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The civil aviation cartel : a study in the politics of international collaboration Busza, Eva 1987

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THE CIVIL AVIATION CARTEL: A STUDY IN THE POLITICS OF INTERNATIONAL COLLABORATION By EVA BUSZA B.A., The University of B r i t i s h Columbia, 1986 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS i n THE FACULTY OF GRADUATE STUDIES (Department of P o l i t i c a l Science) We accept t h i s t hesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA October 1987 (d Eva Busza, 1987 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of P O M T \ £ - f t U S > U ^ J C & The University of British Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date Ou^hJ^r- 8, DE-6(3/81) i i ABSTRACT The thesis examines the formation and development of post-World War II international collaboration in the economic regulation of the commercial aspects ( i . e . , market entry; market shares and prices) of c i v i l aviation. Specif ical ly , i t studies the formation and operation of one type of interna-tional regime: a carte l . The thesis seeks to answer two questions: why do states cooperate to support an international cartel? And why do states cease to support a cartel? The study proposes three reasons why states w i l l support a carte l : (1) to promote consumer welfare and the growth of the industry; (2) to ensure the development and protection of their national carriers; and (3) in response to hegemonic act iv i ty . It then considers why states cease to participate in the cartel arrange-ments. This occurs: i f states no longer believe that the cartel is promot-ing consumer welfare and industrial growth; i f they conclude that their industry no longer benefits from cartel protection; or i f the hegemon is un-able or unwilling, or both, to support the regime. A l l three give valuable insights. Nevertheless, the author proposes that i t is possible to establish a hierarchy of usefulness according to the depth and scope of understanding offered by each explanation. It is argued that hegemonic s tab i l i ty theory provides the most useful insights. i i i TABLE OF CONTENTS Page A b s t r a c t i i L i s t of Tables v L i s t of Appendices v i Acknowledgements v i i I n t r o d u c t i o n 1 Notes 15 1. The Development of I n t e r n a t i o n a l C i v i l A v i a t i o n P r i o r to World War I I 18 2. The Formation of the Regime: 1944-1946 D e s c r i p t i o n 25 A n a l y s i s 40 Notes 58 3. The Heyday of the C a r t e l : 1947-mid-1960s D e s c r i p t i o n 60 A n a l y s i s 78 Notes 87 4. The Weakening of the C a r t e l : mid-1960s-1977 D e s c r i p t i o n 89 A n a l y s i s 122 Notes 130 i v Page 5. The Breakdown of the IATA C a r t e l and I t s R e s t r u c t u r i n g : 1977-1981 D e s c r i p t i o n 134 A n a l y s i s 174 Notes 1 9 2 6. The Restructured Regime and New Challenges: 1981-D e s c r i p t i o n 1 9 4 A n a l y s i s 218 Notes 2 2 8 Conclusion 2 2 9 Tables 2 3 4 B i b l i o g r a p h y 2 4 2 Appendices 2J>6 Notes 2 6 7 V LIST OF TABLES Page 1. World Scheduled I n t e r n a t i o n a l A i r Transport 235 2. Operating Revenues and Expenses of the World Scheduled A i r l i n e s . . 236 3. IATA Scheduled Services ( I n t e r n a t i o n a l and Domestic) 237 4. IATA T r a f f i c on North A t l a n t i c 238 5. T o t a l North A t l a n t i c Passenger T r a f f i c 239 6. Regional Percentage D i s t r i b u t i o n of T o t a l Ton-Kilometers Performed on Scheduled I n t e r n a t i o n a l A i r Services 240 7. U.S. C a r r i e r s ' Market Share of T o t a l Passenger T r a f f i c by World Region (1971-1981) 241 C v i LIST OF APPENDICES r Page I ICAO 256 I I I ATA 258 I I I The B i l a t e r a l Agreement 262 IV The T h i r d S p e c i a l A i r Transport Conferences 264 r v i i ACKNOWLEDGEMENTS In the course of my research and writing, I have become indebted to many people. First, I wish to express my gratitude to my supervisor, Professor Mark Zacher, without whose encouragement and kind direction, this thesis would never have been written. Next, I wish to thank my long-suffering parents for having flown to hell and back with me. My thanks are also due to Brent Sutton and Martin Dresner for not only giving me moral support, but also for ploughing through the entire typescript. I am also grateful to Professor Michael Tretheway for his crit ical reading of the thesis and help-ful comments. Jeanette Paisley cheerfully processed and re-processed my dreadful scrawl and kept impossible deadlines. I thank her, too. And finally, I wish to thank a l l my friends who did not disown me during the summer of 1987. 1 INTRODUCTION The development of i n t e r n a t i o n a l c i v i l a v i a t i o n i s not one of the more popular s u b j e c t s of study i n p o l i t i c a l science. And yet p o l i t i c s , s p e c i f i -c a l l y i n t e r n a t i o n a l p o l i t i c s has played a very important r o l e i n the develop-ment of the i n d u s t r y . In the words of Anthony Sampson, author of Empires i n  the Sky: A i r l i n e s and p o l i t i c s have c o l l i d e d w i t h each other from the beginning. The a i r l i n e s , as they changed the shape of the world, were a l s o locked i n t o the ambitions of n a t i o n s . They provided a k i n d of v i s u a l p r o j e c t i o n of changes on e a r t h — t h e s h i f t i n g p o l i t i c a l balances of power and wealth, the swings of economic b e l i e f s , the t e c h n o l o g i c a l developments coming up a g a i n s t p o l i t i c a l deadlocks and r e a c t i o n s (Sampson 1985:24). To a l a r g e extent i t i s the nature of the i n d u s t r y which makes i t an i s s u e area s u s c e p t i b l e t o the i n t e r p l a y of p o l i t i c a l f o r c e s . F i r s t , i n t e r n a t i o n a l c i v i l a v i a t i o n belongs t o a group of i n d u s t r i e s which are " i n t e r n a t i o n a l " i n c h a r a c t e r . These i n c l u d e a l l t r a n s p o r t a t i o n and communication s e r v i c e s whose task i s p r e c i s e l y t o transcend n a t i o n a l borders i n order to b u i l d l i n k s between s t a t e s . Second, as a c o r o l l a r y , i t forms an i n t e g r a l p a r t of the g l o b a l i n f r a s t r u c t u r e which i s e s s e n t i a l f o r the development of the world economy. I f s t a t e s are t o b e n e f i t from t h e i r r e s p e c t i v e comparative advan-tages and from g l o b a l economies of s c a l e , i t i s c r u c i a l t h a t the t r a n s p o r t of goods and s e r v i c e s ( i . e . , people) across n a t i o n a l boundaries be f a c i l i t a t e d . T h i r d , the i n d u s t r y has high p u b l i c v i s i b i l i t y . Consequently, a i r c a r r i e r s 2 are i d e a l l y s u i t e d ' t o become symbols of n a t i o n a l p r i d e and t o manifest v i s u a l l y a s t a t e ' s g l o b a l presence. F i n a l l y , the a c t u a l operation of the i n d u s t r y r e q u i r e s the derogation of the p r i n c i p l e of s t a t e sovereignty. States must come t o an agreement p e r m i t t i n g f o r e i g n a i r c a r r i e r s to enter t h e i r a i r space and/or land on t h e i r t e r r i t o r y . I t i s t h i s l a t t e r p o i n t which serves as a focus f o r t h i s t h e s i s . T r a d i -t i o n a l l y , the study of i n t e r n a t i o n a l r e l a t i o n s has been p r i m a r i l y concerned with the existence of c o n f l i c t and the occurrence of war; however, i n recent years a growing number of sc h o l a r s have s h i f t e d t h e i r a t t e n t i o n to the exam-i n a t i o n of the dynamics behind i n t e r n a t i o n a l c o l l a b o r a t i o n or the formation and o p e r a t i o n of regimes. 1 i n the post-World War I I era, a multitude of c o l l a b o r a t o r y arrangements are found operating i n a l l areas of i n t e r n a t i o n a l l i f e . W i t h i n the i s s u e area of i n t e r n a t i o n a l c i v i l a v i a t i o n , alone, a number of d i f f e r e n t regimes e x i s t . This t h e s i s focuses on i n t e r n a t i o n a l c o l l a b o r a -t i o n i n the economic r e g u l a t i o n of the commercial aspects ( i . e . , market entry, market shares and p r i c e s ) of c i v i l a v i a t i o n . S p e c i f i c a l l y , i t i s con-cerned w i t h the study of the formation and operation of one type of i n t e r n a -t i o n a l regime: a c a r t e l . The t h e s i s seeks to answer two questions: why do st a t e s cooperate to support an i n t e r n a t i o n a l c a r t e l ? And why do s t a t e s cease to support a c a r t e l ? The c a r t e l r e g u l a t i n g the commercial aspects of i n t e r n a t i o n a l c i v i l a v i a t i o n i s the I n t e r n a t i o n a l A i r Transport A s s o c i a t i o n . I t has been des-c r i b e d as "one of the most powerful and a u t h o r i t a r i a n p r i v a t e i n t e r n a t i o n a l c a r t e l s t h a t the world has ever seen" ( P i l l a i 1 9 6 9 : x i i ) . Founded by a group of a i r l i n e executives from 60 a i r l i n e s who met i n Havana i n 1945, IATA became the trade a s s o c i a t i o n of the world's scheduled i n t e r n a t i o n a l a i r c a r r i e r s . 3 The o r g a n i z a t i o n was preceded by what i s r e f e r r e d t o as o l d IATA. This o r g a n i z a t i o n , founded by s i x a i r l i n e companies a t the Hague on August 25, 1919, was a f r e e a s s o c i a t i o n of p r i m a r i l y European a i r companies. I t s pur-pose was t o f a c i l i t a t e i n t e r n a t i o n a l a e r i a l t r a f f i c through the s t a n d a r d i z a -t i o n and c o o r d i n a t i o n of schedules, t i m e t a b l e s , c o n d i t i o n s of c a r r i a g e , pro-cedures and documents f o r the settlement of accounts between companies, a i r -l i n e l i a b i l i t y , e t c . (Chuang 1972:20). Although i t provided a forum f o r a i r -l i n e s t o d i s c u s s f a r e s and r a t e s on routes, i t possessed no formal r a t e -making power. The new IATA continued t o provide the s e r v i c e s of a trade a s s o c i a t i o n ; but as compared w i t h i t s predecessor, i t s membership and func-t i o n had expanded. With the exception of the USSR and the People's Republic of China, the a i r l i n e s of a l l major s t a t e s joined the a s s o c i a t i o n . Thus i t became a t r u l y i n t e r n a t i o n a l o r g a n i z a t i o n . U n l i k e the membership of the o l d IATA which was predominantly composed of a i r l i n e s owned by p r i v a t e companies, most of the new IATA a i r l i n e s were p a r t i a l l y or completely s t a t e owned. 2 The major exceptions are U.S. c a r r i e r s t h a t are completely p r i v a t e l y owned. Through i n t e r n a t i o n a l agreement, IATA i s authorized t o organize t a r i f f coor-d i n a t i n g conferences which f i x i n t e r n a t i o n a l a i r f a r e s and r a t e s . Although the t h e s i s focuses on the IATA c a r t e l , two other " i n s t i t u t i o n s " w i l l a l s o r e c e i v e some a t t e n t i o n . They are important s i n c e t h e i r a c t i v i t i e s are l i n k e d to those of IATA i n the r e g u l a t i o n of the commercial aspects of c i v i l a v i a t i o n . These i n s t i t u t i o n s are b i l a t e r a l agreements and the I n t e r n a -t i o n a l C i v i l A v i a t i o n Organization. B i l a t e r a l agreements are signed between s t a t e s and d i c t a t e the terms of market entry, c a p a c i t y r e g u l a t i o n , and t a r i f f - s e t t i n g . I t i s important to note t h a t there i s an i n t i m a t e r e l a t i o n s h i p between the r e g u l a t i o n of market 4 entry, capacity and price-setting. Price-setting may be undermined i f market forces are allowed to control market entry and capacity. Consequently, any institution regulating the latter needs to be examined. Moreover, bilateral agreements provide the mechanism by which states give their implicit or explicit approval of IATA tariff-fixing functions. Without such approval, the organization's operations can be impeded at a national level. Currently, a network of over 1,200 intergovernmental air transport agreements exists. The International Civi l Aviation Organization (ICAO) is an intergovern-mental specialized agency of the United Nations Organization. Established by representatives of 54 states, who met in Chicago November 1944 to discuss "matters of routes, land rights, and the general principle of air navigation and international air organization,"3 (pre-conference letter of Chairman Adolf A. Berle, then United States Secretary of State qtd. in Salacuse 1980: 849), ICAO was originally to play an important role in economic regulation. Article 44 of the Chicago Convention listed two of the objectives of the Organization: 1) to "meet the needs of the peoples of the world for safe, regular, efficient and economical air transport," and 2) to "prevent economic waste caused by unreasonable competition" (Mateesco 1981:614). However, for over thirty years, ICAO's role in economic regulation was minimal.4 Instead, ICAO primarily occupied itself with the regulation of technical standards and promotion of aviation safety, regularity and efficiency (Salacuse 1980:831). In the period beginning in the mid-'70s, ICAO's involvement in economic regu-lation increased. There are three basic reasons why states may support the operation of a cartel. First, states may believe that this form of industrial organization is optimal for the promotion of consumer welfare and global industrial 5 growth. Second, a s t a t e may b e l i e v e t h a t the s u r v i v a l and success of i t s own i n t e r n a t i o n a l c a r r i e r r e q u i r e s c a r t e l r e g u l a t i o n . There may be a v a r i e t y of economic, p o l i t i c a l and s e c u r i t y i n t e r e s t s a s s o c i a t e d w i t h f l a g c a r r i e r ownership t h a t e x p l a i n why possession of an i n t e r n a t i o n a l a i r l i n e provides such a great i n c e n t i v e f o r s t a t e cooperation. T h i r d , a s t a t e may support the oper a t i o n of a c a r t e l due t o the a c t i v i t y of a hegemon which, f o r reasons other than those already s t a t e d , promotes t h i s type of c o l l a b o r a t i v e arrange-ment. The view t h a t consumer welfare and i n d u s t r i a l growth are best promoted by c a r t e l r e g u l a t i o n r e s t s on the c h a r a c t e r i z a t i o n of the a v i a t i o n i n d u s t r y as a p u b l i c u t i l i t y . As a p u b l i c u t i l i t y , i t i s a n a t u r a l monopoly. Accord-in g t o Harold Demsetz and Richard Posner, 5 a n a t u r a l monopoly e x i s t s where economies of s c a l e , u s u a l l y a r i s i n g from high f i x e d c o s t s , are found. In such a s i t u a t i o n e f f i c i e n c y gains are t o be made, not i n an environment of p e r f e c t competition, but i n an environment where a few l a r g e f i r m s are allowed t o b e n e f i t from the economies of s c a l e . The o b j e c t i v e of r e g u l a t i o n i s t w o-fold. F i r s t , r e g u l a t i o n i s r e q u i r e d to p r o t e c t the f i r m s from compet-i t i v e f o r c e s . I t i s argued t h a t i n such an i n d u s t r y there i s an i n c e n t i v e f o r f i r m s to t r y and enter the market and i n i t i a l l y capture a l a r g e share of the market through predatory p r i c i n g . (Their o b j e c t i v e i s to secure a p o s i -t i o n i n the market and then, w i t h the help of economies of s c a l e , become monopolists themselves.) These p r a c t i c e s r e s u l t i n market chaos and under-mine e f f i c i e n t m o n o p o l i s t i c operations. Second, although r e g u l a t o r s d e s i r e t o create an environment i n which economies of s c a l e may be e x p l o i t e d , they want t o ensure t h a t monopolists do not abuse t h e i r power. C a r t e l r e g u l a t i o n i s thus needed t o guarantee t h a t the b e n e f i t s of t h i s form of i n d u s t r i a l 6 organization are passed down to the consumer. In addition to being a natural monopoly, a public uti l i ty has another characteristic: i t is a public ser-vice that regulators feel obligated to provide. It is argued that in a com-petitive environment, or in a situation where an unregulated monopoly exists, unprofitable routes would be abandoned. A price-fixing cartel is needed to ensure that these uneconomical, yet vital services continue to operate. A second motive for supporting cartel action is not concern for correct-ing market imperfections or failures, but the desire to ensure the preserva-tion of a state's market share in the industry. A cartel that fixes prices will protect inefficient industries from competition. In this case, states are interested in enjoying a variety of economic and political benefits derived from possession of an international flag carrier. Perhaps one of the most important economic benefits is the effect air-lines have on the balance of payments. An air carrier earns balance of pay-ments receipts by collecting fares from foreign travelers, and can save potential foreign exchange losses by carrying its own nationals. Thus support of the cartel may provide gains, or at least prevent losses of foreign exchange. Many airlines are partially or completely state owned. Any revenue gained from the operation of an international airline will be a credit in the government budget. This logic may also take a more extreme form in the case where states use the cartel to preserve art i f ic ia l ly high prices in order to ensure large profits to the industry. In this case regulation is seen, in effect, as an indirect means by which government can tax international travelers. Government officials may also be interested in ensuring that 7 t h e i r t r a v e l l i n g expenses do not appear as l o s s e s i n the government budget. This may e a s i l y be arranged i n s i t u a t i o n s where a n a t i o n a l c a r r i e r e x i s t s . The possession of an i n t e r n a t i o n a l c a r r i e r may a l s o have i n d u s t r i a l s p i n - o f f s . I t may s t i m u l a t e the development of l o c a l i n d u s t r i e s , e.g., food p r e p a r a t i o n , f u e l management, a d v e r t i s i n g , and a i r p l a n e manufacturing. S i m i -l a r l y , i t may develop the s t a t e ' s i n d u s t r i a l base by r e q u i r i n g s k i l l s and f a c i l i t i e s t o be developed i n order t o ensure a i r c r a f t maintenance. An i n t e r n a t i o n a l c a r r i e r may a l s o f a c i l i t a t e i n t e r n a t i o n a l communication which i n t u r n may promote trade, investment, and tourism. This w i l l promote a s t a t e ' s economic development. The f i n a l economic reason prompting a s t a t e to support a c a r t e l i s i n t e r e s t i n c r e a t i n g market demand f o r c e r t a i n s e r v i c e s or products which i t provides or manufactures. By c r e a t i n g an environment i n which f o r e i g n a i r -l i n e s can develop, the c a r t e l w i l l i n d i r e c t l y s t i m u l a t e demand f o r a s t a t e ' s products. For example, a s t a t e t h a t possesses a major a i r c r a f t manufacturing i n d u s t r y w i l l adopt an i n t e r n a t i o n a l p o l i c y t h a t w i l l promote the formation and expansion of f o r e i g n c a r r i e r companies which w i l l i n t u r n purchase a i r -c r a f t from i t . However, economic motivations may not be the only, nor even the most important f a c t o r underlying a s t a t e ' s support of an i n t e r n a t i o n a l c a r t e l i n c i v i l a v i a t i o n . This form of i n d u s t r i a l r e g u l a t i o n may a l s o provide s t a t e s w i t h a number of p o l i t i c a l b e n e f i t s . F i r s t , s t a t e s may be i n t e r e s t e d i n ensuring the s u r v i v a l of t h e i r i n t e r n a t i o n a l f l a g c a r r i e r f o r reasons of s t a t u s . They a s s o c i a t e the possession of an i n t e r n a t i o n a l c a r r i e r w i t h tech-n o l o g i c a l and economical development; and they view i t as an e f f e c t i v e way 8 of i n v e s t i n g t h e i r s t a t e w i t h a g l o b a l presence. Governments may be i n t e r -ested not only i n enhancing t h e i r s t a t e ' s i n t e r n a t i o n a l p r e s t i g e , they may a l s o be concerned with promoting domestic support. Straszheim w r i t e s : In the l a s t decade dozens of new n a t i o n a l c a r r i e r s have