the other country, and (3) the frequency of all-cargo airlines’ flights. Agreements with some countries do not guarantee the right of U.S. airlines to perform their own ground-handling services or to truck cargo off airport property for final delivery. State Department and DOT officials note, however, that bilateral aviation agreements that restrict cargo services also tend to restrict passenger services. For example, the U.S. agreements with Japan and the United Kingdom restrict both types of service. A State Department official also said that these agreements are considerably more liberal than the agreements they amended or replaced.

Appendix III contains a list of the countries with which the United States has negotiated since 1989 and a table describing specific provisions of the agreements governing air cargo services.

Most All-Cargo Airlines Advocate Separate Negotiations of Air Cargo Rights, but Passenger/Cargo Airlines Are Opposed

Most U.S. air cargo carriers that we surveyed believe that the stated U.S. international aviation policy—embodied in DOT’s 1989 and 1995 policy statements—addresses their interests in liberalizing and expanding international air cargo services. Eleven of the 19 airlines that stated their views on this issue believe that, overall, DOT’s policy addresses their principal concerns to a moderate or great extent. However, only 7 of 20 respondents believe that DOT has been similarly effective in representing their interests during bilateral aviation negotiations, while 4 respondents believe that DOT has done little or nothing to represent their interests.

Respondents were split as to whether the State Department has represented them well or poorly. Seven of the 12 airlines stating their views on this issue believe the State Department has represented them to a little or some extent, while 5 respondents believe the State Department has represented their interests to a moderate or great extent.

Thirteen of the 19 airlines that stated their views advocate that the United States routinely hold bilateral talks dedicated exclusively to negotiating cargo rights, while only 4 support the continuation of comprehensive negotiations. DOT’s policy enunciated in the 1995 statement considers such an approach to negotiations appropriate when it can foster the comprehensive liberalization of aviation relations. While acknowledging that DOT and the State Department have been more responsive to the needs of all-cargo carriers when negotiating aviation agreements over the past several years, several of these airlines assert that under the current framework of comprehensive talks, negotiators primarily focus on the needs of passenger/cargo carriers, often to the detriment of all-cargo carriers’ interests. In addition, some of these airlines believe that the traffic needs of all-cargo operations are sufficiently different from those of passenger/cargo airlines to justify separate negotiations. Some carrier representatives also contend that when substantial consensus on cargo issues is reached during negotiations, progress on an agreement can be delayed because of disputes about passenger services.

According to some U.S. all-cargo charter airline representatives, separate negotiations could facilitate agreement on specific provisions guaranteeing the airlines liberal operating rights. Many U.S. aviation agreements either do not contain a formal provision governing charter services or require that charter services be performed according to the rules of the country in which the traffic originates. According to DOT and airline officials, the regulation of charter services by foreign governments can reduce the viability of such services. For example, Argentina requires that its national airlines have the first opportunity to carry charter freight originating in Argentina.

Finally, the two major international all-cargo carriers believe that separately negotiating cargo services would recognize the intrinsic link between the growth of international trade and liberalized air cargo services. Because of this connection, these airlines think air cargo services should be considered as a trade issue rather than as a transportation issue and that the Office of the U.S. Trade Representative (USTR) should play a more active role in negotiating cargo rights. One of these airlines holds that the best way to promote the liberalization of international air cargo services is by convincing U.S. negotiating partners of the benefits of increased air trade to their economies. Similarly, a State Department official pointed to the U.S. talks with Brazil in 1995 as an example of the influence that a country’s broader trade interests may have on the outcome of negotiations. The United States and Brazil amended the aviation agreement to increase the number of scheduled and charter all-cargo flights permitted, as well as to expand passenger service opportunities. Brazil’s growing air export trade to the United States, which includes shipments of automotive parts and other finished industrial products, was among the incentives for Brazil to liberalize air cargo services, he explained. DOT officials, on the other hand, believe that it was Brazil’s desire for enhanced passenger services to the United States that allowed the United States to obtain cargo rights in return.

The six major U.S. passenger/cargo airlines with significant international operations are opposed to any negotiating policy that would routinely exclude them from air cargo talks with foreign countries. Two of these airlines expressed concern that separate talks for air cargo rights would place their own cargo operations at a competitive disadvantage. Several U.S. passenger/cargo airlines are dedicating increasing resources to transporting freight in international markets. While most passenger/cargo carriers do not compete directly with integrated carriers in the door-to-door, express delivery market, they do compete for traditional airport-to-airport freight traffic, according to industry analysts. Two passenger/cargo airline executives conveyed their companies’ concern that the results of air cargo talks could have profound implications for passenger services by setting unfavorable precedents for issues of common interest, such as the right of U.S. airlines to serve destinations beyond a foreign country.

