Australia/US Bilateral Dispute

The nature of this conflict has changed since it first erupted two years ago. Initially the question was whether Canberra could restrict US carriers based only on its prediction of how much fifth freedom traffic they would carry. Washington insisted it could not.

“Australia has a lot of nerve telling us “We think there’ll be too many Japanese on that flight, huffed David Modesitt, who chaired the South Pacific desk at the US Department of Transportation. “The plane hasn’t even taken off yet! How do they know how many Japanese will be on it?” Washington was adamant that traffic review come only after the fact rather than before. As Modesitt put it: “If people only did things based on the way they were done in the past, we’d still be walking behind donkeys. ” Rodger Robertson, Qantas director of corporate planning, was not persuaded. “They’re kidding themselves,” he replied. “Nobody ever takes traffic off after an ex post facto review. ” Nonetheless, Canberra was willing to push the point only as far as to limit frequencies for both US airlines and to obtain Northwest’s reluctant consent to carry no more than 50% fifth freedom traffic on its Osaka/Sydney route.

Today’s dispute still involves some of that initial question about when fifth freedom limits can be determined. United Airlines has challenged Canberra’s right to restrict its proposed Tokyo/Sydney flights based on fifth freedom projections. Northwest could make the same complaint over rejection of its application in May for four weekly Brisbane/ Tokyo/Detroit flights.

But the central issue now is ex post facto. After giving Northwest a year to prove it could sustain a New York/ Australia route “without unduly affecting the primary right of Australian and Japanese carriers to serve the Japan/Australia route,” Canberra decided earlier this year to act. By mid year, it contended that Northwest had complied with its 50% fifth freedom limit in only one of the preceding 20 months.

Northwest admits it only carried 37% through traffic in its first year-on target with its 35-42% projection. Fifth freedom traffic thus accounted for 63% of its traffic, well above the 50% lid it accepted when it launched the route in October 1991.

Its response is twofold: that Canberra had no right to compel its consent under duress to a 50% lid, and no such lid is authorised under the bilateral. Thus the issue ought to turn on what the bilateral says.

Unfortunately, it simply recites the same boilerplate found in many bilaterals around the world. “The primary objective,” it says, is to carry origin and destination traffic. Fifth freedom traffic is not forbidden, but its carriage is subject to “traffic requirements between the country of origin and countries of destination, the requirements of through airline operations, and the traffic requirements of the area through which the airline passes after taking account of local and regional services. ” Thus, the right to carry fifth freedom traffic between Japan and Australia on flights to or from the US depends on the traffic needs of Australia and the US, “the requirements of through airline operations,” and traffic needs between Australia and Japan, taking into account the capacity offered by Australian and Japanese carriers.

This obviously leaves much room for interpretation and, inevitably, dispute. The view of Transportation Minister Senator Bob Collins is simply that, “It is legitimate for Australia to protect its national interests. It is doing no more than the US would in similar circumstances. ” Northwest has not helped its own cause with several disingenuous claims. Its President, John Dansburg, asserts that Australia had no interest in Osaka until Northwest started to serve it. He told a travel symposium in Hawaii, “Two years ago, the Osaka/Sydney route was unserved. No Japanese or Australian airline chose to fly. ” What he failed to say was that slots have been frozen at Osaka’s Itami airport for years as the result of a consent decree entered in a lawsuit. No matter how much Qantas wanted to fly out of Osaka, it could not. Northwest had that option because it was grandfathered in at the time of the Osaka decree.

Northwest has also hurt its credibility by claiming that Osaka is “on the way” to New York so that a stop is natural. But a string stretched on a globe shows that a Sydney/New York nonstop flight would actually fly well south of the present Sydney/Los Angeles track, and would not even cross the equator into the North Pacific until it passed Tahiti. Osaka may be “on the way” from Sydney to Siberia, but in the real world it is nowhere near a New York routing.

It may also be true, as Northwest claims, that the Japanese on its Sydney flights represent only 4% of all Australia/Japan traffic, but there is nothing to prevent that from mushrooming in the absence of fifth freedom limits.

Northwest’s efforts to boost Australia/US travel via Japan are more constructive than such attempts to downplay its fifth freedom traffic. Under pressure to boost through traffic, Northwest has marketed its Osaka flight in Australia and the US on the grounds that it offers international standards all the way between Sydney and the US east coast rather than “a bus ride,” as Australian manager Col Hughes, puts it, between California and the eastern US. Northwest also boasts that two of its three weekly flights via Osaka reach eastern USA “within minutes” of the travel time via a California connection.