appeared, a l l of which are anxious t o show the f l a g . One m o t i v a t i o n f o r t h i s behaviour l i e s i n the intense d e s i r e of these nations f o r r a p i d growth and a h i g h l y urbanized and t e c h n o l o g i c a l l y advanced s o c i e t y . A l s o , the unstable p o l i t i c a l environment which o f t e n p r e v a i l s may have l e d the government i n power i n some l e s s developed c o u n t r i e s t o undertake p r o j e c t s w i t h a s h o r t time ho r i z o n . New j e t a i r p o r t s and a i r c r a f t are f l a s h y symbols of progress. (Straszheim 1969:16) Next, an i n t e r n a t i o n a l f l a g c a r r i e r has the p o t e n t i a l t o become a u s e f u l instrument of f o r e i g n p o l i c y . The i n a u g u r a t i o n or t e r m i n a t i o n of a f l a g c a r r i e r ' s o p e r a t i o n t o a country can be used as an i n d i c a t i o n of good w i l l or antagonism towards other s t a t e s . I t can a l s o be used to f a c i l i t a t e the f o r g i n g of p o l i t i c a l l i n k s amongst a l l i e s . For example, i t all o w s a s t a t e t o acquire access to or operation through p o l i t i c a l l y s e n s i t i v e areas. This f u n c t i o n may be p a r t i c u l a r l y important t o a s t a t e ' s s e c u r i t y i n t e r e s t s . Another reason f o r wanting t o possess a n a t i o n a l c a r r i e r , l i n k e d to s e c u r i t y i n t e r e s t s , i s a d e s i r e to reduce a s t a t e ' s v u l n e r a b i l i t y to f o r e i g n pressures. Without an i n t e r n a t i o n a l a i r l i n e a country i s dependent on f o r e i g n c a r r i e r s . Consequently, f o r e i g n operators have a p o t e n t i a l p o l i t i c a l b a r gaining t o o l s i n c e they can threaten t o terminate s e r v i c e s . A f l a g 1 9 c a r r i e r may a l s o be important i n a n a t i o n a l emergency when i t can be used t o provide a i r l i f t c a p a c i t y . S i m i l a r l y , i t can be chartered and used t o augment m i l i t a r y a i r f o r c e f l e e t s . The v a r i o u s advantages of owning a n a t i o n a l c a r r i e r , which have j u s t been discu s s e d , provide s u f f i c i e n t e x p l a nation as t o why s t a t e s owning i n e f f i c i e n t c a r r i e r s would wish to p r o t e c t t h e i r i n d u s t r y from competitive f o r c e s . I n an unregulated environment they would be forced t o meet competi-t i v e p r i c e s through heavy s u b s i d i z a t i o n of t h e i r i n d u s t r y , and e v e n t u a l l y would probably f i n d themselves d r i v e n out of the market. The question then a r i s e s , why should s t a t e s w i t h e f f i c i e n t c a r r i e r s support a c a r t e l ? Of course, i f they b e l i e v e consumer welfare and g l o b a l i n d u s t r i a l development i s best promoted by such an arrangement f u r t h e r j u s t i f i c a t i o n of t h e i r behaviour i s not necessary. However, i f t h i s i s not the case, i s there any other reason why a s t a t e would support the operation of a c a r t e l ? A t h i r d e x p l a n a t i o n of why a s t a t e may support a c a r t e l i s rooted i n the theory of hegemonic s t a b i l i t y . The phrase "hegemonic s t a b i l i t y theory" was o r i g i n a l l y coined by Robert Keohane t o r e f e r t o the work of a d i v e r s e group of w r i t e r s who suggest t h a t there i s a d i r e c t r e l a t i o n s h i p between the e x i s t -ence of a dominant power i n the i n t e r n a t i o n a l system and a strong economic regime ( G i l p i n 1987:87). The theory o r i g i n a t e d i n the w r i t i n g s of Charles K i n d l e b e r g e r 6 who s p e c i f i c a l l y l i n k e d the e x i s t e n c e of a hegemon to the form-a t i o n of l i b e r a l economic arrangements. However, authors such as Robert G i l p i n and Robert Keohane 7 gave the theory broader s i g n i f i c a n c e by suggesting t h a t the e x i s t e n c e of a hegemon was a necessary although not s u f f i c i e n t con-d i t i o n f o r the formation of c o l l a b o r a t o r y arrangements i n general. (Since a c a r t e l can h a r d l y be c a t e g o r i z e d as " l i b e r a l arrangement," t h i s t h e s i s i s 10 concerned with the latter conceptualization of the theory.) Hegemonic stab-i l i t y theory begins with the premise that in an anarchical world where states are egotistical, rational actors they will not find i t in their immediate best interest to cooperate. They face a prisoner's dilemma. Each state would prefer the outcome of cooperation as opposed to a situation where no regime is formed. However, a state could make even greater gains by not adhering to the terms of the agreement while the other party or parties con-tinue to abide by the rules. Consequently, there is an incentive to defect. Since no superior authority exists to ensure that states do not defect, states do not cooperate for fear of being the "sucker" (i .e. , losing from an arrangement by cooperating while the other state[s] involved defect[s]). They find themselves in their least favoured situation. A hegemon or domin-ant power is needed to facilitate cooperation by becoming the superior authority that enforces the rules of the agreement. Not only may there be an actual problem with coordinating state coopera-tion, but often there are also costs to be paid associated with the operation of the regime. A dominant power may be needed to actually pay the costs of the regime itself, or to allocate costs among states and enforce payment. It is important to underline that the hegemon will only agree to take on the duties associated with establishing a particular form of international order i f i t finds that the arrangement promotes its own specific economic and poli-t ical 7 interests. (The hegemon after a l l is also a rational actor.) Thus, according to the theory, regime formation not only requires the existence of a dominant power, but i t also requires that a state be both willing and able (i .e. , has the power to enforce the terms of the agreement and, in some cases, pay associated costs) to play the role of hegemon. 11 The theory then branches into two versions. The f irst , which predom-inates in the writings of Robert Gilpin and Stephen Krasner,8 suggests a coercive model of hegemony: the dominant actor uses force to ensure that weaker states adhere to a particular global ordering. In other words, certain states may not find i t in their ultimate interest to support the regime. In this version the hegemon may pay the costs associated with the regime or i t may force the other states to pay the costs. The second, or benevolent version, informing the writings of Charles Kindleberger and Robert Keohane, suggests that the hegemon pays for the cost of establishing an order which is viewed by a l l states as being in their common interest. In other words, acquiescence is not secured through coercive means. Hegemonic stability theory has been used to primarily describe the role of Britain in establishing free trade in the period from the end of the Napoleonic wars to the outbreak of the First World War; and the role of the United States following World War II as manifested, for example, in the establishment of liberal norms embodied in the General Agreement on Tariffs and Trade (GATT), and the International Monetary Fund (IMF). It may also be used to understand why a dominant state with efficient air carriers would support and bear the costs (i .e. , losses made by its carriers by not operat-ing in a freely competitive system) of cartel operation. For example, a hegemon will support the operation of a cartel i f i t is concerned with ensur-ing the viability of its allies' airlines. This behaviour is not altru-ist ic . Rather, the state sees its security^ interests as being promoted by bolstering the economies of other states. One way in which a state can enhance the development and power of its allies is by allowing them to reap the economic benefits of owning and operating an airline. With strong 12 allies, a state's security is increased. A second explanation for hegemonic support of a cartel is also connected to the hegemon's security interests, although in this respect the dominant power's behaviour is explained by its desire to secure the friendship of its all ies. If the hegemon's allies are particularly committed to the operation of a cartel, they are likely to be alienated by a power whose activity undermines their favoured form of indus-tr ia l organization. In order to prevent this estrangement, the hegemon may feel compelled to support the system. A final reason explaining the dominant power's behaviour has already been touched on in a previous context. If the hegemon possesses a large aerospace industry i t may find i t lucrative to support a system which encourages the development of other states' indus-tries. In this way a demand for its manufactured products is assured. Various variables which may explain state cooperation in the formation and establishment of an international cartel have been discussed. It is not clear which explanations are the most pertinent for understanding the dynam-ics behind the cartel operating in c iv i l aviation. This study seeks to determine whether one of the three explanations for state support of a cartel can account for a l l developments within the regime. The second question which the thesis addresses is why does support for a cartel weaken? The explanation lies in the converse of why states cooperate to support a cartel. First, states may cease to support a cartel i f new economic studies make them believe that cartel action is not optimal for con-sumer welfare and industrial growth. For example, economists may discover that the industry is not a natural monopoly, or that market chaos and preda-tory pricing will not ensue in a deregulated atmosphere, or that low-profit services will not be abandoned by profit-maximizing firms. Secondly, states 13 may weaken t h e i r support i f they l o s e i n t e r e s t i n g a i n i n g from the v a r i o u s b e n e f i t s d e r i v e d from the development of t h e i r own n a t i o n a l i n d u s t r y . An a l t e r n a t i v e e x p l a n a t i o n may be t h a t p r e v i o u s l y i n e f f i c i e n t s t a t e s suddenly grow e f f i c i e n t and f i n d t h a t t h e i r n a t i o n a l i n d u s t r y w i l l be best promoted by d e r e g u l a t i o n . A f i n a l e x p l a n ation of c a r t e l weakening l i e s i n the theory of hegemonic s t a b i l i t y . According t o the theory, a regime w i l l weaken (or according t o more extreme v e r s i o n s a c t u a l l y d i s i n t e g r a t e ) when a hegemon ceases t o support i t . There are two p o s s i b l e explanations f o r t h i s change. F i r s t , the reason why the s t a t e paid the costs of r e g u l a t i o n may cease to e x i s t . For example, the s e c u r i t y i n t e r e s t s of a hegemon may no longer r e q u i r e t h a t the s t a t e take measures to b o l s t e r the economies of i t s a l l i e s . The second reason i s a s s o c i a t e d w i t h hegemonic d e c l i n e . The t h e o r i s t s propose t h a t as the hegemon l o s e s power i t i s no longer w i l l i n g nor able t o pay the costs a s s o c i a t e d w i t h maintaining i t s p r e f e r r e d i n t e r n a t i o n a l order. Consequently, the c a r t e l weakens (as argues Keohane) or breaks down (as G i l p i n and Krasner argue). The t h e s i s i s d i v i d e d i n t o s i x p a r t s . The f i r s t p art provides a b r i e f h i s t o r y of the e v o l u t i o n of i n t e r n a t i o n a l c i v i l a v i a t i o n and d e s c r i b e s regu-l a t o r y i n s t i t u t i o n s e x i s t i n g p r i o r t o World War I I . The second pa r t des-c r i b e s the formation of the post-World War I I r e g u l a t o r y regime i n the p e r i o d from 1944 t o 1946. This i s f o l l o w e d by an a n a l y s i s of the various p o s i t i o n s taken by s t a t e s and the a c t u a l outcome of n e g o t i a t i o n s . The t h i r d p a r t examines the p e r i o d from 1947 u n t i l the mid 1960s, the heyday of c a r t e l oper-a t i o n , and explores the reasons why s t a t e s supported the IATA c a r t e l . The f o u r t h p e r i o d discussed, from the mid-1960s to the mid-1970s, sees the 14 weakening of the c a r t e l . There f o l l o w s some a n a l y s i s of why weakening occur-red. The f i f t h p a r t d escribes the breakdown and r e s t r u c t u r i n g of the IATA c a r t e l over the period from 1977 to 1981 and analyzes the developments. The f i n a l s e c t i o n of the t h e s i s examines developments i n the post-1981 pe r i o d . 15 NOTES 1 Regimes are defined as: Sets of implicit or explicit principles, norms, rules and decision-making procedures around which actors' expecta-tions converge in a given area of international rela-tions (Krasner 1982:185-186). 2 Of the 85 IATA members in 1982, 69 (81%) were government owned. Of these, 42 (61%) were 100% government owned; 21 (30%) were more than 50% government owned; and 6 (9%) were less than 50% government owned. Sixteen (19%) were privately owned. Of these, 7 were U.S. carriers and 2 were cargo carriers. With the exception of U.S. carriers, practically a l l major car-riers were to some degree government owned (Rosenfield 1982:483). For a good description of the different types of airline ownership see Gidwitz 1980: 6-13. 3 The preamble to the Chicago Convention on International Civi l Aviation states: Whereas the future development of international c iv i l aviation can greatly help to create and preserve friend-ship and understanding among the nations and peoples of the world yet its abuse can become a threat to the gen-eral security; and whereas i t is desirable to avoid fr ic -tion and to promote that cooperation between nations and peoples upon which the peace of the world depends; there-fore, the undersigned governments having agreed on certain principles and arrangements in order that 16 i n t e r n a t i o n a l c i v i l a v i a t i o n may be developed i n a safe and o r d e r l y manner and t h a t i n t e r n a t i o n a l a i r t r a n s p o r t s e r v i c e s may be e s t a b l i s h e d on the b a s i s of e q u a l i t y of o p p o r t u n i t y and operated soundly and economically, have a c c o r d i n g l y concluded t h i s Convention t o t h a t end. (Mateesco 1981:605). 4 P i l l a i w r i t e s t h a t i n the p e r i o d from the formation of the organiza-t i o n t o the 1970s there were three instances where ICAO made any serious e f f o r t t o study t a r i f f s . In 1957 the ICAO C o u n c i l suggested the undertaking of an o b j e c t i v e study of i n t e r n a t i o n a l a i r t r a n s p o r t and r a t e s and methods used i n e s t a b l i s h i n g them. The p r o j e c t was not c a r r i e d out. In 1963, the " d e s i r a b i l i t y and p o s s i b i l i t y of a c t i o n by ICAO i n the f i e l d of a i r l i n e t a r i f f s "was debated i n c l o s e d s e s s i o n (subject No. 15 on the Agenda of the 51st s e s s i o n of the c o u n c i l before the A i r Transport Committee, 1963 qtd. i n P i l l a i 1969:125). I t was decided t h a t there was "no j u s t i f i c a t i o n f o r ICAO to undertake s p e c i f i c s t u d i e s or other economic work on the s u b j e c t of a i r -l i n e t a r i f f s " a t t h a t time (qtd. i n P i l l a i 1969:127). Proposals i n 1965 f o r ICAO involvement i n t a r i f f i s s u e s ended i n a r e s o l u t i o n d i r e c t i n g the C o u n c i l to undertake s t u d i e s "with the o b j e c t i v e of e x p l o r i n g and a n a l y z i n g measures to f u r t h e r the development of i n t e r n a t i o n a l a i r passenger t r a v e l " (qtd. i n P i l l a i 1969:128). 5 N a t u r a l monopoly theory and i t s r e l a t i o n t o p u b l i c u t i l i t i e s i s d i s -cussed i n H. Demsetz's "Why Regulate U t i l i t i e s , " J o u r n a l of Law and Economics 11 ( A p r i l 1968) and P. Posner's "Natural Monopoly and i t s Regulation," Stanford Law Review 21 (February 1969). 17 6 See Kindleberger's The World in Depression 1929-1939. Berkeley: University of California Press, 1973. 7 See R. Gilpin's War and Change in World Politics. Cambridge: Cambridge University Press, 1984. And R. Keohane's After Hegemony. Prince-ton: Princeton University Press, 1984. 8 See Stephen Krasner's "State Power and the Structure of Internatinal Trade," World Politics 38, 1976. 18 1. THE DEVELOPMENT OF INTERNATIONAL CIVIL AVIATION PRIOR TO WORLD WAR II The pre-World War II development of c i v i l a v i a t i o n passed through two d i s t i n c t phases: the period before 1919 and the period from the 1919 Paris Convention on A e r i a l Navigation to the end of World War I I . BEFORE 1919 The f i r s t heavier-than-air f l i g h t was made i n France on October 9, 1880 by Clement Ader who skimmed the ground i n a motorized machine i n the form of a bat (Mateesco 1981:24). This was followed by two f l i g h t s of longer dura-t i o n , reaching higher a l t i t u d e s i n 1903 by Wilbur Wright i n the United States and Captain Ferber i n France. From 1903-1919 the airplane was p r i m a r i l y seen as an instrument of sport and then of warfare; however, already i n February 1918 the f i r s t a i r m a i l service was i n i t i a t e d (Mateesco 1981:24-26). I t was c l e a r from the beginning that the development of t h i s new form of transport had important i n t e r n a t i o n a l ramifications for i t posed a new challenge to the p r i n c i p l e of state sovereignty. During the f i r s t two decades of the 20th century, l e g a l writers, e s p e c i a l l y from Europe and France debated the issue of whether states had ownership of a i r space over t h e i r t e r r i t o r y . They drew on the p r i n c i p l e s of property and maritime law. Opinions ranged between two extremes. The f i r s t compared a i r space to the high seas and advocated complete freedom of f l i g h t . The other, influenced by the l o g i c of property r i g h t s , argued that freedom of f l i g h t should be r e s t r i c t e d to the a i r space over the high seas and no man's land. A state had complete sovereignty of a i r space at a l l l e v e l s of a l t i t u d e above i t s t e r r i t o r y (Salacuse 1980:810). 