DOT officials stated that retaining the flexibility inherent in comprehensive discussions is entirely consistent with the U.S. government’s formal policy on negotiating bilateral aviation agreements. They explained that while the 1995 U.S. International Air Transportation Policy Statement commits DOT not to forgo agreements covering only air cargo services when circumstances warrant, the 1989 air cargo policy obligates the agency generally to retain flexibility in the interest of obtaining agreements that comport with the United States’ overall economic interests. According to another DOT official, DOT has no institutional interest in holding only comprehensive negotiations. Nevertheless, DOT officials said that comprehensive negotiations have usually proved to be the most effective way to adapt to evolving conditions during negotiations with most countries.

Separate Negotiations Could Liberalize Bilateral Agreements, but May Not Be Routinely Practical or Appropriate

According to airline representatives and DOT and State Department officials, in some cases conducting negotiations dedicated solely to air cargo issues could foster the liberalization of air cargo services by allowing negotiators to focus on these issues. Some all-cargo airline representatives also believe that separate negotiations could prevent negotiators from forgoing agreement on cargo services because of disputes about passenger services. Finally, by negotiating cargo issues in advance of passenger issues, negotiators might develop broad areas of agreement and understanding in an otherwise restrictive relationship, creating a model for subsequent discussions of passenger issues. Despite the potential advantages, these experts point out that significant obstacles to the successful implementation of air cargo-only negotiations exist.

Separate Discussions Could Focus Attention on Cargo Issues and Promote Agreement on Passenger Issues

According to several U.S. aviation officials and all-cargo airline representatives, conducting separate all-cargo negotiations could focus officials’ attention on the operating requirements of air cargo services, such as traffic rights granting carriers maximum operating flexibility to enable them to take advantage of shifting trade flows. These include rights to carry freight to and beyond foreign countries and to alter flight routings according to market demand. They also include intermodal rights and the freedom to transfer freight between aircraft at foreign airports without restriction as to the size, number, or type of aircraft involved—so-called change-of-gauge rights. Finally, negotiators could give increased attention to the doing-business problems of air cargo carriers if discussions were separated. According to one airline representative, these problems often cannot be adequately addressed during comprehensive talks because of crowded negotiating agendas and limited time.

Addressing cargo issues in advance of—and in isolation from—passenger issues could sometimes help create the momentum necessary to liberalize several bilateral relationships, according to some industry observers. Holding successful all-cargo talks in advance of more contentious discussions about passenger services, some observers explain, could create a climate of goodwill and an understanding that differences over passenger services could be resolved. These observers believe that this approach would foster liberalization much as did the deregulation of the domestic U.S. airline industry during the 1970s. The deregulation of domestic cargo services in 1977 led to the development of new service options for shippers, most prominently overnight express delivery, and stimulated dramatic growth in domestic cargo traffic. This growth partially contributed to the confidence that passenger markets could be deregulated the following year, according to these observers. Similarly, according to this point of view, a working demonstration of successfully liberalized international air cargo markets may encourage many of the United States’ foreign trading partners to negotiate for the same benefits in international passenger markets. This view, however, has yet to be proved.

Separate All-Cargo Negotiations Face Several Obstacles

In contrast to such arguments for separate negotiations are obstacles suggesting that this approach may not be routinely practical or appropriate. First, most foreign governments have little incentive to conduct all-cargo negotiations because their countries do not have major international all-cargo carriers. Even though many scheduled foreign passenger/cargo airlines also operate cargo-only aircraft, many of these airlines still carry a significant amount of cargo in the holds of passenger aircraft. As a result, their market needs are defined primarily in terms of initiating or expanding passenger services, which are their primary source of revenue, according to DOT and State Department officials. When foreign officials negotiate, they often do so with the acknowledged goal of expanding their national carriers’ passenger services.

In 1995, 75 foreign carriers from 44 countries operated all-cargo services to the United States. However, many of these carriers are small and their interests are considered secondary by foreign aviation officials, according to DOT officials and industry analysts. Only three foreign all-cargo airlines serving the United States—Cargolux, Nippon Cargo Airlines, and TAMPA—rank in the top 25 international airfreight carriers. Foreign negotiators, therefore, may find it difficult to bargain exclusively on behalf of small all-cargo carriers, seeking instead to gain cargo rights from the United States in the general course of comprehensive discussions. For example, a British government representative told us that while his country’s largest passenger/cargo airline, British Airways, carries significant amounts of cargo across the North Atlantic on board its passenger aircraft, its income from cargo revenue on these routes is largely a function of the frequency of its passenger flights between the United Kingdom and the United States.

