Bilaterals Battle Set to Erupt into Trade War

The US State Department has rejected Australian calls for capacity restrictions on airlines operating between Australia and the US which are similar to those which apply to almost all other international air routes throughout the world. The State department claims the Australian proposals would mean pre-setting capacity levels on the basis of a restrictive formula not reflective of the actual number of passengers carried by airlines of both countries. It said this would “stifle tourism development and overall travel between the two countries” and would “injure” US airlines by “restricting their commercial opportunities. ” It estimated that if the Australian-proposed capacity restrictions had been in effect last year, Continental would have been prevented from carrying nearly half of the passengers it actually transported in the market in 1986 and United would have had to carry about 20 percent fewer passengers. It claims Australia’s refusal to allow Continental to replace its DC-10s with larger 747s is inconsistent with a 1980 memorandum of understanding on capacity that allows one side to freeze levels of the other only after a six month trial period for the higher capacity and after consultations to consider what effects the increased capacity had during the trial period.

The State Department said the US proposed a compromise which would have allowed Australia to refuse the proposed increase but would have required it to allow a new increase at the end of October this year. It said Australia rejected the proposal “because it wished to have more severe restrictions on capacity than the compromise would have allowed. ” But Australia interprets the 1980 MOU as allowing any capacity increase to be rejected after a six month trial. “I am in little doubt that the US officials who agreed it at the time understood what it all meant but if you read it now, it is not an easy document to understand by any means,” said one Australian official.

The MOU virtually allowed airlines of either country to add any level of capacity to the Australia-US route, unless both governments objected. In practice, the US Government never objected and although the MOU provided for retrospectivity on the new capacity after six months, the Australians believed the US government was not taking its objections seriously. Continental increased its services to Australia from 14 to 18 DC-10s per week last October, despite Australian Government objections and had been seeking to replace its DC-10s with 747s (some of them formerly owned by Qantas) acquired with People Express.

Australia refused to consider this additional capacity until the October increase in flights had been discussed with the US government and when these discussions were unsatisfactory, it gave six months notice of intention to terminate the MOU on capacity.

According to Australian officials, Continental currently operates 4622 seats per week between Australia and the US, United 2649 and Qantas 6904, giving the Americans 51 percent of capacity on the route. They claim that Continental wanted to increase its capacity to 5903 seats per week and United to 3429, giving them 9322 seats or 58 percent of the market, compared to Qantas’ 42 percent after a marginal reduction of capacity to 68-48 seats per week.

The State Department is most uncomplimentary about this Australian intransigence. “The Australian Government’s restrictive position on airline service levels has led to a situation where the public’s need for transportation may go unmet and where the legitimate economic interests of US airlines have been injured,” it said in a statement.

But the Australian Minister for Aviation, Mr Peter Morris said the US was not allowing Australia “a fair deal” on trans-Pacific air routes. He said America was already causing Australian primary producers enormous problems by dumping grain onto world markets. “America is now attempting to do the same with air services across the Pacific,” he said. “Australia is now in the position of facing the world’s biggest airline companies flooding the market with unnecessary seats. ” Mr Morris said US carriers were flying the equivalent of about 10 empty jumbos across the Pacific every week and the United States wanted to increase this still further. “But despite the obvious lopsidedness of the 40 year old Australia/US air agreement, American negotiators have remained intransigent,” he said. “America has obstinately refused to put some balance into the agreement, which is heavily biased against Australia. ” Mr Morris, has openly accused the US of trying to intimidate Australia by threatening retaliatory action over moves to gain a fairer air agreement between the two countries. He told Parliament that four rounds of talks over 12 months had failed to win a more balanced deal for Australia, currently suffering from a “heavy bias” in favour of the US.

“We have not sought any decrease in capacity. . . we have not sought to prevent services being provided to Australia; we’re simply saying ‘Look, this (existing) agreement was drawn up in the aftermath of World War II. ” We think that it’s high time that we looked at the provisions of that agreement and the adjustments that have been made since then to ensure some fairness in respect of Australia’s own industry and to ensure that we are providing adequate services for people who want to visit Australia and people who want to travel to the United States. ” Mr Morris said other countries had similar problems with United States airlines and were watching the Australia/US negotiations closely. “We are seeking to have some type of safety-value arrangement inserted into the agreement in respect of future capacity that can be put into those services,” he said. Mr Morris said the effect of the notice of termination of the MOU was to say that if you want to add new capacity onto the Australian/United States route then we need to sit down together (and) have some consultation about it. . . that’s all that’s been done.