19 This period saw the beginnings of attempts to establish some form of international regulation of aviation. In 1910 eighteen European states met in Paris to draft an international treaty. The conference was unsuccessful for delegates were unable to agree on the issue of sovereignty. The major protagonists were Great Britain and France. The former argued for absolute sovereignty over air space, while France supported a regime of limited free-dom (i .e. , the French government maintained that a state should be allowed to protect air space above its territory through legislation, but that i t should not be allowed to completely restrict overflight, nor apply any restrictions in a discriminatory fashion) (Salacuse 1980:812). AFTER 1919 During World War I, the production of aircraft rapidly increased as air-planes became recognized as instruments of war. The experience gained during the war years brought about technical improvements in airplane design and construction (Chuang 1972:16). American Secretary of War, Baker, made the observation: Ten times as many years would not have produced the same advance i f the years had been devoted to peaceful pur-suits and commercial use of airplanes had been the only incentive to investors and producers (qtd. in Jonsson 1987:6). After the war, the conditions for the development of commercial aviation services were ripe: a large number of bombers were available for conversion into passenger aircraft, pilots were trained, the war had disrupted other 20 forms of transport, and the post-war conferences generated an i n i t i a l need for a i r transport services (Gidwitz 1980:37). The f i r s t i n t e r n a t i o n a l and domestic a i r services began to operate on a regular basis i n 1919. Many of the early a i r l i n e s were organized by a i r c r a f t manufacturers who were eager to e x p l o i t t h e i r manufacturing c a p a b i l i t i e s and by maritime shipping companies which wanted to extend t h e i r transport options (Gidwitz 1980:37). Government involvement began at an e a r l y stage. In Europe a number of smaller a i r l i n e s were consolidated i n t o large state-subsidized c a r r i e r s . For example, i n B r i t a i n , Imperial Airways was incorporated i n 1924 as a state a i r l i n e , while i n Germany, the government provided 36% of the i n i t i a l c a p i t a l required to form Deutsche Luft Hansa; and the French government owned 25% of the A i r France which was formed by the merging of f i v e a i r l i n e s i n 1933 (Gidwitz 1980:39). In the United States, although a i r l i n e s were p r i v a t e l y owned, they received very strong government support i n the form of mail con-t r a c t s (Gidwitz 1980:39). In the early development of c i v i l a v i a t i o n , the expansion of interna-t i o n a l services was seen as performing three v i t a l functions. F i r s t , the operation of state a i r l i n e s guaranteed markets for a i r c r a f t and engine indus-t r i e s . Second, c o l o n i a l powers saw a i r l i n e s as useful tools f o r strengthen-ing communications with t h e i r colonies. For example, by 1929 Imperial A i r -ways had developed a route to B r i t i s h colonies i n India which was then extended through Burma to Singapore; by 1935 the Belgians had linked Belgium to the Congo; and by 1931 France was f l y i n g to A f r i c a and to Saigon. In addition, c o l o n i a l powers also established and managed l o c a l / r e g i o n a l a i r -l i n e s within t h e i r colonies (Thornton 1970:10). And t h i r d , the airplane was 21 seen as a useful instrument for gaining influence in an area through "peace-ful penetration." This was perhaps most evident in South America where the French, Germans and Americans struggled for commercial air influence. The rivalry heightened as the tensions preceding World War II increased. The United States alarmed by German aviation operations on the Pacific Coast and by the German presence near the Panama Canal, put significant pres-sure on South American governments to revoke German operating permits and to nationalize previously German-owned airlines. With the destruction of the German network, Pan American, supported by U.S. government funding was encouraged to expand and consolidate its own influence in Brazil, Mexico, Cuba, Columbia, and Guatemala (Thornton 1970:16). The experience of World War I was also important in that i t increased awareness amongst states of the need to resolve the sovereignty debate. In March 1919, France convened an international conference in Paris. The out-come was the first multilateral treaty regulating aviation: the Convention Relating to the Regulation of Aerial Navigation or the Paris Convention. The convention was important for i t settled the sovereignty issue by recognizing a state's complete and exclusive sovereignty over the air space above its territory. However, i t granted states the freedom of transit by incorporat-ing an article in which states, subject to certain conditions, were granted the right of innocent passage during peacetime (Salacuse 1980:814-815). The ramifications of the treaty for the twenty-six signatories were enormous for they had agreed that the development of international aviation was to be dependent on agreements between states. The Paris Convention also contributed to the standardization of tech-nical rules of flight by establishing rules regarding nationality and 22 aircraft registration; by requiring the aircraft to be issued certificates of airworthiness and the crew certificates of competency; and by developing uni-form regulations on customs procedures, takeoff and landing. It established the International Commission for Air Navigation (ICAN), a permanent inter-state organization connected to the League of Nations. ICAN oversaw the development of aviation in the inter-war period fulf i l l ing a very similar role to the post-1944 ICAO. It collected data, implemented and amended tech-nical rules, and provided a forum for international discussion of aviation issues (Salacuse 1980:816-817). The United States did not ratify the Paris Convention owing to its asso-ciation with the Versailles Treaty and the League of Nations (Taneja 1980:1); however, i t affirmed its acceptance of the principle of complete and exclu-sive sovereignty of the air space of every state over its territory and territorial waters by signing the 1928 Pan American Convention on Commercial Aviation. A number of subsequent conferences and treaties established the prin-ciples concerning issues of l iabi l i ty , insurance, bi l ls of lading, etc., during this period. Although a global aviation network developed between 1919 and 1939, i t was not until after World War II that measures were taken to regulate on an international basis the commercial aspects of international aviation, (i .e. , the exchange of routes, frequencies, capacity and fares). An attempt was made to revise the Paris Convention in 1929 in order to permit greater free-dom of operations. The United States, the British Empire, the Netherlands, and Sweden favoured the change, but twenty-seven states were in opposition, including Brazil, Cuba, Chile, Haiti, Uruguay, and Venezuela (Warner 1943: 23 13). The conference was unsuccessful i n e s t a b l i s h i n g general p r i n c i p l e s f o r i n t e r n a t i o n a l operations. Lack of i n t e r n a t i o n a l consensus l e d to the basing of the o p e r a t i o n of f l i g h t s between s t a t e s on one of two arrangements. The f i r s t p r e v a i l e d i n Europe and c o n s i s t e d of b i l a t e r a l agreements between s t a t e s . The agreements took a v a r i e t y of forms. For example, major s t a t e s u s u a l l y agreed to com-p l e t e e q u a l i t y of p r i v i l e g e s w i t h respect t o a i r routes ( i . e . , they would both operate on the agreed r o u t e ) . Agreements between a minor and a major power had d i f f e r e n t p r o v i s i o n s . The major power would u s u a l l y operate a route between the p r i n c i p a l centres of the two c o u n t r i e s w hile the minor power would have a monopoly over i n t e r n a t i o n a l s e r v i c e s l i n k i n g p r o v i n c i a l c i t i e s . These e a r l y b i l a t e r a l s sometimes f i x e d frequencies. This was the case i n the United States-United Kingdom (1935) and United States-French (1939) agreements on t r a n s a t l a n t i c s e r v i c e s . Often s e c r e t inter-company agreements were made t o avoid r a t e and s e r v i c e wars. The most extreme form of t h i s nature of c o l l u s i o n , favoured by the Germans, French and Swedes, but not the B r i t i s h , was the revenue pool (Warner 1943:13). The second type of arrangement, dominant i n the Western Hemisphere south of the Canadian border, was based on a u n i l a t e r a l concession which e i t h e r an a i r p l a n e company or s t a t e was able t o gain from another company. U.S. f l i g h t s t o L a t i n America, and the European Caribbean c o l o n i e s , were regulated by u n i l a t e r a l concessions negotiated by Pan American (Warner 1943:13). The pre-World War I I development of c i v i l a v i a t i o n was hindered by the s t a t e of technology ( i . e . , i t was not p o s s i b l e to operate a h i g h l y developed i n t e r c o n t i n e n t a l s e r v i c e ) and by the high costs i n v o l v e d . However, t h i s s i t u a t i o n changed d r a m a t i c a l l y a f t e r World War I I , p r i m a r i l y on account of 24 technological advances made in military aviation. These included significant improvements in the speed, range, capacity, and navigational accuracy of air-craft. As a result, the potential now existed for developing an economically viable international aviation network which could play an important role in reestablishing communications and promoting economic welfare. The operation of air transport in the first forty odd years of its existence established five precedents: the principle of state sovereignty over^air space, the heavy subsidizing of airlines by governments, the use of the airplane as a tool of government policy, the establishment of bilateral agreements governing commercial aspects of international flights, and a fair amount of sharing among states of routes and revenue. 25 2 THE FORMATION OF THE REGIME: 1944-1946 DESCRIPTION Even before World War II had come to an end, policy-makers were discus-sing the future of c i v i l a v i a t i o n . At the August 1943 Quebec Conference President Roosevelt and Prime Minister C h u r c h i l l expressed i n t e r e s t i n hold-ing a post-war i n t e r n a t i o n a l conference on c i v i l a v i a t i o n (Sampson 1985:80). Several months l a t e r , at the request of the B r i t i s h Government, the Americans agreed to hold such a conference i n November 1944 i n Chicago. The Chicago Conference Delegations from f i f t y - f o u r nations attended the Chicago Conference held from November 1 u n t i l December 7, 1944 (Jones 1960:227). The Axis powers and the Argentine Republic were not i n v i t e d . Saudi Arabia d i d not accept the i n v i t a t i o n and the Soviet Union withdrew on the eve of the conference. The l a t t e r explained that the presence of Switzerland, Spain and Portugal made i t d i p l o m a t i c a l l y impossible f o r the Soviet Union to attend (Wagner 1945:410; Stannard 1945:505). The objective of the conference was to a r r i v e at an agreement on the regulation of market entry, market shares and rates i n i n t e r n a t i o n a l c i v i l a v i a t i o n . However, i t soon became evident that a consensus would be d i f f i -c u l t to a t t a i n f o r there was a fundamental d i v i s i o n i n the positions adopted by the key actors: the United States, B r i t i s h , Canada, A u s t r a l i a , and New Zealand. The United States found i t s e l f on one side advocating "freedom of the a i r , " while B r i t a i n , Canada, A u s t r a l i a , and New Zealand joined on the 26 other side advocating varying degrees of international air t r a f f i c regula-tion. On the issue of market entry, the United States suggested that routes be granted in bilateral negotiations. In contrast, the British and the Cana-dians i n i t i a l l y suggested that an International Authority should be formed which would grant airlines entry to routes by issuing licenses. They then shifted their position arguing that states should be granted the right to establish routes unilaterally to any other country and beyond. The Austral-ian/New Zealand joint proposal provided a more extreme version of the i n i t i a l British and Canadian position. It, too, suggested that contracting states surrender power over entry and route allocation to an International Author-ity ; however, rather than issue licenses, this international body would actu-a l l y own and manage a l l international aircraft and operate international routes. 1 In addition to this arrangement, Australia and New Zealand agreed that states should be allowed to operate their own air services on a regional basis, pending a bilateral agreement on terms of entry. The regulation of market shares refers to restrictions placed on capa-city, frequency and gauge (or aircraft size). In the discussion that follows, a fourth element, which i s often referred to as a term of market entry, w i l l be considered under the category of market share restrictions: the granting of t r a f f i c rights. Traffic rights in c i v i l aviation represent the different stages of liberalizing the right to f l y . They have been cate-gorized as eight freedoms. (Attention usually centres around the f i r s t five freedoms.) The eight freedoms are: 27 The privilege of flying over a state. The privilege to land in a state for technical reasons, e.g., refuelling. Passengers, cargo or mail can not be picked up or set down. The privilege to carry passengers, cargo, or mail from the home state to a foreign state. The privilege to carry passengers, cargo or mail from a foreign state to the home state. The privilege to pick up or set down passengers, cargo or mail between two foreign points. In other words, the carrier of State A can carry traffic picked up in State B to State C on its route from State A to State C. In recent years, certain writers have added three more freedoms to the l i s t : Freedom 6: The privilege to pick up traffic in one state and carry i t to another via the country of the nationality of the air carrier. It can also be characterized as a special type of fifth freedom or a combination of third and fourth freedoms. Freedom 7: Sixth freedom traffic which does not stop at the transit point in the air carrier's state. This categorization is only used by some writers; the more conventional definition would argue that this is in essence the fifth freedom. Freedom 8: Cabotage traffic, i . e . , carriage by a foreign air carrier of the domestic traffic of another state. (Sampson 1984:84; Haanappel 1984:10-12).2 Freedom 1: Freedom 2: Freedom 3: Freedom 4: Freedom 5: 28 The Americans ini t ia l ly proposed a multilateral grant of the five free-doms; however, as mentioned earlier, they also insisted on bilateral negotia-tions for route entry. It is not clear whether they intended to surrender the right to require bilateral route agreements or whether these freedoms were to be practiced only on routes negotiated bilaterally. O'Connor argues that the latter was probably the intended position (O'Connor 1971:42-43). The Americans also favoured unrestricted capacity, frequency and gauge with respect to a l l the freedoms granted. In essence, the United States proposed that market shares be determined by free competition. The British and Canadians adamantly opposed this view. They argued that a multilateral grant of the four freedoms be given according to their in i t ia l proposal through the issue of license by the International Authority, or according to their later proposal, by allowing states to unilaterally establish direct routes to any other country and beyond. In the latter proposal, states would be entitled to establish capacity and frequency equal to 50% of their generating poten-t ia l to various countries along the route (a minimum of one round trip per week on each route was to be guaranteed). On the issue of fifth freedom both the Canadians and the British argued that this right should be granted on a bilateral basis. When exercising fifth freedom rights, the British further argued that airlines should be forced to shrink their capacity and frequency from point to point in accordance with third freedom traffic volumes. Fifth freedom was in no way to be included in the calculation of capacity and frequency allowances on routes. The British conceded that airlines should be allowed to pick up fifth freedom passengers as "fill-up" traffic; however, they argued that these passengers should be charged higher rates than on regional flights operating the same segment of the route. The Canadians 29 o f f e r e d a s l i g h t l y more l i b e r a l p l an f o r f i f t h freedom c a p a c i t y r e g u l a t i o n . They suggested t h a t f i f t h freedom t r a f f i c be considered i n the i n i t i a l a l l o -c a t i o n of c a p a c i t y by the I n t e r n a t i o n a l A u t h o r i t y according to some pre-determined formula. At the root of the B r i t i s h and Canadian proposals was the i n t e n t i o n to guarantee each s t a t e a market share roughly e q u i v a l e n t t o 50% of i t s generating c a p a c i t y . In the Australian/New Zealand proposal market shares were i r r e l e v a n t f o r a l l routes would be operated by a s i n g l e i n t e r n a t i o n a l company. On the i s s u e of r a t e r e g u l a t i o n d i v i s i o n a l s o e x i s t e d . The United States was opposed to r a t e - f i x i n g i n p r i n c i p l e , although O'Connor w r i t e s t h a t the U.S. was prepared t o d i s c u s s "ways and means" of r e g u l a t i n g minimum ra t e s (O'Connor 1971:20). In c o n t r a s t , the B r i t i s h , Canadian and A u s t r a l i a n / New Zealand proposals a l l supported r a t e - f i x i n g by an I n t e r n a t i o n a l Author-i t y . In a d d i t i o n , both the Canadians and the B r i t i s h s t r e s s e d the need t o r e g u l a t e s u b s i d i e s and prevent r a t e - c u t t i n g (O'Connor 1971:20-30; Haanappel 1984:1-14; Jones 1960:227-229; Wagner 1945). Adolph B e r l e described the outcome of the Chicago conference i n e n t h u s i -a s t i c terms. He s a i d : We met i n an era of d i p l o m a t i c i n t r i g u e and p r i v a t e and monopolistic p r i v i l e g e . We c l o s e i n an era of open cov-enants and equal opportunity and s t a t u s . . . . We met i n the seventeenth century i n the a i r . We c l o s e i n the t w e n t i e t h century i n the a i r (qtd. i n Morgan 1945:16). Yet, h i s assessment of the conference's achievements was o v e r e n t h u s i a s t i c . Although p a r t i c i p a n t s agreed t o take measures which would f a c i l i t a t e i n t e r -n a t i o n a l a i r t r a v e l and u l t i m a t e l y a i d the development of the i n d u s t r y , the 30 lack of consensus on how market entry, shares and rates should be regulated prevented any substantial agreement on commercial regulation. The Chicago Agreement consisted of six parts: the Convention on Civi l Aviation, the Interim Agreement on International Civi l Aviation, The Inter-national Air Services Transit Agreement, the International Air Transport Agreement, the Draft Technical Annexes to the Convention, and the Standard Form of Agreement for Provisional Air Routes. Like the Paris Convention, the Convention on International Civi l Avia-^ tion in Article I affirmed that every state has complete and exclusive sover-eignty over the air space above its territory. Consequently, market entry could only be granted on the basis of a bilateral or multilateral agreement. Article V gave non-scheduled flights automatic overflight privileges; how-ever, this right was not extended to scheduled services (Salacuse 1980:-823-825).3 The Interim Agreement on International Civi l Aviation established a provisional organization known as the Provisional International Civi l Avia-tion Organization (PICAO), which operated from June 5, 1945 to April 4, 1947. The agreement, which was open to signature, provided the legal frame-work for the development of international c iv i l aviation and laid the founda-tion for the International Civi l Aviation Organization (ICAO). (See Appendix I.) The International Air Services Transit Agreement like the Interim Agree-ment on International Civi l Aviation was open to separate ratification. Con-tracting states agreed to grant a l l states the first two freedoms subject to certain conditions stipulated in the Chicago Convention. The two key condi-tions were: f irst , that a state could designate routes and airports to be 31 used by a l l foreign carriers entering its air space, and second, a state could charge airlines which stopped for non-traffic purposes on its territory a service fee. It was signed by thirty-three nations.4 Signatories to the International Air Transport Agreement (also open for separate ratification) granted a l l contracting parties the five freedoms of the air . (The five freedoms were not to be subject to any capacity or fre-quency restrictions.) It was not clear whether states signing this agreement were abandoning their intention to bilaterally negotiate route grants or whether these freedoms were only to be granted on negotiated routes. This agreement was signed by nineteen states by February 20, 1945 including the United States (which withdrew its support in 1946), China, Sweden, Afghan-istan, Lebanon, Mexico and ten Latin American countries. Turkey and the Netherlands signed with reservations. The agreement was not widely adopted and became "virtually a dead letter" probably in part due to its inherent ambiguity (O'Connor 1971:42; Warner 1945:410). The division of the five freedoms into two parts, the technical and the commercial privileges open for separate signature, was a consequence of the major disagreement between the key actors. The main contentious issue towards the end of the conference concerned market sharing. Specifically, consensus could not be reached on the principle by which capacity with regard to fifth freedom traffic should be calculated. The British, supported by the Australians, New Zealand and the French, held that the primary purpose of an airline was to carry its own traffic and, hence, argued that fifth freedom traffic be subject to strict regulation, while the Americans, Latin Ameri-; cans, Dutch and Swedes would not agree to these stipulations (Warner 1945: 418; Sampson 1985:86). In effect, a l l the Chicago Conference achieved on 