Rules Are Rules, Australia Tells Northwest Airlines

TRADE frictions between Australia and the United States are growing. It is not just the sugar, dairy, and wheat farmers that are angry; now airlines are getting involved.

A dispute between US carrier Northwest Airlines and the Australian government has escalated to the point where both sides are prepared to impose sanctions on each other's airlines.

The Australian Department of Transport and Communications (DOTAC) says it will revoke Northwest's right to stop in Sydney as part of its thrice-weekly New York/Osaka/Sydney service on May 30 unless it refiles its application. Northwest would then be allowed only two flights a week. The department made the announcement in January, saying the airline breached an agreement requiring that no more than 50 percent of the passengers originate in Osaka. The two flights would also be required to conform to the 50 -percent rule.

The US Department of Transportation said May 8 that if Australia imposes sanctions, the US will require Qantas Airlines to reduce its Sydney-Los Angeles nonstop flights from 10 to 7.

The flap is raising tempers in both countries. "I haven't heard as many hard-ball attitudes from American trade officials in a long time," says Bruce Wolpe, a Sydney political consultant. "The US is very strong in protecting rights of US carriers."

Former Prime Minister Malcolm Fraser calls for rethinking US-Australian strategic ties. "It is no longer realistic for us to be their closest friend and ally on strategic matters, but to be treated as an enemy in matters of trade and economics," he wrote in the Australian.

Behind the dispute, analysts say, is competition over the lucrative North Pacific market. Everyone wants a share of it, especially the limited slots at Japanese airports. Some speculate that Qantas wants to stabilize itself financially before issuing new stock.

It also comes at a sensitive time for the US airline industry, which is the world's most competitive but dependent on bilateral deals for access to foreign markets. A number of foreign governments are talking of revisions in their agreements to limit US access.

"We would have preferred to resolve this dispute through negotiations," said US Transportation Secretary Federico Pena. "But the Australian government's latest threatened actions would further deprive Northwest of its rights under our bilateral agreement and would leave us no other course" than retaliation.

Northwest is taking DOTAC to Australian federal court in June.

It all started in 1991 when Northwest Airlines wanted to enter the North Pacific market by offering service between New York and Sydney via Osaka.

According to David Mishkin, senior vice president for Northwest's international and regulatory affairs, Australia's Transportation Department made the 50-percent rule only three days before the first flight. The Australians say there were many discussions before that.

Mr. Mishkin says that Northwest reluctantly agreed to the terms in a letter, but that a "verbal agreement" with the department led Northwest to believe that the conditions were just a formality to satisfy the Australian carrier Qantas.

"The department knew full well that we were not going to comply ... and they knew very well that the 50-percent condition was not an absolute condition but rather a provision installed by them for their domestic political needs," he says. Northwest had been striving to comply with the spirit of the agreement, even though it felt the agreement was illegal. The average number of New York-Sydney passengers was 40 percent in 1992, Mishkin says.

A spokesman for the Minister of Transport and Communications says nearly every month Northwest was "grossly under" the 50-percent rule.

What is at issue here are differing interpretations of the bilateral agreement. Australia says its actions were consistent with the primary purpose of the agreement, which it says is to carry US-Australia traffic. "In recognition of the fact that that route was coming from Japan then we would allow 50 percent to come from Japan," the spokesman says. The deal allows each government to impose conditions that they regard as appropriate to the primary purpose, he says.

The US says the 50-percent rule violated the agreement, which allows Northwest to operate flights over the North Pacific from the US to Australia via intermediate countries.