11/85 UNITED AIRLINES, NIPPON AIR CARGO-US-JAPAN NEGOTIATIONS - Aviation Constitution

In view of the overall trade deficit tht Japan has with the US it is

hard to believe that the Japanese aviation authorities believe

that they will be able to use the recent acquisition of PanAm's

Pacific routes to force the US to revise the existing air

agreement between the US and Japan, which the Japanese air

authorities have long called unequal and unfair. Their primary

complaint is that 60% of the 1.9 million passengers flying

between the US and Japan each year are Japanese, yet JAL only

carries 39% of the passengers. At a time when Japan

has exports to the US that are more than 2.5 times greater

than its imports from the US, it is surprising that the Japanese

are in a position to call the situation unfair, but that is

precisely what they are doing. They have siezed upon the Pacific

route acquisition by United as the perfect means to revise the

situation. The aviation agreement between the US and Japan is

unclear on whether a firm acquiring routes in this way is

automatically approved by the aviation authorities of the

respective nations. Under tha agreement, United must first obtain

approval from US authorities. Thereafter notification will be sent

to Japanese aviation authorities by the US Commerce Department

via the US Embassy and thereafter United must make its

application directly to Japanese aviation authorities. The

Japanese claim that they have the right to reject the application

and plan to use that right to wrest a revision of the current

aviation agreement with the US.

It seems strange that with American protectionist fevers

running at white hot levels the Japanese would dare to reject

America's largest airline and leave in limbo the status of such

a large group of air flights.

Japan Airlines, which for most of the postwar period has had

a monopoly--among Japanese airlines--in international flights,

and claims to be the world's largest international airline, now

appears terrified by the entry of United into its backyard. It is

comparing it to the 1281 invasion of Japan by the barbarian

Mongol's (Which created the myth that the homeland of Japan was

invincible and could not be defeated, until the Americas came

along.). It is calling this the "Pacific Aviation War."

United has 47,840 employees and 319 aircraft, with this soon

increasing to 382 aircraft, and operating profits of $564 million

in the most recent business year. It flies 1500 flights per day.

It flies to all 50 US states, 127 American cities, and Tokyo and

Hong Kong internationally. United has shown earlier that it can

use its massive network in marketing as it did in 1984 when it

offered major discounts on its domestic network for those taking

its Pacific flights. This proved quite a successful strategy, and

now with PanAm's routes added, the attraction is just that much

enhanced. Finally, United has the world's most advanced

computerized reservation system which is the most popular with

travel agents in the US.

Then there is Japan Airlines. It has 84 aircraft. Its earnings in

the past few years have never been all that great, what with 10

air crasher in 14 years. The most recent resulted in 524 deaths.

The cost of that crash and the 30-40% decline in passengers in

domestic routes are estimated to have wiped out recurring

profits for profits for the next three years. Domestic passengers

are walking away from JAL in Japan to take the trains.

Internationally, with JAL having an international monopoly,

Japanese passengers did not have much of a choice, unless they

wanted to take a foreign airline, which they would do, but would

prefer not to. Even before the August 1985 air crash JAL was

dependent on its Pacific routes, mostly to the US, for 40% of

its total international income, which itself accounts for 80% of

JAL's total income. Now however, with JAL's

accident record and its attraction of Russian jet fighters due to

sloppy flying, Japanese passengers are having to consider the

real risk in flying JAL as opposed to other lines. With United

entering the field with its superb attractions. JAL had good

reason for concern.

Earlier, the US and Japan had achieved an aviation accord in

late April, 1985. It did not cover the above problem with United

Airlines, as that happened later. Apart from the acquisition of

PanAm's routes by United, the aviation agreement provided that

three US sunbelt cities--Dallas Atlanta and Houston would be

opened to direct flights to Tokyo. Three additional US airlines

will be permitted to fly routes to Japan. Leading applicants are

expected to be Federal Express American Airlines, Delta Airlines,

Continental Airlines and Aloha Airlines. The agreement provided

that each country could take their choice of three of the

following routes: Nagoya-Honolulu, Tokyo-Honolulu, Tokyo-

Portland, Tokyo-Los Angeles, and Tokyo to new locations in the

US. JAL immediately announced plans to seek Tokyo-Houston and

Toyo-Atlanta routes and to increase its flights between Nagoya

and Saipan-Guam. Eastern Airlines applied for the Portland Tokyo route.