32 t h i s i s s u e was summed up by a r e p o r t e r i n The Economist: "The weeks of d i s -cussions achieved only agreement t o disagree" (The Economist December 30, 1944:860). The D r a f t T e c h n i c a l Annexes provided a set of recommended p r a c t i c e s and standards p e r t a i n i n g to communications systems, n a v i g a t i o n a l a i d s , c h a r a c t e r -i s t i c s of a i r p o r t s and landing areas, r u l e s of the a i r and of a i r t r a f f i c c o n t r o l p r a c t i c e s , a i r w o r t h i n e s s of a i r c r a f t , r e g i s t r a t i o n and i d e n t i f i c a t i o n of a i r c r a f t , l o g book requirements, a e r o n a u t i c a l maps and c h a r t s , customs procedures, search, rescue and i n v e s t i g a t i o n of a c c i d e n t s . These recommenda-t i o n s were not mandatory, although s t a t e s were urged t o accept p r a c t i c e s "as f a r and as r a p i d l y as may prove p r a c t i c a b l e " (qtd. i n Salacuse 1980:829). F i n a l l y , the Chicago Convention provided a Standard Form f o r B i l a t e r a l Agreements. This was, i n e f f e c t , an acknowledgement of the f a i l u r e t o reach a m u l t i l a t e r a l agreement on commercial r i g h t s . According to the model, con-t r a c t i n g s t a t e s would grant each other s p e c i f i c r i g h t s ( t r a n s i t , n o n - t r a f f i c stops, or commercial entry over p r e s c r i b e d r o u t e s ) . They would designate a i r p o r t s a t which commercial r i g h t s would be o f f e r e d and would s e t down b a s i c p r i n c i p l e s of n o n - d i s c r i m i n a t i o n and m u t u a l i t y of treatment ( i . e . , market shares). In a d d i t i o n to producing the Chicago Convention, the Chicago Conference a l s o l a i d the groundwork f o r the formation of IATA. A i r l i n e operators present a t the Conference, supported by t h e i r governments, appointed a com-mittee t o d r a f t a convention f o r an i n t e r n a t i o n a l a s s o c i a t i o n of scheduled a i r l i n e s . The f i r s t meeting was held i n October 1945 (Hammarskjold 1979b: 27-28). (See Appendix I I . ) 33 With respect to international commercial regulation of c iv i l aviation, the Chicago Conference had made minimal advances. Market entry was made subject to bilateral or multilateral negotiation. Through the broadly signed transit agreement states were granted the privilege of overflight and non-commercial stops multilaterally. However, no agreement was reached on the issue of market sharing and rate regulation. The Interim Period Following the Chicago Conference, two systems of regulating commercial rights evolved. The first characterized bilaterals signed between Britain and its Dominions, most of the Middle East and Eire, which closely regulated frequency, capacity, and rates (The Economist August 3, 1946:145). The second system, based on an unrestricted exchange of the five freedoms charac-terized U.S. bilaterals signed with Iceland, Ireland, Norway, Portugal, Spain, Switzerland, and Sweden (Sampson 1984:90; Haanappel 1984:17). An agreement between Britain and the United States, however, was not forth-coming . In October 1945, a conflict over transatlantic rates flared up. The U.S. Civi l Aviation Board (CAB), an independent regulatory agency in charge of economic regulation of aviation, had licenced three airlines to operate in the United Kingdom: Pan American, American Overseas, and Transcontinental World Airways. Pan American had been granted two services weekly by a 1937 agreement with the British government. It had then been granted temporary permission to make five flights a week. American Overseas was given tempor-ary permission for seven flights a week to Britain. Then, in October, Pan American announced that i t would lower its New York-London fare from $375 to 34 $275. The B r i t i s h withdrew Pan American's temporary f l i g h t grants, and thereby reduced i t s r i g h t t o f l y t o two times a week c l a i m i n g t h a t the a i r -l i n e was engaging i n i l l e g i t i m a t e undercutting. I t s U.S. competitors were allowed t o keep t h e i r t e m p o r a r i l y granted frequencies. Although Pan-American dropped i t s proposal, the i n c i d e n t served to remind the United Kingdom and the United States t h a t some form of agreement on commercial r i g h t s and p a r t i -c u l a r l y r a t e s was needed (The Economist October 21, 1945:826; Taneja 1980: 11-12). The Bermuda Conference Then, i n January 1946, B r i t a i n suddenly abandoned i t s r e l u c t a n c e to negoti a t e w i t h the United Sta t e s . I t issued an i n v i t a t i o n to the U.S. to meet i n Bermuda f o r the purpose of reaching an a i r t r a n s p o r t b i l a t e r a l agree-ment (Taneja 1980:13). The p o s i t i o n s adopted by the United States and the United Kingdom a t the conference were very s i m i l a r t o the p o l i c y stances a t Chicago. Disagreement centered on the i s s u e of market-sharing and r a t e regu-l a t i o n . (By agreeing to enter i n t o a b i l a t e r a l arrangement both s t a t e s had i m p l i c i t l y accepted the p r i n c i p l e e s t a b l i s h e d a t the Chicago Conference: entry would be subject to a b i l a t e r a l agreement.) The Americans wanted to secure a b i l a t e r a l i n which the f i v e freedoms would be granted without r e s t r i c t i o n s , on each route s p e c i f i e d i n the agreement ( i . e . , market shares on these routes would be determined c o m p e t i t i v e l y ) . The B r i t i s h wanted market shares to be s t r i c t l y r e g u lated so t h a t each s t a t e would be given a roughly equal share of the t r a f f i c on routes between the two c o u n t r i e s . The B r i t i s h wanted t o ensure even s t r i c t e r r e g u l a t i o n i f not complete p r o h i b i t i o n of the g r a n t i n g of f i f t h freedom r i g h t s . On the i s s u e of r a t e r e g u l a t i o n , 35 the United States was opposed to any restrictions, while the British favoured tariff-fixing. The bilateral signed provided an elaborate route chart specifying defin-ite routes and airports where technical and commercial privileges were to be granted. (See Appendix III.) It resolved the issue of market-sharing and rate regulation through what was later called the Bermuda Compromise. Carriers were to be granted the two technical freedoms, without restrictions; however, the three commercial freedoms could be exercised subject to a variety of restrictions. These restrictions were ambiguously defined in the Bermuda principles. The Bermuda principles stipulated that: air transport facilities available bear a close relationship to public demand; that car-riers be granted fair and equal opportunity to operate on designated routes; and that carriers of one contracting party take into consideration the inter-ests of the other contracting party so as not to affect unduly the services the other provides. In essence, an airline's capacity allocation was to be related to the traffic demands between the country of origin and the country of destination (primary traffic). Pick-up traffic or fifth freedom traffic was not to play a major role in determining in i t ia l capacity allocations. (The Bermuda Agreement did not specify the quantity of fifth freedom traffic a carrier could pick up in relation to the quantity of third and fourth free-dom carried) (Haanappel 1984:31-32; Hammarskjold 1979b:29). Using these guidelines, airlines were to specify the amount of capacity they would offer on each route. This would then be subject to ex post facto government review. A government that felt that a foreign carrier was abusing its com-mercial rights could call for a renegotiation. Each government would then assemble facts and figures and try to reach an agreement. If this failed, 36 the government lodging the complaint could denounce the agreement. I t was req u i r e d t o give a 12-month's n o t i c e of i t s i n t e n t i o n t o revoke commercial r i g h t s . New n e g o t i a t i o n s were expected t o s t a r t and an agreement was to be formulated i n order t o prevent a t e r m i n a t i o n of s e r v i c e a t the end of the year (Diamond 1975:453). Since the Bermuda c a p a c i t y p r i n c i p l e s d i d not a c t u -a l l y provide a s p e c i f i c market-sharing scheme, they were i n i t i a l l y seen as being a concession made by the B r i t i s h t o the United States i n favour of the competitive determination of market shares. Although, as A d r i a n i p o i n t s out, the vagueness of the p r i n c i p l e s allowed a c e r t a i n f l e x i b i l i t y of i n t e r p r e t a -t i o n ; i n f a c t , they embodied a f a i r l y r i g i d market a l l o c a t i o n scheme (Diamond 1975:41). Wheatcroft describes the parameters w i t h i n which even the more l i b e r a l i n t e r p r e t a t i o n s of the clauses operated: The " l i b e r a l " nations have been w i l l i n g to accept t h a t commercial competition should be the a r b i t e r of market shares, but only w i t h i n c e r t a i n l i m i t s . . . . [T]he e v i -dence suggests t h a t the most which " l i b e r a l " c o u n t r i e s have been w i l l i n g t o accept i s t h a t t h e i r share of t r a f -f i c on major routes might be permitted to f a l l as low as 40% of the t o t a l before they turned towards measures f o r r e s t r i c t i n g f o r e i g n competitors. The d i f f e r e n c e between " l i b e r a l " and " p r o t e c t i o n i s t " p o l i c i e s may t h e r e f o r e be thought of as a w i l l i n g n e s s on the one hand to compete f o r 20 per cent of the t o t a l market, compared w i t h an i n s i s t e n c e upon a 50/50 d i v i s i o n of t r a f f i c on the other ^ (qtd. i n Diamond 1975:437-438). 37 The other dimension of the Bermuda compromise was the concession t h a t the United States made to the B r i t i s h i n agreeing to approve the f i x i n g of r a t e s on i n t e r n a t i o n a l routes by an a s s o c i a t i o n of i n t e r n a t i o n a l scheduled t r a f f i c c a r r i e r s : IATA. Appendix I I of Bermuda I reads: The C i v i l Aeronautics Board of the United States, having announced i t s i n t e n t i o n to approve the r a t e conference machinery of the I n t e r n a t i o n a l A i r Transport A s s o c i a t i o n , as submitted, f o r a period of one year beginning i n Feb-ruary, 1946, any r a t e agreements concluded through t h i s machinery during t h i s p e r i o d and i n v o l v i n g United States a i r c a r r i e r s w i l l be s u b j e c t t o approval by the Board (qtd. i n Haanappel 1984:28). U.S. a n t i - t r u s t laws r e q u i r e d such e x p l i c i t approval by the CAB; otherwise, the IATA c a r t e l could be charged w i t h a n t i - c o m p e t i t i v e , c o n s p i r a t o r i a l a c t i v -i t y . The CAB granted IATA a n t i - t r u s t immunity on February 19, 1946, and renewed i t i n 1947, 1948, 1950, 1951, 1952, and 1954. In 1955, permanent approval was given. As w i l l be discussed, t h i s p o l i c y changed i n the l a t e 1970s (Haanappel 1984:29). Rates charged were to be s u b j e c t t o government approval. Appendix I I of Bermuda I reads: Rates t o be charged by the a i r c a r r i e r s of e i t h e r Con-t r a c t i n g Party between p o i n t s i n the t e r r i t o r y of the U.S. and p o i n t s i n the t e r r i t o r y of the U.K. . . . s h a l l be s u b j e c t to the approval of the C o n t r a c t i n g P a r t i e s w i t h i n t h e i r r e s p e c t i v e c o n s t i t u t i o n a l powers and o b l i g a -t i o n s . . . (qtd. i n Haanappel 1984:28). 38 Thus, a l l IATA r a t e s and f a r e s had to be submitted to the a e r o n a u t i c a l a u t h o r i t i e s of both c o n t r a c t i n g p a r t i e s a t l e a s t 30 days before t h e i r pro-posed i n t r o d u c t i o n . I f , during t h i s p e r i o d , a r a t e agreement was disapproved by a c o n t r a c t i n g party, or i f the IATA t r a f f i c conference was unable t o reach an agreement or i f IATA machinery was i n a p p l i c a b l e or i f a c o n t r a c t i n g party withdrew or f a i l e d t o renew i t s approval of the IATA r a t e conference machin-ery, one of two measures would be taken. In the event t h a t the CAB was granted the a u t h o r i t y t o f i x i n t e r n a t i o n a l r a t e s and suspend i n t e r n a t i o n a l r a t e s , and i f a disagreement arose over r a t e s and f a r e s t o be charged by designated c a r r i e r s on b i l a t e r a l l y agreed routes, the disputed t a r i f f s would go i n t o e f f e c t p r o v i s i o n a l l y pending settlement of the disagreement by a r b i t r a t i o n . However, i n the event t h a t the CAB was not granted such a u t h o r i t y , the government o b j e c t i n g t o the t a r i f f s could take a c t i o n t o prevent the in a u g u r a t i o n or c o n t i n u a t i o n of the s e r v i c e i t complained about (Haanappel 1984:29-33). The former p r o v i s i o n d i d not come i n t o operation s i n c e Congress never gave the CAB more than the power to suspend and r e j e c t i n t e r n a t i o n a l a i r t a r i f f s . And t h i s d i d not occur u n t i l 1972. Bermuda I gave vague g u i d e l i n e s as t o the l e v e l a t which t a r i f f s should be s e t : they were to take i n t o account the cost of ope r a t i o n , a reasonable p r o f i t , and the ra t e s charged by other a i r c a r r i e r s . The i n t e n t i o n of both c o n t r a c t i n g p a r t i e s was described as encouraging cheap r a t e s c o n s i s t e n t w i t h sound economic p r i n c i p l e s (qtd. i n Haanappel 1984:32). The Bermuda Agreement made no reference to c h a r t e r s . 39 Summary The Chicago Convention and the Bermuda Agreement e s t a b l i s h e d the frame-work f o r the r e g u l a t i o n of the commercial aspects of c i v i l a v i a t i o n . Three b a s i c p r i n c i p l e s were embodied i n the operation of the regime or c a r t e l . F i r s t , market entry would be subj e c t to b i l a t e r a l agreement. Second, s t a t e s would be guaranteed a market share n e i t h e r f a l l i n g below 40% nor exceeding 60% of the t o t a l t r a f f i c a v a i l a b l e on major routes. F i n a l l y , t a r i f f s would be s e t on a l l i n t e r n a t i o n a l routes by IATA. A l l operators agreed t o charge a uniform f a r e f o r the same category of s e r v i c e on the same route. 40 ANALYSIS Analysis of the Chicago Conference Although the regime was not formed a t the Chicago Conference, a n a l y s i s of the p o s i t i o n s adopted by the v a r i o u s s t a t e s i s u s e f u l f o r i t r e v e a l s t h e i r a t t i t u d e s towards the r e g u l a t i o n of market shares and r a t e s , or s p e c i f i c a l l y , the adoption of a c a r t e l system. The f i r s t questions to be addressed are: Were the p o s i t i o n s adopted by s t a t e s a consequence of concern f o r general consumer welfare or i n d u s t r i a l development? Were s t a t e s i n f l u e n c e d by economic s t u d i e s suggesting t h a t i n a deregulated atmosphere predatory p r i c i n g would ensue, or a monopoly would take c o n t r o l ? I t should be f i r s t pointed out t h a t comprehensive economic s t u d i e s of the i n d u s t r y had not been made by t h i s time. Thus, any opinions about the nature of the i n d u s t r y were based on observations of the pre-World War I I p e r i o d . Such observations were u n s a t i s f a c t o r y s i n c e they lacked an e m p i r i c a l foundation. C l e a r l y , i n the case of the United States and i t s supporters, economic arguments i n support of r e g u l a t i o n s d i d not i n f l u e n c e t h e i r p o s i t i o n . On the contrary, they opposed excessive r e g u l a t i o n on the grounds t h a t i t would promote the unhealthy a c t i v i t y of the pre-World War I I European c a r t e l s ( B i d d l e 1945). Rather, they argued t h a t i n d u s t r i a l develop-ment would be enhanced by the f r e e operation of market f o r c e s . The B r i t i s h , Canadians, and the various s t a t e s supporting t h e i r p o s i t i o n s may have been i n f l u e n c e d by economic arguments supportive of c a r t e l s . S i r George Cri b b e t , commenting on the post-war n e g o t i a t i o n s , w r i t e s : I t was a g a i n s t a pre-war background of excessive competition i n Europe, w i t h i t s c o r o l l a r y of burdensome 41 subsidies, rate warfare and other unfair competitive devices, and the revival of intense national rivalries, that the various problems were considered (qtd. in Harbison 1982:9). However, one can infer from these states' public declarations that a determination to ensure that their own air carrier would be guaranteed an equitable share of the market was on a par with, i f not considered to be more important than, consumer welfare and the general development of the indus-try. The only proposal that seemed to reflect a prime concern for consumer welfare was that of the Australians and New Zealanders. They were prepared to abandon the idea of owning a "flag carrier" in favour of an internation-ally owned and controlled airline. Their position was dominated by the view of international aviation as a public ut i l i ty . They wanted to ensure that their countries would receive a high level of international service. At the same time, they realized that they did not possess the economic resources to operate flights at their desired level of frequency. An international cor-poration, committed to providing adequate service to a l l parts of the globe, would provide these countries with the transport they required at a limited cost, since operations could be cross-subsidized with higher profit routes. In addition, they argued that in a system where an international body con-trolled aviation, international conflict would be avoided. In the words of the New Zealand delegate: . . . Any other system we suggest leads to national com-petition, to an attempt to serve national interests as against world interests, to achieve individual needs at the expense of others. It must lead to the creation and 42 expansion of l a r g e commercial o r g a n i z a t i o n s whose a c t i v i -t i e s must i n the long run be based p r i m a r i l y on the p r o f i t motive. I t may w e l l be f e l t t h a t i n commercial hands there might be some small degree of e x t r a e f f i -c i e ncy; I would ask you t o balance t h i s p o s s i b i l i t y w i t h what seems to us the c e r t a i n t y of a commercial and n a t i o n a l r i v a l r y i n t h i s f i e l d which must lead i n the long run t o commercial and n a t i o n a l competition and i l l -w i l l , and which cannot i n the long run hope t o achieve i t h a t proper balance between the r i g h t s and n e c e s s i t i e s of a l l n a t i o n s , which would t o a much greater degree be w i t h i n the competence of an i n t e r n a t i o n a l body (qtd. i n O'Connor 1971:23-24). The Australian/New Zealand proposal d i d not gain much support. A B r a z i l i a n delegate expressed the general a t t i t u d e towards i t when he s a i d : "Our times are not r i p e f o r the i n t e r n a t i o n a l i z a t i o n of a v i a t i o n and perhaps the time w i l l never be r i p e f o r i t " (qtd. i n Jonsson 1987:99). The plan was r a p i d l y d iscarded as being too r a d i c a l , and the A u s t r a l i a n s and New Zea-landers gave t h e i r support to the B r i t i s h plan i n s t e a d . As was suggested e a r l i e r , the p o s i t i o n s adopted by other s t a t e s r e f l e c t e d an i n t e r e s t i n promoting the development of t h e i r r e s p e c t i v e a v i a -t i o n i n d u s t r i e s . This would suggest t h a t the second s e t of explanations f o r s t a t e support of a c a r t e l should be examined. Haanappel provides i n s i g h t s i n t o the motivations behind the two key p r o t a g o n i s t s ' behaviour a t the Con-ference: B r i t a i n and the United Sta t e s . He w r i t e s : 43 The B r i t i s h and American proposals r e f l e c t e d very w e l l the economic s i t u a t i o n of the a i r l i n e i n d u s t r y i n the U.K. and i n the U.S.A. a t the end of the war. The B r i t i s h a i r l i n e i n d u s t r y , l i k e the one i n most other European c o u n t r i e s , had been almost completely destroyed during the war, whereas the American a i r l i n e i n d u s t r y could a t the end of the war dispose of l a r g e numbers of r e a d i l y a v a i l a b l e a i r c r a f t , i n p a r t i c u l a r m i l i t a r y t r a n s -port planes, which could be e a s i l y converted i n t o c i v i l a i r c r a f t . A system of f r e e competition would d e f i n i t e l y favor the U.S. a i r l i n e s , and i t was e x a c t l y t h i s competi-t i o n which the B r i t i s h feared. They intended t o p r o t e c t t h e i r own weakened a i r l i n e i n d u s t r y through an i n t e r n a -t i o n a l r e g u l a t o r y machinery which would give each country a " f a i r share" of i n t e r n a t i o n a l a i r t r a f f i c (Haanappel 1984:13) B r i t i s h i n t e r e s t i n p r o t e c t i n g t h e i r own a i r l i n e was motivated by secur-i t y , p r e s t i g e , p o l i t i c a l and economic c o n s i d e r a t i o n s . Warner, i n d e s c r i b i n g the a t t i t u d e of B r i t i s h policy-makers, w r i t e s : "In t h e i r thoughts the problem of c i v i l a v i a t i o n mingles c o n s t a n t l y w i t h questions of s e c u r i t y " (Warner 1945:419-420). Influenced by the experience of the war, which had brought out the v i t a l importance of a i r power to a s t a t e ' s n a t i o n a l s e c u r i t y , the B r i t i s h b e l i e v e d t h a t the development of t h e i r c i v i l a v i a t i o n i n d u s t r y would provide the needed support and t r a i n i n g f o r the Royal A i r Force (The  Economist December 30, 1944:862). 