US Throttles Down Sky-High World Air Fares

Prices for international flights are rarely cheap. But if the United States has it its way, Americans may someday enjoy the same low fares going abroad that airline deregulation brought to US skies.

Already, the US has deals with 25 countries to open their markets. A round-trip flight between Newark, N.J., and Brussels, for instance, can be had for $296 on City Bird of Belgium. Another upstart airline, Martinair Holland, offers a $416 round-trip fare between Amsterdam and Orlando, Fla.

These prices are the kind proponents of airline deregulation say the whole world will enjoy if more so-called "open skies" agreements are adopted.

But not everyone is so sure. Governments often find a way to protect their often-subsidized national airlines. And travelers worry that cabin service may decline to domestic United States standards, where amenities like hot meals have yielded to fierce price cutting. And some analysts wonder what a combination of global deregulation and global alliances will really mean for competition.

The US, which led the way in deregulating its domestic air routes in 1978, has been making open-skies agreements with a number of individual countries. Earlier this month, the US and Japan concluded talks in San Francisco to liberalize the gigantic transpacific air-travel market and related air routes to the growing economies of Asia. American and Japanese negotiators sounded optimistic that a deal will finally be reached - one that might relieve the high prices and limited choices that have plagued international air travelers.

The two sides have reportedly been on the verge of reaching an agreement to increase transpacific air traffic for months. But with billions of dollars and dominance in the world's fastest-growing air-travel market at stake, they have yet to resolve differences over landing slots, airline alliances, and the right of American carriers to fly between Japan and other Asian destinations.

'A step in the right direction'

"So far, what the Japanese have been prepared to offer falls short of what we need to ensure substantial up-front liberalization of the market for our carriers," an American official says. "We're for 'open skies' worldwide, but since Japan adamantly refuses to accept a fully deregulated arrangement, we're seeing if we can't come to an agreement that takes a step in the right direction."

International cargo and passenger aircraft move the people, packages, equipment, and commodities needed around the world to keep international business in gear, as well as driving the worldwide boom in tourism. Air transport has undergone a dramatic expansion to meet the demands of an increasingly integrated planet. It accounts for an estimated 22 million jobs and $1 trillion in annual economic activity and grows at more than 6 percent each year. In the US, the Commerce Department estimates the industry accounts for $54 billion in direct output, making it one of the largest US industries.

It is also one of the few major industrial sectors in which the US dominates the world market. Since the US domestic air travel market was deregulated in 1978, American air carriers have become more efficient than their major European and Asian competitors. Their market shares have increased in most major markets, including Japan, where US carriers already have a 62 percent share of the passenger market. US air-express couriers like Federal Express and DHL also dominate the booming industry they have created.

"Here's one industrial sector where [American] companies are globally cost-effective and could dominate the market the way Japan took over the consumer electronics industry," says aviation analyst Scott Gibson of the Washington-based Economic Strategy Institute. "Our carriers would grow and prosper in an open-skies environment."

Not surprisingly, Washington has made opening the world's aviation markets a top trade priority. Until recently, most governments tightly regulated international air traffic to their countries in an effort to protect their national airlines, which are often government-owned or -controlled. More-efficient American carriers already dominate these protected competitors in many markets and stand to improve their position if markets are liberalized.

So in recent years the US has negotiated so-called open-skies agreements with more than two-dozen countries, including Germany, Canada, and the Netherlands. These lift most or all restrictions on the types of aircraft and the frequency and destinations of flights.

Such agreements should, in theory, result in improved service and lower fares through increased competition. In practice, however, other market barriers can stifle competition in some markets.

Japan is vital to the American open-skies strategy. The Asia-Pacific air-passenger market has grown at twice the world average over the past decade and is expected to comprise more than half the world's total by 2010 (see chart). The battle for global airline dominance will be fought there.

For reasons of geography and market size, Japan's airports are the gateway to the fast-growing markets of East and Southeast Asia. It is possible to fly directly from the US to Hong Kong or Taipei, but it is much more cost effective to pick up and drop off passengers in Japan to tap into Japanese and third-country traffic.

But first an airline has to be able to land in Japan. US-Japan air traffic is regulated under a 1952 treaty that gives flying rights to three so-called "incumbent" carriers: Northwest Airlines, United Airlines, and Japanese Air Lines (JAL). The US carriers (plus cargo flights by Federal Express) can fly up to a designated number of times into three Japanese cities from specific cities in the US and Asia.

Japan's other international carrier, All Nippon Airways (ANA) and three US carriers - Delta, Continental, and American - have more-limited landing rights under a 1985 amendment. Other carriers like TWA and US Airways have none.

Japan adamantly has refused US proposals for fully open skies, concerned about the effect new competition would have on its inefficient national airlines. Washington is now seeking an interim agreement that will increase US flying rights now and lead to open skies in the not-too-distant future.

An industry source said the two sides have agreed to completely open US-Japan rights for the incumbent carriers, and that ANA should also gain incumbency status. Among the contentious issues still unresolved: Will US incumbents have the full flying rights between Japan and other Asian countries? (The US feels these airlines are already entitled under the 1952 agreement, but Japan has limited this access.)

"We're for the most liberal position that can be agreed to by both sides," says Greg Principato of Access US-Japan, a Washington lobbying group representing TWA, Delta, American, and Continental. "True 'open skies' just aren't a possibility now, but we can get an agreement that would greatly expand the market."

Results of 'open skies' uncertain

With dozens of mayors and two formidable multicarrier lobbying groups favoring a compromise deal, State Department negotiators are under pressure to find a solution that will open the bottleneck in transpacific flights. That promises a major boon for the economy: $9 billion a year, according to proponents at Access US-Japan, and more flights from hub cities like Chicago, Atlanta, and Houston.

What this and other open-skies agreements will mean for the flying public isn't altogether certain. In theory, removal of government regulations should encourage competition, increase service, and drive prices down. Sources say that the open-skies agreements negotiated to date haven't been in place long enough to draw conclusions about their effects on prices - although flight frequencies have clearly increased in some key markets.

Economist James Brock of Miami University in Oxford, Ohio, says the expanding number of open-skies agreements will foster a "worldwide replay" of what happened after the American market was deregulated in 1978. "It's good for large, established carriers, but it's not going to be altogether positive for start-up airlines or consumers," he says.

Overall, Americans have enjoyed lower airfares and improved service within the US since deregulation increased competition in most markets.

But not everywhere. A number of new industry practices - long-term, exclusive leasing of airport gates, control of flight-reservations systems, and airline alliances - have restricted entry of new carriers in many markets, according to the US Government Accounting Office.