The United States reaction had been to accuse Australia of creating a “crisis in US/Australian aviation arrangements” and to say it would now consider “appropriate action. “”That is clearly intimidatory. ” Mr Morris said. “It is clearly a threat. . . of retaliatory action. ” In fact the level of disenchantment in Canberra over the US attitudes is so great that it is even beginning to transcend politics. During May, Mr Peter Morris, Mr John Moore – the new Liberal Aviation Spokesman and Mr Bruce Lloyd all co-signed a single media release actively condemning the present US attitude. This happens about as frequently as Halley’s Comet and is a measure of the depth of feeling that is now beginning to emerge on both sides of the Pacific.

The Australians claim that last January, which they say was the busiest month ever for trans-Pacific traffic, Continental carried 15,491 third and fourth freedom passengers between Australia and the US and about 16,000 fifth freedom passengers between Australia and intermediate points. Continental’s capacity for this month was 41,100 seats from which the Australians calculate a seat load factor for the month of 77 per-cent in other words they claim Continental was 23 percent empty or had about 10,000 free seats, during this busiest month ever. The significance of their complaint becomes clearer when comparable figures for the other major airlines of the route are examined. According to the Australians, the other American giant, United, carried 11,357 third and fourth freedom passengers, 7250 fifth freedom passengers, on a total seat capacity of 23,281, for a seat load factor of 80 percent. Qantas claims to have carried 33,488 third and fourth freedom passengers and about 7000 fifth freedom passengers with a seat capacity of 61,284 seats for a load factor of 67 percent.

According to figures tabled by the Australian negotiators during the recent negotiations in Washington, in the year to last October, Continental carried more people between Australia and NZ, Fiji and Tahiti, than between the US and Australia. Australia claims Continental carried an average of 991 people per month between the US and Australia, but an average of 1096 between Australia and NZ, Fiji and Tahiti. Qantas by comparison, in the year to last December, carried an average of 3134 passengers per month between the US and Australia but only 749 between the US and Fiji or Tahiti.

Continental disputes these figures, claiming the whole argument is dogged by varying definitions of different types of traffic and contradictory numbers. Continental’s vice president, marketing and operations for the Pacific, Mr Paul Casey, claims that the averaged figures quoted by the Australians are misleading and that in peak travel seasons there are hordes of American tourists who want to come to Australia but cannot get seats.

Australian officials claim that not even Continental is really pretending that the matters in dispute have anything to do with catering for the demand for travel to Australia by US tourists. They claim the dispute arises solely from Texas Air, Continental’s principal, taking over the financially desperate US domestic airline discounter, People Express, and acquiring in the process several 747s which it has to find a use for. Several of these are ironically former Qantas aircraft. Some Australian negotiators claim that during negotiations in Washington, senior Continental executives made no secret of the fact that they were none too pleased to have to find a hole for the 747s.

“Continental people make no secret of the fact that they wish the bloody things had never been heard of,” said one. “They would have preferred to continue with their DC-10s. The issue appears to have absolutely nothing to do with whether there are enough seats for peak time tourists. It is apparently wholly and solely a question of finding a use for their aeroplanes. No counties enter into bilateral arrangements on that basis. ”

The issue is of great importance to the government and to Qantas because Qantas is better at selling Australia as a destination for other tourists and it has also become an increasingly significant earner of foreign exchange to boost Australia’s shaky economy. According to Qantas chief executive, Mr John Menadue, Qantas in 1985 carried 70 percent of all US residents visiting Australia – more than Continental and United combined.

The Managing Director of the Australian Tourist Commission, Mr John Rowe, is also very critical of foreign airlines for their comparative lack of commitment to promoting tourist travel to Australia. ”The degree of interest shown by other international carriers in marketing Australia varies according to the importance of the Australian route in their overall operations but, with few exceptions, their promotion of Australia is completely insignificant in comparison with the total commitment by Qantas. ”

He said many carriers, whatever grandiose claims they may make in their corporate publicity, competed selectively on price and conditions of fares, aiming at gaining market share without expense or risk.