44 In a d d i t i o n to s e c u r i t y concerns, the r o l e of a n a t i o n a l a i r c a r r i e r as a s t a t u s symbol was of great importance t o B r i t a i n . Stannard w r i t e s t h a t i n order t o understand the approach of B r i t i s h policy-makers a t Chicago, i t i s necessary t o see t h e i r a t t i t u d e i n r e l a t i o n t o pre-war developments. Since the men shaping B r i t a i n ' s p o l i c y i n the "40s were the same as those who shaped i t s p o l i c y i n the '30s. He observes t h a t pre-World War I I B r i t i s h i n t e r n a t i o n a l a v i a t i o n was not considered t o be a v i a b l e commercial enter-p r i s e i n i t s own r i g h t . Rather, the B r i t i s h government, through extensive s u b s i d i e s , maintained i t f o r p r e s t i g e reasons (Stannard 1945:500). A t h i r d c o n s i d e r a t i o n was the v i t a l r o l e an i n t e r n a t i o n a l c a r r i e r could play i n p r e s e r v i n g B r i t a i n ' s c o l o n i a l l i n k s . The Economist reported on December 30, 1944 t h a t the development of B r i t i s h c i v i l a v i a t i o n was needed "to k n i t together a Commonwealth t h a t w i l l become ramshackle i f a l l i t s p arts can move more r e a d i l y to f o r e i g n c o u n t r i e s than they can t o each other" (The  Economist December 30, 1944:822). A more immediate p o l i t i c a l m o t i v a t i o n was the B r i t i s h d e s i r e to possess an a i r l i f t c a p a b i l i t y i n order t o a i d i n the l i b e r a t i o n of the c o l o n i e s a f t e r the war (Thornton 1970:23). Both a s h o r t run and a long run economic m o t i v a t i o n seem t o have been d e c i s i v e f a c t o r s i n B r i t a i n ' s i n s i s t e n c e on developing her own i n t e r n a t i o n a l c a r r i e r . In order t o s a t i s f y the high demand f o r imports a r i s i n g from post-war r e c o n s t r u c t i o n needs without adding t o her balance of payments problems, B r i t a i n needed to export goods and perform i n t e r n a t i o n a l s e r v i c e s f o r others. An i n t e r n a t i o n a l c a r r i e r was c r u c i a l to these a c t i v i t i e s (Warner 1945:419). The second c o n s i d e r a t i o n hinged on two b e l i e f s about the economic f u t u r e of c i v i l a v i a t i o n . F i r s t , B r i t i s h policy-makers were convinced t h a t i n the long run, one or two nations would e s t a b l i s h a i r c r a f t i n d u s t r i e s which 45 would then dominate a l l world air routes. The British wanted to ensure that they would not be ousted from the race at an early stage, so that in the future they could secure for themselves a monopoly position in the airline industry (Warner 1945:419-420). Second, they were influenced by the early experiences of the shipping industry which suggested that the demand for new transportation is very elastic. They reasoned that the provision of services would create its own demand and bring large economic returns to the British industry paralleling the fortunes made by early shipping magnates (The Econo-mis£ December 30, 1944:862). Given the weak state of the British aviation industry vis-a-vis the American industry with its surplus of transport planes which could be easily converted into c iv i l aircraft, there was a growing belief in Britain that "competition with well-stocked American airlines, already in ful l operation will be well-nigh impossible" (The Economist December 30, 1944:861). The only system which would ensure the protection of Britain's industry was an extensive international regulatory regime which restricted market entry, guaranteed market shares, and fixed rates. In view of this, i t is not surprising that the fifth freedom issue proved to be the major stumbling block in the Chicago negotiations. The right to pick up or leave passengers along international trunk routes was vital for these operations to be economically viable. At the Chicago Confer-ence, only the United States was in a position to operate such services. The British feared that by agreeing to an unrestricted exchange of the five free-doms, they would in fact jeopardize the future development of their own international services. The Americans, with their competitive advantage, would have gained such a strong foothold in the operation of long trunk 46 routes t h a t the B r i t i s h would be unable t o gain any share of f i f t h freedom t r a f f i c a t a f u t u r e date. A more immediate concern was t h a t the e x e r c i s e of American f i f t h freedom r i g h t s would d i m i n i s h the volume of t h i r d and f o u r t h freedom t r a f f i c c a r r i e d by B r i t i s h c a r r i e r s s i n c e they would be competing w i t h i n the same market. There was another reason f o r B r i t i s h support of i n t e r n a t i o n a l r e g u l a -t i o n . They were convinced t h a t u n r e s t r i c t e d competition would r e s u l t i n u n f a i r competition and would lea d t o subsidy wars between governments. Not only would t h i s burden a s t a t e ' s operating budget, but i t might foment i l l -f e e l i n g among s t a t e s and hinder government cooperation i n other i s s u e areas (Warner 1945:419-420). This would, i n t u r n , threaten post-war i n t e r n a t i o n a l s e c u r i t y . However, the pre-Chicago as w e l l as the Chicago n e g o t i a t i o n s i n d i c a t e d t h a t the United States was u n w i l l i n g t o accept the type of i n t e r n a t i o n a l r e g u l a t o r y regime envisioned by the B r i t i s h . Thus, the B r i t i s h decided to s t a l l n e g o t i a t i o n s i n the hope t h a t the passage of time would strengthen t h e i r n e g o t i a t i n g p o s i t i o n . They b e l i e v e d t h a t w i t h the r e c o n s t r u c t i o n of t h e i r post-war economy t h e i r need f o r U.S. economic and m i l i t a r y a i d would d i m i n i s h , and hence t h e i r dependence on the good w i l l of the United States would be reduced. Second, they hoped t h a t , as Europe recovered from the war, i t would g a i n cohesion and support the B r i t i s h i n t h e i r attempt to r e s i s t U.S. pressure t o a l l o w competitive market fo r c e s t o dominate the i n d u s t r y (Thornton 1970:29). The Canadians and most of the Europeans adopted a s i m i l a r p o s i t i o n t o the B r i t i s h a t the conference. L i k e the B r i t i s h , they were i n t e r e s t e d i n developing t h e i r own i n d u s t r i e s f o r reasons of: p r e s t i g e ; access to the 47 c o l o n i e s , i n the case of the Europeans (e.g. French i n t e r e s t s i n Indochina, and Dutch i n t e r e s t s i n the East I n d i e s ) ; and i n t e r e s t i n s e c u r i n g c e r t a i n economic b e n e f i t s te.g. gains to the balance of payments) which would not accrue t o them i n an open competitive environment. The u n d e r l y i n g b e l i e f was t h a t i n a l i b e r a l regime the United States would gain a monopoly over c i v i l a v i a t i o n . In the case of c o u n t r i e s t h a t opposed c a r t e l r e g u l a t i o n , the question must be asked: were they not i n t e r e s t e d i n securing a market share f o r t h e i r own i n d u s t r i e s ? On the contrary, i t would appear t h a t the United States and the s t a t e s supporting i t s advocacy of f r e e competition saw c a r t e l a c t i o n as being d e t r i m e n t a l to the development of t h e i r own a i r c a r r i e r s e r v i c e . They b e l i e v e d t h a t i n a deregulated environment, they would have access to a greater market share than i n a regulated environment. In h i s a n a l y s i s of the U.S. p o s i t i o n a t Chicago, Thornton w r i t e s : In general, the Chicago conference can be described w i t h reasonable accuracy as an attempt by the United States t o c a p i t a l i z e on i t s overwhelming strong bargaining p o s i t i o n i n i n t e r n a t i o n a l d i r e c t i o n by securing f o r i t s e l f a near monopoly of long-haul a i r t r a n s p o r t (Thornton 1970:25). The United States was c l e a r l y the most powerful a c t o r i n the i n t e r n a -t i o n a l system i n the immediate post-war p e r i o d . I t s wartime a c t i v i t y ( i . e . , performing i n t e r c o n t i n e n t a l and long-haul t r a n s p o r t ) had e s t a b l i s h e d a route network and given i t s p i l o t s o p erating experience. I t had a l s o stimulated the production of t r a n s p o r t a i r c r a f t which could e a s i l y be converted i n t o c i v i l a i r c r a f t (Thornton 1970:19). According to a 1944 r e p o r t i n The Econo- mist, "the U.S. owned n e a r l y one-half of the t o t a l productive a i r c r a f t 48 c a p a c i t y of the world; and i t had a v i r t u a l monopoly on the production of c i v i l t r a n s p o r t " (The Economist December 30, 1944:861). Owing t o the h i g h l y developed s t a t e of i t s i n t e r n a t i o n a l c i v i l a v i a t i o n i n d u s t r y , r e l a t i v e to other c o u n t r i e s , the development of American i n d u s t r y would be best promoted i n an environment of f r e e competition. Thus, i t i s not s u r p r i s i n g t h a t i t opposed B r i t i s h attempts t o r e g u l a t e the i n d u s t r y . I t i s worth n o t i n g t h a t the U.S. espousal of freedom of the a i r i n the post-war p e r i o d represented a s u b s t a n t i a l change t o i t s previous p o l i c y . Burden wrote i n 1945: The United States, long an ardent p r o t e c t i o n i s t n a t i o n , appeared as an eloquent advocate of f r e e trade i n the a i r ; and Great B r i t a i n , long i d e n t i f i e d w i t h the gospel of f r e e trade and freedom of the seas, apparently f o r g o t her bold a s s a u l t s on m e r c a n t i l i s m i n the nineteenth cen-t u r y and favored r e s t r i c t i o n and c o n t r o l i n the a i r . The change i n p o s i t i o n i s perhaps symptomatic of the change i n the r e l a t i v e i n d u s t r i a l s t r e n g t h of the two powers. The United States seems motivated by the same combination of s e l f - i n t e r e s t and i d e a l i s m t h a t moved Great B r i t a i n t o assume her h i s t o r i c a t t i t u d e towards ocean t r a n s p o r t (Burden 1945:19). As i n the case of the B r i t i s h , a key m o t i v a t i o n behind the U.S. d e s i r e to promote the development of i t s own i n d u s t r y was i t s concern f o r i t s own s e c u r i t y as w e l l as the s e c u r i t y of the Western World. Jones describes t h i s mixed motive: 49 The United States had already sensed t h a t i t would be c a l l e d upon t o lead the s o - c a l l e d "Free World" i n the century t o come, and about the only bond between the f r e e world nations was r e c i p r o c a l trade and commerce, person-to-person contact, mutual a s s i s t a n c e and loose m i l i t a r y a l l i a n c e s . Since our own s u r v i v a l hinged on t h i s arrangement, i t seemed imperative t h a t we e s t a b l i s h a foremost place i n the a i r , i n c l u d i n g c i v i l i n t e r n a t i o n a l a i r t r a n s p o r t (Jones 1960:229). The n e g o t i a t i o n s at Chicago showed t h a t U.S. policy-makers were very aware of the p o l i t i c a l leverage t h a t could be acquired from h o l d i n g a domin-ant p o s i t i o n i n the i n d u s t r y . For example, during the Chicago n e g o t i a t i o n s , one of t h e i r major concerns was t o convince the B r i t i s h to grant American a i r l i n e s f i f t h freedom r i g h t s . As described e a r l i e r , the B r i t i s h d i d not have t r a n s p o r t a i r c r a f t and r e s i s t e d f r e e l y g r a n t i n g t h i s commercial r i g h t f e a r i n g t h a t they would l o s e t h e i r chance to compete on i n t e r n a t i o n a l trunk routes. The United States thus o f f e r e d t o provide the B r i t i s h w i t h t r a n s p o r t a i r c r a f t so t h a t they would not f e e l as though they were a t a complete com-p e t i t i v e disadvantage. (The United States was i n such a strong p o s i t i o n t h a t the o f f e r would not jeopardize i t s own competitive advantage.) I t i s i n t e r -e s t i n g t o note t h a t the wording of the o f f e r made by B e r l e i m p l i e s t h a t the United States would use i t s p o s i t i o n as c h i e f s u p p l i e r of t r a n s p o r t a i r c r a f t t o favor c o u n t r i e s of whose p o l i c i e s i t approved. B e r l e s t a t e d e x p l i c i t l y t h a t the U.S. government i s prepared to make a v a i l a b l e c i v i l a i r t r a n s p o r t planes, when they can be released from m i l i t a r y s e r v i c e to those 50 c o u n t r i e s which recognize as we do the r i g h t of each n a t i o n t o maintain f r i e n d l y i n t e r c o u r s e w i t h others (qtd. i n Morgan 1945:13). I t does not seem too f a r - f e t c h e d to suggest t h a t the United States a l s o viewed expansion and development of American i n t e r n a t i o n a l a v i a t i o n as a use-f u l t o o l f o r w i e l d i n g s i m i l a r p o l i t i c a l i n f l u e n c e . The f i n a l m o t i v a t i o n behind U.S. proposals was c l e a r l y economic: due to i t s c ompetitive advantage, i t s i n d u s t r y stood to gain most i n an unregulated environment. Several c o u n t r i e s i n Europe and L a t i n America supported the American p o s i t i o n . In Europe the behaviour of the Scandinavian c o u n t r i e s , S witzerland and P o r t u g a l , can be explained by the f a c t t h a t these s t a t e s were small t r a f f i c generators. They r e a l i z e d t h a t they could gain a l a r g e r market share i n an unregulated environment than would ever be p o s s i b l e under any quota system d i v i d i n g t r a f f i c ; consequently, they favoured U.S. proposals (Burden 1945:118; Lim 1981:45). The support given by many small c o u n t r i e s , and par-t i c u l a r l y those i n L a t i n America, seems to have been i n f l u e n c e d by two con-s i d e r a t i o n s . F i r s t , these s t a t e s ' s e r v i c e s were not very developed (or i n some case n o n e x i s t e n t ) , and consequently, they d i d not have the immediate concern of p r o t e c t i n g t h e i r own i n d u s t r y . Many c o u n t r i e s were more i n t e r -ested i n seeing U.S. c i v i l a v i a t i o n develop f o r i t would then be able t o provide s e r v i c e s t o t h e i r c o u n t r i e s (Burden 1945:20; The Economist December 9, 1944:768). More i m p o r t a n t l y , these c o u n t r i e s were very v u l n e r a b l e to U.S. pressure, and could be coerced i n t o adopting a p o l i c y f r i e n d l y t o American i n t e r e s t s . Evidence of t h i s use of power i s found i n a r e p o r t i n 51 The Economist which noted t h a t the Mexican delegate denounced "the ' d i c t a -t o r i a l ' methods used by Mr. B e r l e i n seeking t h e i r [ L a t i n American] support" (The Economist November 11, 1944:634). When one considers the r e l a t i v e power d i s t r i b u t i o n s i n the post-war pe r i o d , a t f i r s t glance i t seems s u r p r i s i n g t h a t the United States was not able t o achieve i t s o b j e c t i v e s a t the Chicago Conference. In f a c t , Chicago seems t o have been a B r i t i s h v i c t o r y s i n c e the B r i t i s h were able to s t a l l a l l important d e c i s i o n s on the r e g u l a t i o n of commercial r i g h t s from being made. Thi s , of course, r a i s e s the question: why? Although the United States had both the m i l i t a r y and economic leverage to coerce the B r i t i s h to adopt p o l i c i e s i t favoured, i t was u n w i l l i n g t o pay the c o s t s of such an a c t i o n : a l i e n a t i n g i t s a l l y . This had relevance t o both i t s s h o r t run and long run f o r e i g n p o l i c y o b j e c t i v e s . At the time of the conference, World War I I was not yet over and although a l l i e d v i c t o r y was expected, the United States wanted to ensure t h a t i t would have B r i t i s h support i n d e f e a t i n g the Japanese once the Germans had c a p i t u l a t e d . The Americans wanted t o avoid provoking i l l - f e e l i n g and c r e a t i n g a r e l a t i o n s h i p based on m i s t r u s t (Thornton 1970:23-24). In more general terms, they were probably a l s o l o o k i n g ahead t o t h e i r post-war i n t e r e s t s i n b o l s t e r i n g t h e i r own s e c u r i t y through b u i l d i n g e xtensive l i n k s w i t h f r i e n d l y n a t i o n s . But a t the same time, however, the United States was not prepared t o compromise i t s own p o s i t i o n . Thus i t would appear t h a t U.S. p o l i c y was d i r e c t i o n l e s s — o n the one hand, the Americans were u n w i l l i n g t o pay the costs of promoting t h e i r p r e f e r r e d p o l i c y , w h i l e on the other hand, they were not w i l l i n g t o change t h e i r own p o s i t i o n . 52 A comment made by Taneja sheds some l i g h t on t h i s p e r i o d . He w r i t e s t h a t , i n the immediate post-war p e r i o d , U.S. p o l i c y was not coordinated. F o l l o w i n g the Chicago Conference, an A i r Coordinating Committee was organized t o a c t as a center f o r government a v i a t i o n p o l i c y and t o make sure t h a t there was agreement among va r i o u s government agencies (Taneja 1980:12). This would suggest t h a t i n t e r n a l c o n f l i c t s i n policy-making weakened U.S. a b i l i t y to achieve i t s goals. Another f a c t o r e x p l a i n i n g the outcome of the Chicago Conference i s a l s o l i n k e d t o the i s s u e of power f u n g i b i l i t y . Although the United States was overwhelmingly powerful i n general economic and m i l i t a r y terms, and c l e a r l y had the most power i n the i n d u s t r y i n terms of i t s t r a f f i c generating capa-b i l i t i e s (80% of transoceanic t r a f f i c o r i g i n a t e d from the U.S. [O'Connor 1971:22]), i t s possession and manufacture of c i v i l t r a n s p o r t a i r c r a f t , and even i t s c o n t r o l over s t r a t e g i c a l l y important bases (e.g. the Hawaiian i s l a n d s ) ;5 i t i s a l s o t r u e t h a t the B r i t i s h and Europeans had an important n e g o t i a t i n g ' t o o l . In order t o develop i t s i n t e r n a t i o n a l network, the United States needed access to a number of va l u a b l e r e f u e l l i n g i s l a n d s c o n t r o l l e d by these c o u n t r i e s . For example, an A t l a n t i c journey r e q u i r e d a stop a t Gander, which was s i t u a t e d i n the B r i t i s h colony of Newfoundland. Other B r i t i s h bases were l o c a t e d i n Egypt, I n d i a , Malaya and A u s t r a l i a (Taneja 1980:12). The Portuguese, w i t h t h e i r c o n t r o l over the Azores, and the I r i s h had s i m i l a r p o t e n t i a l instruments of leverage. 