Northwest’s other steps to increase through traffic include deep discount promotional Sydney/US fares and generous travel agent commission overrides, and moving the terminus of its flight in October from New York to its primary hub in Detroit.

These efforts have raised third and fourth freedom traffic from a puny 5% in the first four months to an average of around 40%. The biggest problem, according to Col Hughes, is still educating passengers to the Osaka route. As he says, “Old habits die hard. ” Because the bilateral is vague, both sides have resorted to inventive arguments. Qantas claims it has “invested” in Japan over the years by deliberately operating more frequencies than load factors justified. It did this to secure precious Japanese slots. Now that slots are effectively capped by saturation at Japan’s main gateways, Qantas claims this strategy was starting to pay off before Northwest entered this market. But the claim that Northwest is undercutting a Qantas “investment” has been destroyed by the IASC’s recent award of most rights to Osaka’s new Kansai airport to Ansett Australia. Starting late next year when the airport opens, Ansett can operate the equivalent of four weekly 747s and three 767-200s-roughly twice the seats awarded Qantas. Canberra’s claim that it is simply protecting national interests must also be revised in light of its Single Aviation Market with New Zealand. Air New Zealand has nominated Japan as a destination to serve from Brisbane starting next year, meaning that Qantas will face competition from both Ansett and Air New Zealand before it even considers US carriers. Nor can Canberra claim that fifth freedom rights are inherently bad following its own negotiation of the “Asian Triangle” that allows Qantas to carry intra Asia fifth freedom traffic around southeast Asia and promote its multiple destination network in that region to European travellers.

However, in trying to restrict US fifth freedom traffic, Canberra has moral support from Tokyo and the Orient Airlines Association. Japan and the US are in the throes of their toughest bilateral talks ever on this very issue, while the OAA has criticised the majority of Asia-Pacific bilaterals with the US on the grounds they were negotiated in the ’50s and ’60s and “no longer provide an acceptable balance. ” But recent warnings by US airlines of a global conspiracy to undercut US bilateral rights exist only in their imaginations. No other nation has any power to influence the outcome of Australia/US talks.

As Canberra and Washington search for a way to resolve their differences, the question arises as to how they will do it.

Some observers suggest that the accord in late September between Germany and the US may offer a model, or at least some hint of what concessions the US might make. That dispute was also an acrimonious debate over capacity and fifth freedoms, amongst other issues. After German threats to cancel the bilateral, Washington backed down and agreed to interim capacity restrictions and limited fifth freedom growth for US carriers beyond Germany.

In the Australia/US dispute, a more likely settlement would involve a tradeoff between fifth freedom limits and capacity. To the extent Canberra succeeds in directly limiting fifth freedom traffic, it will probably concede more start-up and/or growth capacity. For instance, if Canberra holds out for an explicit fifth freedom lid, United Airlines might be allowed to start Tokyo/Sydney flights four times a week rather than two, and expand to daily service in one year rather than three. In other words, explicit fifth freedom limits might be traded off against higher than normal startup capacity and/or faster than normal capacity growth.

Conversely, if Canberra caves in on a direct fifth freedom lid, it could be more successful in restricting the overall capacity of US carriers. As in the case of Air New Zealand’s flights beyond Brisbane to Asia, frequency limits indirectly restrict fifth freedom traffic without any explicit lids. Given the choice, Washington would find this more palatable be- cause it would avoid explicit fifth freedom restrictions.

The US is clearly looking beyond this dispute to the precedent it may set for talks with Tokyo, where Northwest and United have much more at stake. With valuable rights beyond Tokyo to other points in Asia, Northwest earns a third of its revenue in Asia while United depends on it for 23%.

The decision in June to maintain the status quo in the present dispute until the end of this year favoured the US by allowing Northwest to keep flying in the interim regardless of its fifth freedom levels. According to some accounts, US Transportation Secretary Pena admitted after this deal was struck that his tough stance was actually designed as a signal to Japan that the US was prepared to deal from strength, and Australia happened to be a handy pawn.

This coincides with the warning by Peter Harbison, managing director of Sydney’s BDW Aviation Services. Current US aviation policy, he says, is “idealism with an iron fist” designed to benefit the US airline industry. Washington supports international open skies, but only because it favours US carriers. To its bilateral partners, Harbison sees such a US policy as “a declaration of war. ” When asked about Australia’s negotiations with the US, Senator Bob Collins promised: “We are not going to roll over. We haven’t in the past and we are not going to in the future. We want some sensible negotiations. ” The events of late November will show whether he gets them.