While international visitor spending within Australia dominates discussions of tourism’s economic role, about half of the average holiday costs for visiting tourists is accounted for in fares. Every Qantas ticket sold overseas is the export of an Australian service. John Menadue estimates Qantas’ foreign revenue earnings in the last year at $1. 5 billion (refer Interview, this issue). This financial year it is targeting for foreign exchange earnings of $1. 8 billion, which will make it the fifth or sixth largest export-earning company in Australia. (Qantas derives about one third of its revenue from carrying Australians overseas but although they hurt the balance of payments by spending their money overseas, at least by paying their fares to Qantas instead of a foreign airline, they stem the invisibles deficit by about $1 billion a year, according to Qantas. )

Not all Australians are solidly behind their Federal Government’s enthusiasm to protect its national airline. The Committee for Melbourne, chaired by Elders IXL Chief and rumoured prime ministerial pretender, John Elliot, wants greater access for foreign airlines to Australia. He said in a statement recently that Qantas was controlling the future development of tourism into Melbourne. ”There are wider issues at stake than the profitability of Qantas,” he said. “The potential in overseas earnings brought about by increased trade and tourism far outweigh the contribution to the economy made by Qantas earning a profit. ”

The Committee cited Korean Airlines, Continental Airlines, Iberia, All Nippon and Canadian Airlines International as seeking greater access s_ _ !O Australia. Melbourne civic into tests have

Consistently cnt1c1sed Qantas for not operating more direct flights to Melbourne but the airline claims there is not sufficient demand for tourist visits to the city. Other airlines seem to agree – almost all of them are mainly interested in operating to Sydney and Queensland, although most pay lip service to the possibility of operating to Melbourne.

The dispute between the US and Australia clearly shows increasing strains on the traditional method of regulating international flights by bilateral agreements. Most international airlines are government-owned or effectively controlled by their governments and will therefore fit fairly tamely into whatever bilateral agreement is negotiated on their behalf.

But Continental is an aggressively private enterprise and has become arguably the largest airline conglomerate in the free world by hard-nosed exploitation of the freedoms of deregulation. The US is becoming a small pond for the likes of Continental and their growing international operations are putting increasing pressure on government-owned airlines in other countries.

Chairman Frank Lorenzo turned Continental around after he gained control by putting it into voluntary bankruptcy, firing almost all the staff and rehiring at significantly lower wage rates. His brutal but effective tactics have allowed him to take over several larger but fatter airlines so that over about seven years he has grown from control of an insignificant charter airline to the biggest player in the entire US industry.

Its marketing consists mainly of heavy but well-tuned advertising of slashed fares and special deals. Continental is an aggressive fare discounter in the US and international markets and has said it will offer one way fares between the US and Europe of $US199 when it begins operations between Denver and London Gatwick in June. Continental has said it will give away more than 500,000 free tickets worth more than $US200 million from the US to Sydney and various other international destinations during May.

Passengers departing from five New York-area airports during May will receive a card with a destination name behind each Continental logo covering 18 US destinations and Sydney, Auckland, London, Paris, Honolulu and Mexico City. The cards are good for a three-month period sometime during the next five years. Free trips are limited to six per person and reservations must be made at least 30 days in advance.

Such aggressive tactics could be deadly for the major airlines of most other countries which are at least partly protected by government-enforced monopolies or oligopolies. The officially stated US government policy is to have a minimum of government intervention, leaving maximum freedom and flexibility to airlines.

By accepting into bilateral air services agreements the US goes through the diplomatic niceties of showing that it understands, recognises, respects and accommodates the concern of other governments which do not have as much airline muscle – although many of the US’ bilateral partners might be surprised to learn that their concerns are being ‘accommodated’.

Governments like Australia’s argue that the open slather conditions sought by the US would be inconsistent with the concept of having. a bilateral agreement which is supposed to represent an accommodation of the positions of the two sides, which generally are not coincident.

“If one side decides unilaterally to act in a certain way because it is big and strong and ugly and can win by that approach, it would not be a bilateral situation,” commented one Australian official.