53 A n a l y s i s of the Bermuda Conference The i n i t i a l p o s i t i o n s put forward a t Bermuda by the B r i t i s h and Ameri-cans were, t o a great extent, a r e p e t i t i o n of t h e i r p o l i c i e s a t Chicago. However, c e r t a i n developments f a c i l i t a t e d t h e i r reaching a consensus. The B r i t i s h were experiencing a severe c r i s i s i n t h e i r balance of pay-ments and began t o negotiate a $3.75 b i l l i o n loan from the Americans (Thorn-ton 1970:35). This request was met w i t h considerable o p p o s i t i o n i n the United States (a p u b l i c p o l l i n the United States showed 70% were against the loan [Taneja 1980:13]). In the middle of the loan n e g o t i a t i o n s , B r i t a i n reversed i t s d e c i s i o n to s t a l l a i r t r a n s p o r t n e g o t i a t i o n s and requested to meet the Americans a t Bermuda to negotiate a b i l a t e r a l agreement. The a b i l -i t y of the United States t o provide a loan, and i n t h i s way i n f l u e n c e B r i t i s h p o l i c y i n i n t e r n a t i o n a l a v i a t i o n , provides a good example of how general economic p o t e n t i a l can be t r a n s l a t e d i n t o o b t a i n i n g a d e s i r e d outcome i n a s p e c i f i c i s s u e area. Stanley Morgan, a member of the U.S. d e l e g a t i o n t o Bermuda, described how the United States used the loan as leverage: During the few months before the Bermuda Conference, the State Department had been u r g e n t l y p r e s s i n g the B r i t i s h f o r t h i s meeting. I t had been s u b t l y pointed out t h a t the e f f e c t i t would have on the B r i t i s h loan n e g o t i a t i o n s i f a strong e f f o r t t o reach some agreement was not made before the loan came up f o r debate i n the Senate. I t was no s e c r e t t h a t the a i r l i n e s ' lobby would work a g a i n s t the B r i t i s h loan i f our a v i a t i o n i n t e r e s t s continued to be ignored (qtd. i n Jonsson 1987:114). 54 I t a l s o appears t h a t B r i t i s h eagerness t o adopt some form of i n t e r n a t i o n a l r e g u l a t i o n was i n f l u e n c e d by t h e i r l i m i t e d success i n secu r i n g h i g h l y r e s -t r i c t i v e agreements i n the immediate post-Chicago p e r i o d . They looked a t the success of the United States i n s i g n i n g b i l a t e r a l s , which exchanged the f i v e freedoms without r e s t r i c t i n g c a p a c i t y or frequency on any of the o f f e r e d s e r v i c e s , and r e a l i z e d t h a t the United States was able to use i t s supply of a i r c r a f t as a n e g o t i a t i n g t o o l i n a r r i v i n g a t agreements w i t h c o u n t r i e s "hungry f o r a i r c r a f t . " I t was c l e a r t o the B r i t i s h t h a t they could strengthen t h e i r own p o s i t i o n i n the a v i a t i o n i n d u s t r y q u i c k l y through access to U.S. funds and a i r c r a f t . In order t o do so, they were w i l l i n g to make c e r t a i n compromises. The urgency of a r r i v i n g a t an agreement was compounded by a s h i f t i n the country's view of i t s own f u t u r e p o t e n t i a l i n the a v i a t i o n i n d u s t r y . Research i n t o j e t p r o p e l l e d a i r c r a f t and a s l i g h t economic recovery, gener-ated a mood of optimism, and the B r i t i s h began t o b e l i e v e t h a t i n the long run they had a chance of meeting American competition. Consequently, they a l s o modified t h e i r p o s i t i o n on the r e s t r i c t i o n of f i f t h freedom r i g h t s f o r they r e a l i z e d t h a t these would be c r u c i a l t o the economic v i a b i l i t y of t h e i r own f u t u r e i n t e r n a t i o n a l trunk route s e r v i c e s (The Economist February 16, 1946). C e r t a i n new v a r i a b l e s a l s o i n f l u e n c e d the U.S. p o l i c y stance. As men-ti o n e d e a r l i e r , the United States now possessed a policy-making body which enhanced i t s a b i l i t y to p r i o r i t i z e and achieve p o l i c y o b j e c t i v e s . Second, although B r i t i s h need f o r a new loan increased U.S. r e l a t i v e power, the U.S. p o s i t i o n was s l i g h t l y weakened by i t s d e s i r e to secure a favourable outcome from B r i t a i n and the Commonwealth a t a co n c u r r e n t l y held telecommunications 55 conference. The United States was a l s o i n t e r e s t e d i n e l i m i n a t i n g i m p e r i a l preferences which d i s c r i m i n a t e d a g a i n s t i t (Thornton 1970:35). And one more f a c t o r i n f l u e n c e d the U.S. p o s i t i o n on f i f t h freedom r i g h t s . The Americans began t o appreciate the value of c e r t a i n f i f t h freedom r e s t r i c t i o n s as they came t o r e a l i z e t h a t an u n r e s t r i c t e d exchange of f i f t h freedom r i g h t s could work t o t h e i r disadvantage. The Economist reported on August 3, 1946 t h a t the U.S. State Department had declared t h a t i n f u t u r e n e g o t i a t i o n s the United States would not f r e e l y o f f e r f i f t h freedom r i g h t s . Instead, i t would o b t a i n f o r U.S. a i r l i n e s what i t could by hard bargaining (The Economist August 3, 1946:165-166). Although a c e r t a i n rapprochement had been reached between B r i t i s h and American i n t e r e s t s , p a r t i c u l a r l y on the f i f t h freedom question, i t i s s t i l l not c l e a r why the Americans were w i l l i n g to make such l a r g e concessions. For a country which would not gain, and was i n f a c t l i k e l y t o make lo s s e s i n a h i g h l y r e g u l a t e d environment, the acceptance of the IATA t a r i f f - f i x i n g mech-anism and the market-sharing scheme embodied i n the Bermuda c a p a c i t y p r i n -c i p l e s i s p u z z l i n g . Thornton e x p l a i n s U.S. support f o r a c a r t e l system by arguing t h a t U.S. a v i a t i o n p o l i c y was shaped by an " o v e r r i d i n g concern f o r n a t i o n a l defence or i t s s t a t e d e q u i v a l e n t , anti-communism" (Thornton 1970: 681). S p e c i f i c a l l y , U.S. behaviour was motivated by the view t h a t a c a r t e l would promote i t s s e c u r i t y i n t e r e s t s i n two ways. F i r s t , i t ensured the development of the i n t e r n a t i o n a l a v i a t i o n i n d u s t r i e s of other s t a t e s which i n tu r n b o l s t e r e d t h e i r economies. Thornton w r i t e s : U.S. p o l i c y c a l l e d f o r the maintenance of non-communist governments i n a l l s t a t e s not already communist. This 56 r e q u i r e d strong, economically healthy governments throughout the f r e e world. I t was a l s o assumed t o mean governments f r i e n d l y t o the United S t a t e s . Thus when a f o r e i g n country begged f o r favorable treatment from the United States government f o r t h e i r a i r l i n e , the United S t a t e s , f e a r f u l of weakening a f r i e n d l y government or of r e s t r i c t i n g the f o r e i g n exchange earning power of the seeker, f e l t o b l i g e d to a s s i s t (Thornton 1970:682). And second, the United States wanted to ensure t h a t i t r e t a i n e d the f r i e n d -s h i p of f o r e i g n governments whose cooperation i t needed i n the implementation of i t s chosen defense s t r a t e g i e s . For example, the United States S t r a t e g i c A i r Force needed access to bases i n I t a l y , Spain, P o r t u g a l , the U.K., Japan, and the Netherlands. Another c o n s i d e r a t i o n prompting the United States to support t h i s r e s t r i c t i v e regime may have been the stake t h a t the U.S. a i r -c r a f t manufacturing i n d u s t r y had i n s t i m u l a t i n g f o r e i g n demand f o r U.S. a i r -c r a f t . The preceding a n a l y s i s of the formation of the i n t e r n a t i o n a l c i v i l a v i a -t i o n regime would seem to support the view t h a t U.S. behaviour can be explained by the t h i r d set of reasons why a s t a t e might support a r e s t r i c t i v e a c a r t e l . The United States, due both to i t s power and as witnessed by i t s behaviour, was able and w i l l i n g to play the r o l e of a hegemon. I t s behav-i o u r was s e l f - i n t e r e s t e d , but a t the same time i t s w i l l i n g n e s s t o make con-cessions (or pay the cost of reduced p r o f i t s due t o a regulated environment) served the i n t e r e s t s of weaker nations which f o r a v a r i e t y of economic, p o l i -t i c a l and s e c u r i t y motivations wanted t o ensure the development of t h e i r own i n d u s t r i e s . U.S. hegemony was i n no way benevolent, f o r the United States 57 was q u i t e prepared to manipulate the i n t e r e s t s of nations or even coerce them i n t o adopting p o l i c i e s t h a t favoured U.S. concerns (e.g., as seen i n the f a c t t h a t the b i l l g r a n t i n g $3.75 b i l l i o n to the B r i t i s h was not introduced i n t o Congress u n t i l the end of the Bermuda Conference; and as seen i n the pressure placed on L a t i n American c o u n t r i e s a t Chicago by B e r l e ) . A f i n a l o bservation which can be drawn from the behaviour of the United States i s t h a t where i t s s e c u r i t y and economic i n t e r e s t s clashed, s e c u r i t y i n t e r e s t s were paramount. 58 NOTES 1 The Australian/New Zealand proposal took i t s cue from a French pro-posal a t the 1932 Disarmament Conference. The French had suggested t h a t a c o n t i n e n t a l , i n t e r - c o n t i n e n t a l or i n t e r - c o l o n i a l o r g a n i z a t i o n operate i n t e r -n a t i o n a l a v i a t i o n s e r v i c e s under the aegis of the League of Nations (Wagner 1943:15) 2 Jonsson provides u s e f u l diagrams t o i l l u s t r a t e the s i x freedoms. Freedom 1 Freedom 2: Freedom 3: Freedom 4: Freedom 5: Freedom 6: A* A A* A A* A' A* A A* A A* X B A, B, C, X: four s t a t e s A* : a i r l i n e of country A x"" ^ : d i r e c t i o n of route (Jonsson 1987:33) A* has r i g h t t o c o l l e c t t r a f f i c a t B and f l y the t r a f f i c to C. A* has r i g h t t o p i c k up i n X t r a f f i c t h a t i s bound f o r C and route i t through A. This t r a f f i c normally be-longs t o the a i r l i n e s of X and C. 59 3 The Chicago Convention d i d not d e f i n e "scheduled a i r s e r v i c e s . " 4 As of 1981 B r a z i l , China, Indonesia and the USSR had not signed the t r a n s i t agreement. Thus s t a t e s had t o n e g o t i a t e b i l a t e r a l s f o r the f i r s t two freedoms (Guildmann 1981:151). 5 The Hawaiian i s l a n d s were an important r e f u e l l i n g stop f o r f l i g h t s between A u s t r a l i a and Canada. The B r i t i s h , i n t e r e s t e d i n developing l i n k s w i t h and between the Commonwealth c o u n t r i e s , were eager to gain t r a n s i t as w e l l as commercial r i g h t s to them. 60 3. THE HEYDAY OF THE CARTEL: 1947-mid-1960s DESCRIPTION In the two decades t h a t followed, the c a r t e l system operated fundament-a l l y unchallenged. Knut Hammarskjold d i v i d e s the per i o d i n t o two d i f f e r e n t phases: the pioneering p e r i o d from the m i d - f o r t i e s i n t o the e a r l y f i f t i e s and the period of c o n s o l i d a t i o n from the f i f t i e s t o the e a r l y t o m i d - s i x t i e s (Hammarskjold 1979a:47). The Pioneering Period In the years immediately f o l l o w i n g Bermuda, a l a r g e number of b i l a t e r a l agreements based on the Bermuda I model were concluded. By the end of 1949, 200 b i l a t e r a l s had been signed. The United States was p a r t i c u l a r l y a c t i v e , n e g o t i a t i n g 40 b i l a t e r a l s i n the f i r s t two years (Jones 1960:231). This, of course, was not s u r p r i s i n g f o r i n "a war-ravaged world" i t was the only s t a t e which had "money, a i r p l a n e s , and a l a r g e number of p o t e n t i a l t r a v e l e r s " (Lowenfeld 1975a:40). The United States was very l i b e r a l i n i t s route grants, and i n r e t u r n i t was able t o ob t a i n extensive concessions from a l l c o u n t r i e s w i t h which i t negotiated. As a consequence, i t was able t o b u i l d up a " w o r l d - c i r c l i n g east-west a i r route system" (Jones 1960:233). The Europeans, the B r i t i s h and other Commonwealth nations i n t h e i r b i l a t e r a l n e g o t i a t i o n s w i t h each other were on the whole cautious about g r a n t i n g routes (Straszheim 1969:38). In L a t i n America two trends developed: a few northern s t a t e s were eager t o grant f o r e i g n c o u n t r i e s access to a v a r i e t y of routes w h i l e the other s t a t e s adopted a more p r o t e c t i v e a t t i t u d e t o route grants (Bogolasky 1978:96). The 61 A f r i c a n and Asian c o u n t r i e s were not s i g n i f i c a n t a c t o r s during t h i s p e r i o d . Most of these s t a t e s d i d not negoti a t e b i l a t e r a l s i n the pione e r i n g p e r i o d . Indeed, many d i d not even own t h e i r own a i r l i n e . These c o u n t r i e s s e r v i c e d by U.S. and European f l a g c a r r i e r s gave, f o r the most p a r t , u n i l a t e r a l access t o t h e i r markets. P o l i c y towards market-sharing v a r i e d among s t a t e s and t h i s was r e f l e c t e d i n the b i l a t e r a l s signed. However, i t should be understood t h a t the v a r i a -t i o n occurred w i t h i n the parameters set by the Bermuda p r i n c i p l e s . In other words, the agreements signed d i d not v i o l a t e t h i s aspect of the c a r t e l system. The United States adhered t o a l i b e r a l i n t e r p r e t a t i o n of the Bermuda p r i n c i p l e s ( i . e . , a 40-60 d i v i s i o n as opposed to a 50-50 market s p l i t ) . The only exception t o i t s more l i b e r a l p o l i c y was the r e l u c t a n c e t o provide "beyond r i g h t s " t o f o r e i g n c a r r i e r s i n r e t u r n f o r s i m i l a r p r i v i l e g e s i t had acquired i n other c o u n t r i e s . (Beyond r i g h t s enable a c a r r i e r to f l y to a po i n t i n a country g r a n t i n g the r i g h t and beyond to po i n t s i n any other country or c o u n t r i e s . ) In t h i s way, the United States prevented f o r e i g n c a r r i e r s from g a i n i n g a share i n the t r a f f i c moving from U.S. gateways i n t o the U.S. h i n t e r l a n d or beyond the United States ( S t o f f e l 1969:128). A few European s t a t e s , such as the Netherlands, Sweden, Norway and Denmark, and c e r t a i n northern L a t i n American s t a t e s f o l l o w e d l i k e the United States a more l i b e r a l i n t e r p r e t a t i o n of the Bermuda p r i n c i p l e s . The four European s t a t e s were p a r t i c u l a r l y keen on n e g o t i a t i n g an u n r e s t r i c t e d exchange of f i f t h f r e e -dom r i g h t s . However, most European s t a t e s (e.g., France, I t a l y , Belgium, I r e l a n d , Spain, P o r t u g a l , and Greece), most L a t i n American s t a t e s , the B r i t i s h and Commonwealth nations favoured a more r e s t r i c t i v e i n t e r p r e t a t i o n of the Bermuda p r i n c i p l e s . In t h e i r b i l a t e r a l n e g o t i a t i o n s they pursued a 62 50-50 s p l i t of the market on major routes. This was guaranteed by a v a r i e t y of s p e c i f i c c a p a c i t y c o n t r o l schemes. In the most r e s t r i c t i v e b i l a t e r a l s these might take the form of an agreement on pre-determined c a p a c i t y and frequency formulas' 1 or commercial revenue p o o l i n g . A l l the b i l a t e r a l s signed during t h i s p eriod e i t h e r i m p l i c i t l y or e x p l i -c i t l y condoned t a r i f f - f i x i n g by the IATA T r a f f i c Conferences. Although d i s -agreements occurred throughout the process of t a r i f f n e g o t i a t i o n s , they were not s u b s t a n t i a l and d i d not i n any way challenge t h i s fundamental p r i n c i p l e of the c a r t e l system. The Consolidation Period The p e r i o d from the mid-1950s t o the mid-1960s was marked by high t r a f f i c growth. A i r t r a n s p o r t expanded a t the annual r a t e of 15-20% (Hammar-s k j o l d 1979a:46-48). (See Table 1 and Table 3.) The decade was marked by three major developments: European demands f o r greater access to U.S. markets; the entry of a l a r g e number of c a r r i e r s from newly independent developing c o u n t r i e s ; and tensions a r i s i n g from s e r v i c e competition, U.S. attempts t o lower f a r e s against the o p p o s i t i o n of the European c a r r i e r s , and overcapacity (owing t o the i n t r o d u c t i o n of j e t s i n the e a r l y 1960s). For the most p a r t , these developments d i d not s i g n a l any fundamental change i n the c a r t e l system. With the beginning of economic p r o s p e r i t y and the development of new te c h n o l o g i e s ( i n p a r t i c u l a r , t h a t of j e t a i r c r a f t i n the e a r l y '60s), Euro-pean c o u n t r i e s found themselves i n a p o s i t i o n t o expand t h e i r a i r t r a n s p o r t i n d u s t r i e s . They f e l t t h a t they had made too many concessions t o the United 63 States i n the pioneering p e r i o d and began t o pressure f o r r e n e g o t i a t i o n s of b i l a t e r a l s . S t o f f e l , w r i t i n g i n 1959, described the s i t u a t i o n : Today many governments f e e l t h a t they were too generous to the United States when they made those agreements. They now seek t o p r o t e c t t h e i r own n a t i o n a l a i r l i n e by s t r e t c h i n g the l i b e r a l Bermuda p r i n c i p l e s t o s u i t t h e i r purposes or by asking f o r amendment or r e n e g o t i a t i o n ( S t o f f e l 1959:119). The major source of contention was the question of f i f t h freedom r i g h t s . The Europeans f e l t t h a t they had l i t t l e t o gain from f i f t h freedom r i g h t s i f t h e i r f l i g h t s stopped and turned around a t the i n t e r n a t i o n a l gate-ways of New York ( f o r t r a n s a t l a n t i c f l i g h t s ) and San F r a n c i s c o or Los Angeles ( f o r t r a n s p a c i f i c f l i g h t s ) . In c o n t r a s t , i t was c l e a r t h a t the United States was making l a r g e gains from the same p r i v i l e g e s granted i n Europe (e.g., an American c a r r i e r could land i n London or P a r i s and p i c k up passengers and then f l y on to a v a r i e t y of Eurasian centres: Rome, Cai r o , Bombay, e t c . ) . With the encouragement of a i r 7 c a r r i e r s such as A i r France, KLM, BOAC, and A i r I n d i a , which resented the a p p r o p r i a t i o n of t h e i r t r a f f i c by U.S. c a r -r i e r s , the European governments began t o demand greater concessions t o com-pensate f o r the uneven d i s t r i b u t i o n of b e n e f i t s . I n i t i a l l y , t h i s took the form of a t h r e a t by a number of s t a t e s i n c l u d i n g France, I t a l y , and I n d i a t o cancel b i l a t e r a l s unless the l i b e r a l i n t e r p r e t a t i o n of the Bermuda c a p a c i t y clauses was abandoned i n favour of predetermined c a p a c i t y and frequency. The United States made a few concessions. However, t h i s European t a c t i c was soon superseded by a new approach based on demands f o r " e q u a l i t y of 64 opportunity." States i n s i s t e d on r e c i p r o c i t y on a route-for-route basis, i n terms of t r a f f i c centres served, and the a c q u i s i t i o n of beyond r i g h t s . The European c a r r i e r s were granted access to Boston, New York, P h i l a d e l -phia, Chicago, and new routes to New York, San Francisco and Los Angeles as a quid pro quo for f i f t h freedom r i g h t s . S i m i l a r l y , c e r t a i n states (e.g., France, the Netherlands, and West Germany) won beyond r i g h t s to L a t i n America (Jones 1960:233-234; S t o f f e l 1959:128). U.S. c a r r i e r s ' market share began to decrease as European c a r r i e r s expanded t h e i r a c t i v i t y and became more competitive. In 1951 American car-r i e r s c a r r i e d 37.2% of t o t a l i n t e r n a t i o n a l t r a f f i c (measured i n ton-miles). This rose i n 1955 to 38.9% and began f a l l i n g subsequently: 33.4% i n 1960 and 31.4% i n 1961 ( L i s s i t z y n 1964:258). This trend became p a r t i c u l a r l y evident i n the North A t l a n t i c Market. In 1946 the United States had gener-ated 70% of the t r a n s a t l a n t i c and t r a n s p a c i f i c t r a f f i c and c a r r i e d about 80% of i t . During the consolidation period, although i t continued to generate about 70% of t r a n s a t l a n t i c t r a f f i c , i t s actual carriage f e l l to 40% (Jones 1960:234). Writing i n 1964, K i t t r i e said: The competitive p o s i t i o n of the American f l a g c a r r i e r s v i s - a - v i s the foreign a i r l i n e s has been a subject of great concern i n recent years. Having o r i g i n a l l y pleaded for complete l a i s s e z - f a i r e on the hope that the forces of supply and demand would ensure to the benefit of the United States l i n e s , our domestic c a r r i e r s have been fi n d i n g the competition of the r e v i t a l i z e d foreign car-r i e r s much too hard to meet ( K i t t r i e 1964:8). 