A second obstacle to separate all-cargo talks is the possibility that they could reduce the flexibility of U.S. negotiators to obtain new rights for all-cargo and passenger/cargo airlines. In particular, DOT and State Department officials and passenger/cargo airline representatives believe that separating talks diminishes opportunities to exchange cargo rights for passenger rights, and vice-versa. With comprehensive discussions, negotiators can seek the best overall deal, which might mean allowing more passenger flights for foreign carriers in exchange for increased flights by U.S. all-cargo carriers, according to these officials. DOT and State Department officials with whom we spoke urged adherence, in most cases, to the current framework for negotiating, which relies on comprehensive talks, with separate negotiations available as an alternative. According to these officials, the service gains available to U.S. all-cargo carriers will usually be greater when agreements arise from flexible, comprehensive talks. They cited as examples the agreements reached with Canada, Mexico, and several of the European countries with which the United States now has an “open skies” agreement. Moreover, according to the officials, the interests of large integrated all-cargo airlines are often dissimilar to those of smaller, traditional freight carriers. This diversity of interests suggests that cargo-only talks may not, in many cases, be more effective than comprehensive negotiations in meeting the needs of all members of the community of all-cargo airlines. Indeed, two of the all-cargo airlines that responded to our survey supported this assessment. These carriers expressed the fear that the specific interests of the large integrated all-cargo airlines—Federal Express and United Parcel Service—are likely to receive favored treatment in cargo-only negotiations.

Finally, according to DOT and State Department officials, the U.S. government would incur additional costs by negotiating passenger and cargo rights separately. Each round of negotiations requires advance preparation to identify goals and develop strategies to achieve them. Importantly, preparation also includes consultation with the affected parties, including carriers, airports, and local communities. Aviation negotiations can involve multiple rounds of talks conducted over several months and demand negotiators’ attention before, during, and after the actual talks. Finally, when the foreign government hosts the discussions, typically for every other round, both DOT and the State Department also incur often significant travel costs. The U.S. negotiators that we spoke with are hesitant to pursue a policy of routinely separating passenger and cargo negotiations. They expressed concern that they would have insufficient time and funding to split each round of talks so that cargo issues and passenger issues would receive equal amounts of attention.

Talks With Japan Illustrate Advantages and Disadvantages of Separate Negotiations

Air cargo talks with Japan, concluded in March 1996, illustrate both the advantages and disadvantages of negotiating exclusively for the expansion of cargo services. One major advantage, according to DOT and State Department officials, is that the negotiations addressed cargo issues on their own merits and were not overshadowed by the contentious passenger issues in the relationship. Under the terms of the U.S.-Japan agreement, the United States received Japan’s consent for an additional U.S. airline to begin all-cargo services to Japan; for United Parcel Service to expand its service to and beyond Japan; and for Federal Express, United Airlines, and Northwest Airlines to route their flights more flexibly.

However, the agreement also focuses attention on the difficulties inherent in concluding similar agreements with other countries. First, the United States and Japan were able to hold cargo negotiations because their relationship—unlike U.S. relationships with other countries—allows the cargo needs of each to be considered separately and distinctly from the passenger needs, according to DOT. Each country has at least one major all-cargo carrier, and each has passenger/cargo carriers that operate cargo-only aircraft on bilateral routes.

Second, both the U.S. and the Japanese governments had concerns over the precedent that an agreement on cargo services could set for subsequent passenger talks. Japanese negotiators, in particular, did not wish to set a precedent in which the United States could regard expanded cargo rights as a precursor to similarly expanded passenger rights, according to State Department officials. Foreign negotiators representing other major U.S. trading partners are likely to express similar reservations.

With Japan, the United States originally sought an agreement that would allow all-cargo carriers the maximum flexibility to respond to business opportunities with little regulatory interference. During the discussions, U.S. negotiators argued that granting the right to carry freight to destinations beyond Japan to U.S. all-cargo carriers is essentially a trade issue and that significant economic benefits would accrue to Japan from unreservedly allowing such flights. However, Japan has not accepted this reasoning, and it limited the ability of U.S. all-cargo airlines to carry cargo originating in Japan from Japanese points to points beyond Japan. One U.S. airline representative expressed concern that continuing such limits on U.S. carriers’ right to serve destinations beyond Japan may have set an unwelcome precedent for passenger services.