Under the April 1985 agreement Continental-Air Micronesia was permitted

to increase the number of its flights between Nagoya and Saipan-Guam. All

restrictions on the types of aircraft it could use on route were

also removed. Thus Continental soon applied for an additional two

flights per week out of Nagoya, starting from August 1985. Continental

later upped this to four flights and this was approved in late

July 1985. The agreement also provided for an additional

Japanese airline to serve the routs to Saipan-Guam. However, as this would

require a resolution to the problem of the Japanese air constitution

concerning permitting other Japanese airlines to break JAL’S monopoly on

international flights, an immediate entry was not expected. The president of ANA

did take the opportunity of the United Airlines's entry to

rephrase his case for ANA international flights as being in

Japan's national interest. JAL, also took the opportunity

presented by this temporary void in international

airline decisions to start flying the jets of Japan Asia Airways

on the route. JAA is 100% owned by JAL and is the only other

Japanese airline approved for international service. Thus far

however, its service has been restricted to Taiwan.

In preparation for the anticipated increased competition

from other Japanese and American airlines entering the Pacific

routes, JAL has decided to beef up its direct flight services, to

provide faster services. Presently JAL flies a Tokyo-Seattle-

Chicago route three times a week. It will be changing this to two

direct flights to Seattle per week and three direct flights to

Chicago each week. It will also be increasing its direct flights

to New York from its present 7 per week to 9 from 1986 and then

to 14 in 1988.

The April 1985 agreement also permitted Nippon Cargo Airline to

begin cargo flights between Japan and San Francisco and New York

five times per week from May 8, 1985. This was several months later than

NCA had hoped. The president of NCA claims that the delay, which cost it

1 billion yen per month, was due to the lobbying efforts of

Flying Tiger Airlines. The NCA president said this was unfair as

the Flying Tiger Airlines had virtually unlimited access to the

Japanese market and was flying 31 flights per week from Japan.

NCA soon concluded an agency agreement with a Hong

Kong subsidiary of its parent company, All Nippon Airways. NCA

expects that initially abut 10% of its ai cargo business will

come from SE Asia. Unfortunately NCA started business

just as the growth of the US economy was beginning to

slow and Japanese exports to the US, particularly the high value

added exports such as computer parts and semiconductors, fell

dramatically.

Flying Tiger Airlines has come in for quite a bit criticism

from its Japanese competitors. NCA claims that its application

was delayed due to the political influence of former President

Gerald Ford. Mr. Ford is a director of Flying Tiger Airlines. The

Japanese claim he used his political influence to block NCA. The

Japanese also assert that national security factors are being

taken into consideration by US aviation authorities. They claim

that the refusal of US authorities to permit NCA and JAL to enter

the Chicago market was due to such factors. They claim that the

Chicago is a very lucrative market for the two airlines providing air

cargo services between Japan and Chicago--Flying Tiger and

Northwest Orient. The US government is said to be particularly

grateful to Flying Tiger Airlines for its airlift services

provided during the Vietnam War, over ten years ago. United

Airlines is said also to be preferred by US authorities as it was

singled out by the Chairman of the Joint Chiefs of Staff, General

David Jones "as the first airline to commit itself to the program

for strengthening air transport capability in his report to

Congress on military preparedness." JAL in July 1985 once again asked the

Ministry of Transport to ask the US for permission for it to fly air cargo

flights to Chicago. It noted that the large number of Japanese firms in the

area would provide it with a good market. The Japanese seem to believe that

they have some sort of property rights to Japanese passengers and Japanese

businesses. In recent months however, aviation talks between the US and Japan

have grown heated once more. In November, 1985 the US rejected the

request by NCA for one additional flight to the US per week. Japan asked

Japan asked the US to reconsider this, stating the rejection was in violation

of the April 1985 agreement. The US then reversed itself

and approved the application saying it was only temporary to

handle the heavy Christmas traffic. NCA was asking for the flights

on a charter basis. US aviation authorities were claiming that the April

1985 agreement covered only scheduled flights and chartered flights were not

guaranteed to be approved. The Japanese countered that was not their understanding.

Nevertheless, the US approved one flight only per week and said

this was only an exception. Another case would not be permitted.

For FY 1986 the Japanese government has decided to authorize NCA for 10 charter

flights, cutting that from JAL's quota. Under the April 1985 agreement, both

countries are permitted 300 charter flights per year. ANA also provides

international charter air cargo flights.

Negotiations between the US and Japan are expected to grow

more difficult over the next few months. The April 1985 agreement

permits 3 new American airlines to enter Japan. Soon after the

agreement United announced its takeover of PanAm's Pacific

routes. Japan is very concerned that if left as is, American

airlines will have overwhelming power on the Pacific routes.

Yet the reason given by the US Transportation Department

in approving United's acquisition was that it would permit

American airlines to provide greater competition to JAL on

the Pacific routes, whoch JAL currently dominates.

THE JAPAN LAWLETTER, November, 1985. By Roderick Seeman