65 However, r e g a r d l e s s df d e c l i n i n g market shares, the U.S. government continued r to s i g n b i l a t e r a l s which granted l a r g e concessions to f o r e i g n c a r r i e r s . Concessions f u r t h e r diminished U.S. t r a f f i c shares as new c a r r i e r s began competing i n markets p r e v i o u s l y monopolized by U.S. c a r r i e r s . Not s u r p r i -s i n g l y , U.S. c a r r i e r s and the p u b l i c protested. The f i r s t wave of c r i t i c i s m f o l l owed agreements made w i t h the Scandin-avian c o u n t r i e s , Germany, The Netherlands, and A u s t r a l i a . From 1952 to 1954 the United States began n e g o t i a t i o n s w i t h SAS over the p o l a r route to Green-land. The U.S. granted the route and gave SAS f i f t h freedom r i g h t s a t Anchorage (Thornton 1970:681). According to the terms of the German b i l a t -e r a l , Lufthansa obtained l u c r a t i v e o p erating r i g h t s on routes from Germany v i a i n termediate p o i n t s i n the United States ( i n c l u d i n g New York) and beyond to the Caribbean and South America ( L i s s i t z y n 1964:254; Thayer 1965:78-79). The Dutch agreement gave KLM operating r i g h t s on two important routes from Amsterdam t o New York and Curacao and Amsterdam to Montreal and on t o Houston. The Netherlands had l i t t l e t o o f f e r as a quid pro quo i n a i r t r a n s p o r t p r i v i l e g e s , and the agreement was concluded only a f t e r the Dutch government had r a i s e d the i s s u e t o the highest l e v e l . In a speech from the throne to Parliament the Dutch Prime M i n i s t e r made a s p e c i a l appeal t o the U.S. P r e s i d e n t ( L i s s i t z y n 1964:254). The A u s t r a l i a n s x obtained l u c r a t i v e o p e rating r i g h t s to London v i a San Francisco and New York, exchanging l e s s v a l u a b l e r i g h t s i n r e t u r n . The State Department argued t h a t f a i l u r e t o grant these routes would set an undesirable precedent ( L i s s i t z y n 1964:254). C r i t i c i s m of these agreements came from various q u a r t e r s . For example, American a i r c a r r i e r s and the American A i r Transport A s s o c i a t i o n c r i t i c i z e d 66 the agreement with West Germany complaining t h a t Lufthansa was g a i n i n g f i f t h freedom r i g h t s t o the detriment of U.S. domestic and i n t e r n a t i o n a l c a r r i e r s ( L i s s i t z y n 1964:252). In 1956 the Senate Committee on I n t e r s t a t e and Foreign Commerce held a hearing on " I n t e r n a t i o n a l A i r Agreements" and produced a r e p o r t which was h i g h l y c r i t i c a l of U.S. p o l i c i e s . The Committee recommended t h a t l e g i s l a t i o n be passed t h a t would r e s t r i c t P r e s i d e n t i a l review of the d e c i s i o n s of the CAB concerning c e r t i f i c a t e s f o r f o r e i g n a i r t r a n s p o r t a t i o n and f o r e i g n a i r c a r r i e r s . The purpose of t h i s measure was to increase the r o l e of economic as opposed to p o l i t i c a l c o n s i d e r a t i o n s i n the U.S. n e g o t i a t i o n of b i l a t -e r a l s . This l e g i s l a t i o n was not passed ( L i s s i t z y n 1964:253). In Congress, Senators Smathers, Mundt, and Capehart and Representatives Jarman and Bow c r i t i c i z e d uncompensated route awards and s t r e s s e d t h a t t r a f f i c c a r r i e d by a country's a i r l i n e s should be r e l a t e d t o i t s t r a f f i c generation (Congressional Record A p r i l 4:5136 qtd. i n Thayer 1965:78). The Eisenhower A d m i n i s t r a t i o n responded by reminding i t s c r i t i c s t h a t during b i l a t e r a l n e g o t i a t i o n s , U.S. r e p r e s e n t a t i v e s "are charged w i t h the r e s p o n s i -b i l i t y f o r t a k i n g i n t o c o n s i d e r a t i o n the i n t e r e s t s of the t r a v e l i n g p u b l i c , the i n t e r e s t s of the areas served by a i r t r a n s p o r t operations, and the i n t e r -e s t s of the a i r t r a n s p o r t i n d u s t r y . " Furthermore, the State Department s t a t e d t h a t "the government makes every e f f o r t t o balance c o n s c i e n t i o u s l y a l l of these i n t e r e s t s so t h a t the welfare of the United States as a whole w i l l be served" ( L i s s i t z y n 1964:253). I t added t h a t , i n many cases, the United States had no choice "but t o be l i b e r a l w i t h other members of the f r e e world a l l i a n c e " (Department of State B u l l e t i n June 24, 1957:1012-13 qtd. i n Thayer 1965:79) . I 67 Following 1957, the United States became l e s s l i b e r a l i n i t s route con-ces s i o n s . For example, KLM, A l i t a l i a , and SAS a l l f a i l e d t o o b t a i n routes from Europe t o the American West Coast ( L i s s i t z y n 1964:255; Straszheim 1969: 40). S i m i l a r l y , the United States denied the Japanese r i g h t s t o complete an around-the-world f l i g h t . This a c t i o n l e d to d i p l o m a t i c tensions and the is s u e was not solved u n t i l 1965 when, i n exchange f o r access to New York and A t l a n t i c , the United States was given landing r i g h t s i n Osaka and, i n a d d i -t i o n , beyond r i g h t s from Tokyo (Straszheim 1969:41). The second wave of c r i t i c i s m focused not on what were perceived as U.S. "route give-aways" but r a t h e r on d i s t u r b i n g developments i n the p o l i c y of other s t a t e s : p a r t i c u l a r l y as seen i n Europe and L a t i n America. I t was found t h a t a number of s t a t e s were adopting r e s t r i c t i v e p r a c t i c e s and were v i o l a t i n g or abusing Bermuda c a p a c i t y standards. For example, c e r t a i n coun-t r i e s were p r e s c r i b i n g maximum t r a f f i c allowances, t r y i n g t o make c a r r i e r s pay a percentage t o the n a t i o n a l c a r r i e r on t r a f f i c c a r r i e d , r e s t r i c t i n g f i f t h freedom allowances i n an a r b i t r a r y f a s h i o n , even t r y i n g t o c l o s e sec-t i o n s between two c o u n t r i e s and preventing t h i r d p a r t i e s from c a r r y i n g t r a f f i c i n the re g i o n , l i m i t i n g frequencies, i n s i s t i n g t h a t f o r e i g n c a r r i e r s use l o c a l t r a v e l agents (who o f t e n were more i n t e r e s t e d i n promoting t h e i r n a t i o n a l c a r r i e r ' s t r a f f i c ) , and charging f o r e i g n c a r r i e r s e x o r b i t a n t fees f o r the use of ground s e r v i c e s ( i n most cases c a r r i e r s were forced t o use the l o c a l l y a v a i l a b l e s e r v i c e s ) (Slotemaker 1966:905). Although these s t a t e s were more than eager t o r e s t r i c t U.S. f i f t h freedom r i g h t s , they were, i n e f f e c t , abusing p r i v i l e g e s granted to t h e i r c a r r i e r s by the United States by a l l o w i n g c a r r i a g e of excessive volumes of f i f t h freedom t r a f f i c . In Europe, 68 KLM, SAS and Sabena were s i n g l e d out as the major offenders i n such a c t i v i t y ( L i s s i t z y n 1964:236). 2 The Kennedy A d m i n i s t r a t i o n appointed a nonpartisan group to i n v e s t i g a t e these complaints. The group submitted i t s conclusions i n the 1961 " P r o j e c t Horizon" Report of the Task Force on N a t i o n a l A v i a t i o n Goals i n a hearing held before the A v i a t i o n Subcommittee of the Senate Committee on Commerce. In a d d i t i o n t o confirming the occurrence of r e s t r i c t i v e p r a c t i c e s and abuse of f i f t h freedom p r i v i l e g e s , the r e p o r t a l s o brought a t t e n t i o n t o the i n c r e a s i n g tendency of f o r e i g n c a r r i e r s t o strengthen t h e i r bargaining p o s i -t i o n v i s - a - v i s the U.S. through the formation of pools (e.g., the Common-wealth pool of B r i t i s h , A u s t r a l i a n , Indian, and Canadian a i r l i n e s ) . A f u r t h e r o bservation was a l s o made: c e r t a i n c a r r i e r s , p a r t i c u l a r l y L a t i n American ones, were undercutting IATA r a t e s and thereby d i v e r t i n g t r a f f i c from U.S. c a r r i e r s ( L i s s i t z y n 1964:256). The i n v e s t i g a t i o n had two consequences. F i r s t , the CAB introduced a proposal which would empower the Board t o request f o r e i g n c a r r i e r s t o provide data on t h e i r t r a f f i c a c t i v i t i e s and r e q u i r e them to f i l e t h e i r schedules w i t h the Board f o r approval ( K i t t r i e 1964:6-7). This would a l l o w the United States to enforce i t s p o s i t i o n on f i f t h freedom r i g h t s . I f the Board found t h a t abuses were o c c u r r i n g , i t would be able t o suspend operations. F u r t h e r -more, t h i s power would give the CAB a bargaining t o o l i n i t s campaign against r e s t r i c t i v e p r a c t i c e s . Not s u r p r i s i n g l y , the proposal was met w i t h strong p r o t e s t s from BOAC, SAS, KLM, and Sabena which moved t h a t the CAB lacked the power t o amend f o r e i g n a i r c a r r i e r permits i n the manner proposed ( K i t t r i e 1964:6-7; L i s s i t z y n 1964:255). A f t e r a major debate i n the CAB and Congress, the proposal was dropped and "the b a s i c c o n c l u s i o n was t h a t such a c t i o n was 69 l a r g e l y u n j u s t i f i e d and would p r e c i p i t a t e r e t a l i a t i o n abroad" (qtd. i n Straszheim 1969:208). 3 The second consequence was a P r e s i d e n t i a l Order of 1961 t o make a thorough study of U.S. p o l i c y . The i n v e s t i g a t i o n gave r i s e t o a 1963 p o l i c y statement t h a t r e i t e r a t e d support f o r the - b i l a t e r a l entry system and the Bermuda c a p a c i t y p r i n c i p l e s . I t encouraged the government t o seek adequate access f o r U.S. c a r r i e r s to f o r e i g n markets, to promote t r a v e l to the U.S., and encourage the purchase of U.S. a i r c r a f t . Next, i t encouraged the CAB t o gi v e t e c h n i c a l and f i n a n c i a l a s s i s t a n c e t o l e s s developed c o u n t r i e s . And f i n a l l y , i t supported the IATA f a r e machinery but asked Congress t o give the CAB a u t h o r i t y t o set p r i c e s and veto t a r i f f s t h a t i t considered unreason-able. This proposal was a l s o a response to the Chandler c r i s i s , which w i l l be discussed s h o r t l y . The proposal was not adopted (Taneja 1980:18; Straszheim 1969:204; Haanappel 1984:31). 4 The 1963 p o l i c y statement con-cluded: A w e l l reasoned p o l i c y . . . w i l l c a r r y us f a r toward the primary o b j e c t i v e of U.S. i n t e r n a t i o n a l a i r t r a n s p o r t p o l i c y : t o develop and maintain an expanding, economi-c a l l y and t e c h n o l o g i c a l l y e f f i c i e n t i n t e r n a t i o n a l a i r t r a n s p o r t system best adapted t o the growing needs of the Free World, and to assure a i r c a r r i e r s of the United St a t e s , a f a i r and equal opportunity to compete i n world a v i a t i o n markets (qtd. i n Straszheim 1969:204) The c o n s o l i d a t i o n p e r i o d a l s o saw new competition e n t e r i n g the commer-c i a l a v i a t i o n i n d u s t r y . From 1954 to 1958 more than 75 new i n t e r n a t i o n a l a i r l i n e s entered the scheduled i n t e r n a t i o n a l f i e l d . Of these, 45 a c t u a l l y 70 s u r v i v e d and continued t o operate (Jones 1960:234). This p r o l i f e r a t i o n was p r i m a r i l y due to a s t r u c t u r a l change i n the i n t e r n a t i o n a l community: d e c o l -o n i z a t i o n . With the gaining of independence, many new nations sought to enter i n t o the i n t e r n a t i o n a l a v i a t i o n market. Most had n e i t h e r m a t e r i a l nor t e c h n i c a l resources to compete e f f e c t i v e l y . However, the developed s t a t e s were ready to provide a i d i n the form of c a p i t a l investment, t e c h n i c a l a s s i s t a n c e and a i r c r a f t l e a s i n g . The United States was p a r t i c u l a r l y a c t i v e . From 1956 to 1961 i t provided almost $300 m i l l i o n i n c a p i t a l a s s i s t a n c e . Of t h i s , $136 m i l l i o n was i n the form of Export-Import Bank loans f o r the purchase of U.S. a i r c r a f t . However, the a v a i l a b i l i t y of these loans was not n o n - d i s c r i m i n a t o r y . The United States a l s o provided a i d through the Agency f o r I n t e r n a t i o n a l Development and t e c h n i c a l a s s i s t a n c e through ICAO (Straszheim 1969:28). As mentioned e a r l i e r , the 1963 P o l i c y Statement made e x p l i c i t reference to the need t o encourage the development of a v i a t i o n i n l e s s developed c o u n t r i e s (LDC). The Europeans, while p r o v i d i n g a s s i s t a n c e t o s e v e r a l LDC c o u n t r i e s i n the form of f i n a n c i a l and t e c h n i c a l a i d , were f a i r l y cautious i n g r a n t i n g t h e i r a i r l i n e s access to European gateways. Many i n s i s t e d on s p e c i f i c c a p a c i t y r e s t r i c t i o n s , or granted access s u b j e c t t o p o o l i n g arrangements (Straszheim 1969:38). The United States was more l i b e r a l i n i t s route grants. For example, ag a i n s t CAB o p p o s i t i o n , the White House supported the g r a n t i n g of access to New York f o r A i r A f r i q u e and N i g e r i a n Airways. In exchange, Pan American Airways r e c e i v e d a d d i t i o n a l route grants i n A f r i c a . In e x p l a i n i n g t h i s unequal exchange, the State Department s t a t e d t h a t these agreements were c o n s i s t e n t w i t h the United S t a t e s ' a i d program t o A f r i c a (qtd. i n Straszheim 1969:41). The i n i t i a l 71 f o r e i g n a s s i s t a n c e was not s u f f i c i e n t to make most LDC c a r r i e r s economically v i a b l e , and heavy government s u b s i d i z a t i o n was r e q u i r e d to continue opera-t i o n s . In order t o p r o t e c t n a t i o n a l c a r r i e r s from f o r e i g n competition, LDC governments f r e q u e n t l y adopted h i g h l y r e s t r i c t i v e p o l i c i e s . Throughout the c o n s o l i d a t i o n p e r i o d , government a t t i t u d e s towards r a t e -making procedures l a r g e l y remained the same. The IATA system was not free of c r i s e s ; however, disagreements as a r u l e ended i n compromise. Unfortu-n a t e l y , due t o the secrecy surrounding the IATA conferences, i n f o r m a t i o n about n e g o t i a t i o n s and p a r t i c u l a r l y disagreements i s d i f f i c u l t to o b t a i n . Nevertheless, i t i s p o s s i b l e to i d e n t i f y three types of challenges which the IATA c a r t e l was forced to meet: s e r v i c e competition, U.S. pressure to lower f a r e s , and i l l e g a l d i s c o u n t i n g which r e s u l t e d from overcapacity i n the e a r l y 1960s. The operation of the IATA c a r t e l v i r t u a l l y e l i m i n a t e d p r i c e competition, and consequently, a i r l i n e s r e s o r t e d to other methods of a t t r a c t i n g passen-gers; namely, s e r v i c e competition. S e r v i c e competition could take a v a r i e t y of forms: e.g., i n meal and d r i n k s e r v i c e , lounge s e r v i c e , s e a t i n g d e n s i t y , baggage allowance, and even i n the p r o v i s i o n of g i f t s . The T r a f f i c Confer-ences t r i e d t o r e g u l a t e t h i s by p r o v i d i n g r u l e s r e l a t i n g t o c o n d i t i o n s of s e r v i c e . However, disputes o f t e n arose, p a r t i c u l a r l y when new s e r v i c e s were being introduced by c a r r i e r s . Perhaps one of the most p u b l i c i z e d contro-v e r s i e s d uring t h i s p eriod was the i n - f l i g h t entertainment ban. In 1961, TWA made a l a r g e investment i n p r o v i d i n g i n - f l i g h t entertainment f o r i t s passen-gers. The IATA c a r r i e r s protested and c a l l e d f o r the d i s m a n t l i n g of t h i s system, warning t h a t i t would lead to c o s t l y s e r v i c e competition. IATA argued t h a t t r a f f i c would not i n c r e a s e as a consequence of the entertainment, 72 and i n s t e a d , a i r l i n e s would be forced to increase r a t e s to pay f o r t h i s c o s t l y perk. At the 1964 IATA Athens Conference, v i r t u a l l y a l l c a r r i e r s , l e d by Quantas, refused t o d i s c u s s the i s s u e of r a t e s u n t i l the entertainment i s s u e had been s e t t l e d . In response, the a n t i - t r u s t d i v i s i o n of the J u s t i c e Department advised the CAB to re-examine "the e n t i r e concept of IATA conference machinery and the CAB immunization of agreements and r e s o l u t i o n s " which "are per se v i o l a t i o n s of the Sherman Act" (qtd. i n P i l l a i 1969:43). The i s s u e was r e s o l v e d at the conference i n Vienna, where i t was agreed t h a t c a r r i e r s would be allowed t o o f f e r i n - f l i g h t entertainment, but a $2.50 charge per headset would be l e v i e d . The CAB approved the d e c i s i o n ( P i l l a i 1969:40-42). From the e a r l y '50s on, the United States was the major proponent of lowering r a t e s and was c o n s i s t e n t l y opposed i n i t s i n i t i a t i v e s by the Euro-peans. The mandate of the t r a f f i c conferences was t o f i x r a t e s a t "reason-able l e v e l s " paying due regard "to a l l r e l e v a n t f a c t o r s such as cost of oper-a t i o n and reasonable p r o f i t s " ( P i l l a i 1969:57-58). However, there were two problems a s s o c i a t e d w i t h t h i s task. F i r s t , the word "reasonable" was e s s e n t i a l l y ambiguous. And second, there was a l a c k of data a v a i l a b l e to the IATA Cost Committee which would enable i t to make accurate cost-based proposals. The United States i n i t s a l l e g a t i o n s t h a t r a t e s were too high \ based i t s c a l c u l a t i o n s on i t s own e f f i c i e n t operating c o s t s , on the example of below-IATA r a t e s being charged by L o f t l e i d e r on i t s North A t l a n t i c s e r v i c e s , and on the f a c t t h a t U.S. non-scheduled a i r l i n e s were o f f e r i n g non-s u b s i d i z e d t r a n s a t l a n t i c s e r v i c e s a t l e v e l s below the IATA p r i c e s (Keynes 1964:177-178). On the b a s i s of these c a l c u l a t i o n s , the United States f e l t t h a t the Europeans' attempt to preserve a r t i f i c i a l l y high p r i c e s should be 73 challenged. This sentiment was expressed by the Senate Committee on Commerce i n 1963: The prime need f o r r a t e c o n t r o l i s not the p r o t e c t i o n of U.S. f l a g c a r r i e r s from the low r a t e s of f o r e i g n competi-t o r s , but r a t h e r the p r o t e c t i o n of the American p u b l i c from excessive and unreasonable r a t e s charged by IATA c a r r i e r s w i t h the a c t i v e a s s i s t a n c e of t h e i r governments. . . . As noted e a r l i e r i n t h i s r e p o r t , f o r e i g n c a r r i e r s and t h e i r governments have pursued a h i g h - r a t e p o l i c y which a r i s e s from higher costs and a d e s i r e t o o f f s e t l o s s e s on uneconomic routes. This p o l i c y , from a l l i n d i -c a t i o n s w i l l continue. The U.S. f l a g c a r r i e r s are the most e f f i c i e n t i n the world and can a f f o r d , and have pub-l i c l y d eclared on many occasions t h a t they wish, to charge lower r a t e s than t h e i r f o r e i g n competitors. I t i s the committee's f i r m b e l i e f t h a t the a d d i t i o n a l powers contained i n the b i l l as reported w i l l most e f f e c t i v e l y enable the Board to pursue i t s , as w e l l as U.S. f l a g c a r r i e r s ' , announced p o l i c y of p r e s s i n g f o r lower i n t e r -n a t i o n a l a i r fares ( L i s s i t z y n 