Finally, concluding the U.S.-Japan agreement on all-cargo services has not proved to be a catalyst for accelerating progress on passenger service issues. In fact, the recent agreement on air cargo services has not prevented conflict over the pre-existing traffic rights of U.S. all-cargo airlines. The two countries resumed negotiations on passenger issues on April 29, 1996, but the talks have been at an impasse since then because of a dispute over Japan’s refusal to approve flights by two U.S. passenger/cargo airlines—United and Northwest—and Federal Express through Japan to other destinations in Asia. The United States believes these flights are authorized under current U.S.-Japan agreements. On July 16, 1996, DOT proposed to prohibit Japan Air Lines from carrying cargo from points elsewhere in Asia on its scheduled all-cargo services through Japan into the United States unless the Japanese government approved Federal Express’s request. As of September 25, 1996, the negotiations had achieved little progress on these issues and DOT had reaffirmed the U.S. intent to resolve outstanding disputes over the rights of U.S. carriers to operate flights beyond Japan before undertaking passenger negotiations over new opportunities.

Modified Approaches Could Create Negotiating Efficiencies and Promote Liberalization, but Offer No Panacea

Two modifications to the U.S. strategy have been under discussion within government and the industry. First, conducting multilateral negotiations has been offered as an approach that could create broad areas of agreement among countries and provide an incentive for countries with relatively restrictive aviation policies to liberalize them as part of a regional agreement. Second, continuing to allow carriers and other affected parties to directly observe discussions has been advocated as a means to help ensure that all parties have an opportunity to communicate their interests to U.S. negotiators. While each modification offers promise, each also raises problems.

Multilateral Negotiations Could Promote Liberalization, but May Not Be Practical

According to DOT officials, conducting multilateral talks could, in principle, help create negotiating efficiencies by focusing federal negotiating resources on talks with several like-minded countries at one time and could promote liberalization on a large scale. DOT’s 1995 U.S. International Air Transportation Policy Statement identified the negotiation of such multilateral agreements as an option in obtaining further liberalization of U.S. aviation relations. Some DOT officials and industry experts believe that concluding a liberal multilateral agreement on cargo services might heighten foreign governments’ interest in liberalizing passenger services. By offering significantly expanded access to the vast U.S. market, such an approach could motivate countries with restrictive aviation policies to join their neighbors in concluding a relatively liberal agreement with the United States.

U.S. officials have attempted to gauge foreign interest in holding multilateral negotiations. In 1991, in 1994, and again in 1996, DOT and State Department negotiators held exploratory talks with representatives of the European Commission, the executive arm of the European Union (EU). During the earlier talks, U.S. and EU officials reached an understanding on a broad array of cargo issues, which included deregulating pricing, eliminating numerical restrictions on the number of all-cargo airlines allowed to operate, allowing for an unrestricted amount of cargo to be transported between the United States and the EU, and a host of doing-business issues.

Nonetheless, the Commission no longer supports holding multilateral talks on cargo services in advance of and in isolation from discussions on passenger issues, believing this approach to be counterproductive to its ultimate goal of negotiating air services between the United States and EU member states. The Commission embraces the concept of multilateral negotiations and has obtained approval from a majority of its member states to proceed with phased, exploratory talks with the United States. However, according to DOT officials, the Commission does not have the authority to negotiate traffic rights—a disabling limitation in their view. DOT officials believe that there is interest in seeking air transport liberalization through regional associations, including those in Asia and Latin America. However, both U.S. and foreign officials said that none of these groups has yet achieved a consensus favoring such an approach.

Direct Participation Might Benefit Some Carriers, but Could Pose Problems

Formalizing and continuing a recent U.S. policy that allows “direct participation” by carriers in comprehensive negotiations could help ensure that agreements reflect all carriers’ needs and interests. While observers do not play a formal role in the negotiations, their presence allows them to state their case directly to DOT and State Department negotiators and to react immediately to any foreign country’s positions that might adversely affect their ability to serve markets in and beyond the country in question. According to a State Department official, one advantage to formalizing direct participation would be that “carriers couldn’t complain later that they were not part of the process.”

However, DOT and State Department officials have three primary concerns. First, smaller affected parties could be disadvantaged in articulating their needs because they often would be unable to send a representative to negotiations. Large, resource-rich carriers could conceivably send a representative to every negotiation, while smaller carriers could not afford the considerable travel and other staff costs of doing so. Second, U.S. delegations composed of large numbers of U.S. airlines interested in serving the relevant market may intimidate foreign negotiating teams representing weak foreign airlines. Finally, large numbers of observers may discourage negotiators from openly discussing substantive matters, increasing the frequency of so-called chairmen’s meetings to resolve key issues. Such closed meetings could create an atmosphere of mistrust between the U.S. chairman and the observing parties.