The United States-Japan Gateway Awards Case of 1990: International Competition and Regulatory Theory

Abstract

For 30 years, the Civil Aeronautics Board (CAB) set national policy of regulated competition within the U.S. air transport system by controlling carrier entry, rates, routes, and mergers. While sharing with the Department of State negotiation of international aviation agreements, the CAB selected the U.S. designated to serve foreign routes. The passage of the Airline Deregulation Act of 1978 (PL 95-904) ended that era, abolishing the CAB and phasing out route entry and pricing control. Analysts disagree about the relative success of airline deregulation. The new era began as advocates envisioned: new entrants, more competition, lower prices, and more service on major routes. Following a merger wave and record profits in 1988, airline industry growth slowed and profits plummeted. By 1990, critics of deregulation argued that service was poorer, prices higher, and industry concentration greater than before deregulation (Dempsey, 1990). In this earlier period, federal rules required a large number of direct flights from one city to the next where most passengers who changed planes in mid-trip also changed airlines. After deregulation, the larger airlines dropped many direct flights, particularly to smaller communities, creating instead a hub-and-spoke system which funneled regional traffic flows into large markets to increase load efficiencies. By restricting gates through hub systems, an airline could maximize its passenger transfer options and constrain competition. Hubbing operations also overtook international routing as international and their countries responded to increased competition from U.S. carriers. The early success which greeted deregulation made its supporters enthusiastic about exporting this policy to overseas markets which operated in a highly regulated manner. International resistance to open skies provided considerable impetus to congressional passage of the 1979 International Air Transportation Act (PL 96-192), which called for the strengthening of the position of U.S. carriers overseas in future bilateral negotiations over landing rights Stockfish, 1992). Historically, foreign governments had taken exceptional interest in directing their airlines whether through subsidization, regulatory protection, or even ownership. Starting in the 1980s, foreign airlines were being threatened by lower cost U.S. airlines and the U.S. government's aggressive promotion of more bilateral landing agreements. Consequently, the international air transport industry began breaking down as more airline denationalization and liberalized bilateral agreements occurred. Foreign airlines found new ways to function within a highly regulated international structure through agreements among airlines which governed revenues, reservations, equipment interchanges, marketing, and even ownership. Constrained by domestic competition and low profits, U.S. sought both foreign capital and international routes to maintain their viability. Foreign and governments, in turn, pressured the United States to liberalize its foreign ownership limitations in U.S. (Arlington, 1993). Between 1990 and 1992, U.S. airlines lost a staggering $9 billion, which exceeded industry profits over the previous 44 years (Weintraub, 1993). The 1990 United States-Japan gateways case occurred at a time of airline turmoil domestically and realignment of and routes internationally. As American Airlines Chairman Robert Crandall aptly noted of this period and industry condition, it is intensely, vigorously, bitterly, and savagely competitive (Zellner, Rothman, and Shine, 1992; 5 1). Policy Makers and Prizes When the CAB ceased to exist on December 31, 1984, the U.S. Department of Transportation (DOT) assumed a number of its regulatory responsibilities, including mergers and bilateral negotiations over landing rights and route authorizations from the former CAB's Bureau of International Aviation. …