1964:263). The United States had l i m i t e d success i n lowering f a r e s by i n t r o d u c i n g the T o u r i s t Class i n 1952 and economy f a r e s on the North A t l a n t i c i n the s p r i n g of 1958. In 1949 Pan American had proposed the implementation of a T o u r i s t s e r v i c e on the North A t l a n t i c . The plan was f i n a l l y endorsed three years l a t e r ; however, the agreed f a r e was 20% higher than the p r i c e suggested by the American c a r r i e r (Keynes 1964:177). Economy f a r e s introduced on the 74 North A t l a n t i c i n 1958, followed a proposal made by Pan Am the year before. The agreed f a r e was 13% lower than the t o u r i s t f a r e i n e f f e c t , although Pan Am had pressed f o r a 25% r e d u c t i o n (Keynes 1964:177). Keynes, a n a l y z i n g these i n c i d e n t s , w r i t e s : there i s no doubt t h a t the higher l e v e l of f a r e s (and lower d e n s i t y of seating) provided f o r i n the f i n a l l y adopted agreement were brought about by the need t o accommodate the views of European c a r r i e r s (Keynes 1964: 180). When t a r i f f disagreements arose i n 1956 and 1962-1963, the CAB was even l e s s s u c c e s s f u l i n lowering p r i c e s . The 1956 c o n f l i c t began when the CAB announced i t s i n t e n t i o n t o disapprove an IATA agreement p r o v i d i n g f o r a 10% increase i n f i r s t - c l a s s f a r e s on the North A t l a n t i c . The CAB f e l t t h i s proposal should be accompanied by a r e d u c t i o n i n t o u r i s t f a r e s , saying, " t o u r i s t f a r e s g e n e r a l l y [were] higher than can be j u s t i f i e d on the b a s i s of a standard of s e r v i c e . . . designed to meet the needs of a mass t r a n s p o r t a -t i o n medium" (qtd. i n Keynes 1964:180-181). However, the CAB reversed i t s stand and approved f a r e r e s o l u t i o n s f o r the 1956 season due to p r o t e s t s by f o r e i g n governments and IATA members. At the 1962 conference i n Chandler, A r i z o n a , i n response to f i n a n c i a l d i f f i c u l t i e s ( f o l l o w i n g the i n t r o d u c t i o n of j e t a i r c r a f t t h a t r e s u l t e d i n temporary o v e r c a p a c i t y ) , the IATA membership re s o l v e d t o increase North A t l a n t i c economy round t r i p f a r e s by 5%. The CAB, which had been advocating a decrease i n f a r e s to r e f l e c t lower j e t operating c o s t s , announced i t s d i s a p p r o v a l of the IATA r e s o l u t i o n . The B r i t i s h govern-ment threatened to d e t a i n U.S. planes v i o l a t i n g the agreement. European c a r r i e r s and governments j o i n e d the B r i t i s h i n pr e s s u r i n g the CAB t o reverse 75 i t s d e c i s i o n . The U.S. Secretary of State wrote t o the CAB, impl y i n g t h a t the absence of government a u t h o r i t y over i n t e r n a t i o n a l r a t e s made i t neces-sary f o r the CAB t o r e t r e a t from i t s p o s i t i o n . T h i s , i n f a c t , was not the case, f o r as Keynes points out: The a v a i l a b l e a l t e r n a t i v e t o r e t r e a t was, then, the use (or threatened use) of suspension power to most B r i t i s h and other s e r v i c e s conducted a t r a t e s which were i n our op i n i o n too high. \ Why was t h i s course not adopted? B r i e f l y because n e i t h e r the State Department nor the Board had, or a t any r a t e would admit to having, a u t h o r i t y t o take t h i s a c t i o n , which was c l e a r l y w i t h i n the pr e r o g a t i v e of the United States' government (Keynes 1964:185-186). At Montreal, the a i r l i n e s agreed t o a minor adjustment i n the r a t e s t r u c t u r e , and the CAB gave i t s approval t o the f a r e i n c r e a s e ( P i l l a i 1969:7-8). The r u l e of unanimity f o r f a r e r e s o l u t i o n s made i t very d i f f i c u l t f o r U.S. c a r r i e r s and the CAB t o implement lower f a r e s through the IATA framework. Thus, the United States r e s o r t e d to a new t a c t i c : the encouragement of non-scheduled low-priced operations working outside the IATA framework. As w i l l be seen s h o r t l y , t h i s proved to be a major development which weakened the IATA t a r i f f - f i x i n g c a r t e l . The f i n a l challenge t o the IATA c a r t e l during t h i s p e r i o d , r e s u l t e d from the i n t r o d u c t i o n of j e t s i n 1960-1961. As p r e v i o u s l y mentioned, the j e t s created temporary overcapacity and consequent f i n a n c i a l problems f o r c e r t a i n c a r r i e r s . I l l e g a l d i s c o u n t i n g spread e x t e n s i v e l y . 5 The problem was debated i n IATA, and c a r r i e r s pledged to d i s c o n t i n u e these p r a c t i c e s . IATA t r i e d to 76 curb t h i s a c t i v i t y through i t s enforcement mechanism; however, i t s attempts were l a r g e l y u n s u c c e s s f u l . By 1963 demand f o r commercial t r a f f i c s e r v i c e s increased and the problem of d i s c o u n t i n g l a r g e l y disappeared except i n L a t i n America and the Middle East (Straszheim 1969:142). The problem reappeared i n f u l l f o r c e i n the mid-'70s with the entry of wide-bodied a i r c r a f t . l Summary The three developments during t h i s p e r i o d : increased European aggres-siveness, the entry of new c a r r i e r s i n t o i n t e r n a t i o n a l markets, and tensions d i s r u p t i n g the smooth op e r a t i o n of IATA p r i c e - f i x i n g had v a r y i n g impacts on the c a r t e l system. The c o n f l i c t s a r i s i n g from European and other s t a t e s ' demands f o r new gateways and beyond r i g h t s from the United States and f o r a greater share of i n t e r n a t i o n a l markets i n general d i d not r e f l e c t a breakdown of the c a r t e l system. The various r e n e g o t i a t i o n s of the terms of market-sharing f e l l w i t h i n the parameters s e t by the Bermuda c a p a c i t y p r i n c i p l e s . The only dimension of s t a t e s ' aggression which may be seen as a departure from the Bermuda p r i n c i p l e s was the a r b i t r a r i l y r e s t r i c t i v e r e g u l a t i o n of f o r e i g n f i f t h freedom t r a f f i c and the c a r r i a g e of excessive volumes of f i f t h freedom t r a f f i c by c e r t a i n s t a t e s ' c a r r i e r s . In the l a t t e r case, s t a t e s were obv i o u s l y v i o l a t i n g the r u l e t h a t c a p a c i t y should be a l l o c a t e d according to primary j u s t i f i c a t i o n t r a f f i c . The extent of these abuses i s undocumented and, consequently, i t i s d i f f i c u l t t o judge t h e i r s i g n i f i c a n c e . However, i t would seem t h a t f o r the most p a r t the parameters of a 40-60 market s p l i t were not abandoned i n s t a t e s ' b i l a t e r a l n e g o t i a t i o n s over t r a f f i c r i g h t s , c a p a c i t y , and frequency r e s t r i c t i o n s . The entry of new c a r r i e r s i n t o i n t e r n a t i o n a l markets increased competition on i n t e r n a t i o n a l routes. This 77 had an impact on the s i z e of c e r t a i n s t a t e s ' market shares and was t o be one of the f a c t o r s t h a t i n f l u e n c e d a change i n U.S. p o l i c y i n the f u t u r e ; how-ever, t h i s development d i d not d i r e c t l y challenge the three p r i n c i p l e s on which the c a r t e l system was based. The appearance of s e r v i c e competition and U.S. pressures to lower IATA f a r e s produced c e r t a i n tensions a t the IATA conferences, but they d i d not i n themselves challenge the b a s i c p r i n c i p l e of m u l t i l a t e r a l t a r i f f - f i x i n g — p a r t i c u l a r l y s i n c e the disputes were resolved. However, i l l e g a l d i s c o u n t i n g d i d c o n s t i t u t e a v i o l a t i o n of t h i s b a s i c c a r t e l system p r i n c i p l e . As i n the case of f i f t h freedom v i o l a t i o n s , the extent t o which i l l e g a l d i s c o u n t i n g was p r a c t i c e d i s undocumented, and thus, once again, i t i s impossible to determine the s i g n i f i c a n c e of t h i s development. Straszheim argues t h a t i l l e g a l d i s c o u n t i n g was s h o r t - l i v e d (Straszheim 1969:142). Consequently, one can only suggest t h a t the c a r t e l system may have weakened f o r a short period during which these p r a c t i c e s were adopted. However, one can a l s o conclude t h a t i n general the p r i n c i p l e s of the c a r t e l system continued t o be embodied i n s t a t e s ' r e g u l a t i o n of the a v i a t i o n i n d u s t r y from the l a t e 1940s to the mid-1960s. 78 ANALYSIS During the "heyday" of the cartel, states supported the regime. To a certain extent, their behaviour may have been influenced by economic argu-ments that posited that in a deregulated environment predatory pricing, market chaos and loss of services would ensue. However, this consideration does not seem to have been the main motivating force behind their conduct. With the exception of the United States, countries supported the cartel because they felt that this nature of regulation would ensure the development of their own industries. States were interested in establishing their own air carrier services for a variety of economic, political and security related motivations. Their operations were inefficient and i t was clear that in an unregulated environment their carriers would not be able to compete with efficient U.S. carriers. As has been described, within this category of states, a distinction in approach to the granting of market access and market-sharing existed. The adoption of a more liberal or a more restrictive interpretation of the Bermuda capacity clauses by states reflected varying concerns over the degree to which they believed their industry should be protected. In many cases, this expressed either, in the case of the former, a weaker commitment, or in the case of the latter, a stronger commitment to the cartel system. But in both cases, at a fundamental level, the states supported the principles of the cartel. European and Latin American states which were reluctant to grant foreign carriers market access and which tended to interpret the Bermuda capacity principles restrictively were clearly very concerned about their market shares. These states either had inefficient industries and/or were primarily third and fourth freedom traffic carriers. States belonging to the latter category were adamant about controlling fifth 79 freedom r i g h t s which allowed f o r e i g n c a r r i e r s t o compete i n t h e i r t h i r d and f o u r t h freedom markets. The newly emergent A f r i c a n s t a t e s a l s o favoured more r e s t r i c t i v e p o l i c i e s , a l t h o u g h i n the immediate post-war p e r i o d , these s t a t e s had given f o r e i g n c a r r i e r s ( e s p e c i a l l y the United States) f a i r l y l i b e r a l access t o t h e i r markets. This anomaly may be e a s i l y explained. In the immediate post-war p e r i o d c o l o n i a l s t a t e s d i d not possess the resources to e s t a b l i s h a i r c r a f t i n d u s t r i e s . Consequently, they were q u i t e happy t o r e c e i v e any form of s e r v i c e which other s t a t e s were w i l l i n g to provide. As these s t a t e s gained independence, they became i n t e r e s t e d i n e s t a b l i s h i n g t h e i r own i n d u s t r i e s . The c h i e f motivation seems to have been p r e s t i g e c o n s i d e r a t i o n s . This view i s supported by the comments of the Ghanian M i n i s t e r of Transport who s t a t e d i n 1960 t h a t h i s government would support uneconomic operations i n order "to expand and develop Ghanian i n f l u e n c e to the g r e a t e s t extent p o s s i b l e i n A f r i c a and elsewhere" (qtd. i n P i l l a i 1969:16). The operations of the undeveloped s t a t e s were h i g h l y i n e f f i c i e n t and r e q u i r e d both f i n a n c i a l and t e c h n i c a l a i d from developed c o u n t r i e s and heavy s u b s i d i z a t i o n from n a t i o n a l governments. Consequently, i t i s not s u r p r i s i n g t h a t these s t a t e s were i n favour of the more r e s t r i c t i v e v e r s i o n of the c a r t e l system. The s t a t e s t h a t opted f o r a more l i b e r a l c a r t e l system based on l i b e r a l route access and a l e s s r e s t r i c t i v e i n t e r p r e t a t i o n of Bermuda c a p a c i t y clauses tended, f o r the most pa r t , to be small t r a f f i c generators. The Netherlands, Sweden, Norway and Denmark, four s t a t e s belong-i n g t o t h i s group, i n p a r t i c u l a r favoured fewer r e s t r i c t i o n s on f i f t h freedom t r a f f i c . These s t a t e s were more l i k e l y to gain access t o a l a r g e r market share i n a l e s s r e s t r i c t e d environment than i n a system i n which f i f t h f r e e -dom c a r r i a g e was r i g i d l y r e l a t e d to t r a f f i c generating c a p a b i l i t i e s . In the 80 case of c e r t a i n L a t i n American s t a t e s , Bogolasky suggests, a d i f f e r e n t motiv-a t i o n f o r g r a n t i n g f o r e i g n c a r r i e r s l i b e r a l route access and a l a r g e r market share e x i s t e d . These s t a t e s were i n t e r e s t e d i n encouraging tourism and f e l t t h a t by g r a n t i n g f o r e i g n c a r r i e r s a greater share of t h e i r market, they would be guaranteed a l a r g e r volume of t o u r i s t s (Bogolasky 1978:95-97). The United States, l i k e other s t a t e s , wanted to develop and expand i t s own i n d u s t r y . The prospect of economic b e n e f i t s and the d e s i r e t o e s t a b l i s h an i n t e r n a t i o n a l communications network seems to have been i t s primary motiv-a t i o n . Commenting on the l a t t e r , Jones e x p l a i n s : The f r e e world nations are h e l d together only by t h e i r common n a t i o n a l i n t e r e s t s , mutual a s s i s t a n c e and coopera-t i o n , and m i l i t a r y a l l i a n c e s . I t seems obvious t h a t com-munications by means of r a p i d and e f f i c i e n t t r a n s p o r t a -t i o n of person, property, and i n f o r m a t i o n i s of absolute n e c e s s i t y t o the e x i s t e n c e of such communities of n a t i o n s ; and s i n c e the l e a d e r s h i p of these hegemonies has been entrusted to the United States, i t f o l l o w s t h a t the United States must e s t a b l i s h and maintain a foremost place i n t h i s most f l e x i b l e , r a p i d and e f f i c i e n t means of t r a n s p o r t a t i o n — c i v i l a i r t r a n s p o r t (Jones 1960:220). However, these o b j e c t i v e s would be best pursued i n a deregulated environ-ment. The United States, which possessed the most e f f i c i e n t i n d u s t r y , gener-ated the bulk of t r a v e l e r s across the A t l a n t i c , P a c i f i c , to A s i a and C e n t r a l and South America, and owned a l a r g e f l e e t of a i r c a r r i e r s , could e a s i l y monopolize the i n d u s t r y i f competitive f o r c e s were allowed t o operate. And yet, on may occasions, the United States took a c t i o n which was d e t r i m e n t a l t o 81 the development of i t s own i n d u s t r y . F i r s t , i t supported a c a r t e l system which a l l o c a t e d market shares and f i x e d high p r i c e s . Second, even when i t challenged the high IATA p r i c e s , i t was prepared to r e t r e a t . (This was par-t i c u l a r l y c l e a r i n the Chandler C r i s i s . ) And t h i r d , i t gave huge route con-cessions a l l o w i n g f o r e i g n a i r l i n e s to compete i n i t s l u c r a t i v e markets. The question must be asked, why d i d the United States behave i n a way t h a t hindered the development and expansion of i t s i n d u s t r y ? One e x p l a n a t i o n would be t h a t the United States was pressured i n t o t a k i n g these a c t i o n s . However, t h i s suggestion may be discarded s i n c e , c l e a r l y , throughout the pioneering and c o n s o l i d a t i o n periods, the United States dominated the a v i a t i o n i n d u s t r y and enjoyed overwhelming economic and m i l i t a r y s u p e r i o r i t y . The other explanation l i e s i n the theory of hegemonic s t a b i l i t y . The United States, f o r reasons other than concern f o r the d e v e l -opment of i t s own a v i a t i o n i n d u s t r y , was w i l l i n g t o support the c a r t e l system. Two reasons f o r c a r t e l support seem t o have motivated U.S. behav-i o u r . The f i r s t was connected to U.S. s e c u r i t y i n t e r e s t s ; the second t o i t s economic i n t e r e s t s . The United States saw i t s s e c u r i t y i n t e r e s t s as being f u r t h e r e d by ensuring t h a t the economies of i t s a l l i e s were strong. By supporting a c a r t e l system, the United States would a l l o w an environment to be created i n which s t a t e s could develop t h e i r own a v i a t i o n i n d u s t r i e s . T h i s , i n t u r n , would s t i m u l a t e the growth of t h e i r economies. U.S. l i b e r a l route conces-sions may a l s o be explained, i n p a r t , by t h i s m o t i v a t i o n , f o r they helped f o r e i g n i n d u s t r i e s develop by i n t r o d u c i n g them i n t o h i g h l y p r o f i t a b l e markets. Straszheim w r i t e s : 82 . . . the United States made l i b e r a l concessions as part of i t s a i d program of r e b u i l d i n g the Western World—eco-nomically as p a r t of the d o l l a r shortage . . . and p o l i -t i c a l l y as p a r t of i t s e f f o r t s to u n i t e the West (Straszheim 1069:39-40). The s e c u r i t y needs of the United States a l s o r e q u i r e d t h a t i t e s t a b l i s h m i l i t a r y bases i n v a r i o u s p a r t s of the world. Thornton w r i t e s t h a t from 1949 t o 1962 the U.S. A i r Force needed bases i n I t a l y , Spain, P o r t u g a l , the United Kingdom, Japan and the Netherlands i n order to be able to reach p o t e n t i a l t a r g e t s i n the S o v i e t Union (Thornton 1970:681). This U.S. need gave coun-t r i e s a c e r t a i n amount of p o l i t i c a l leverage. In r e t u r n f o r cooperating w i t h the United S t a t e s , they asked f o r route concessions and pressured the United States not to take a c t i o n t h a t would be damaging to the development of t h e i r a v i a t i o n i n d u s t r i e s . Thornton w r i t e s : A i r l i n e t r a f f i c r i g h t s were among the thin g s sought by f o r e i g n e r s i n exchange f o r m i l i t a r y bases, and were com-monly obtained without e q u i v a l e n t United States a i r l i n e routes (Thornton 1970:681). With t h i s i n mind, the concessions made by the United States t o various s t a t e s become more understandable. For example, behind U.S. concessions t o SAS was the former 1s i n t e r e s t i n securing s t r a t e g i c bases i n Greenland (Thornton 1970:681). S i m i l a r l y , the b i l a t e r a l agreement concluded w i t h the Germans on the occasion of Chancellor Adenauer's v i s i t to Washington which gave Lufthansa important p r i v i l e g e s , a l s o appears to have i n v o l v e d a s e c u r i t y t r a d e - o f f . In the case of the Netherlands agree-ment, P r e s i d e n t Eisenhower even admitted the importance of the "Netherlands 83 p u l l i n g i t s weight as a sound member of the Western A l l i a n c e (qtd. i n Thorn-ton 1976:254). Thus, Thornton summarizes: The reasons f o r the apparently poor showing of the United States i n t r a f f i c b argaining i s not hard t o estimate. As might be expected, i t i s c l e a r t h a t ever s i n c e World War I I , the United States has been using her bargaining power i n the a i r l i n e sphere as a means of securing f o r e i g n agreement t o th i n g s which have l i t t l e to do w i t h the a i r -l i n e i n d u s t r y . Obviously, these o b j e c t i v e s have a higher p r i o r i t y i n the minds of p o l i c y makers than does the success of the United States a i r l i n e i n d u s t r y , or even of be t t e r a i r l i n e s e r v i c e f o r United States c i t i z e n s . The o v e r r i d i n g o b j e c t i v e has been n a t i o n a l defence, or i t s sta t e d e q u i v a l e n t , anti-communism. The United States considers the So v i e t Union and i t s t o o l , i n t e r n a t i o n a l communism to be the major t h r e a t t o her s a f e t y (Thornton 1970:681). A t h i r d m o t i v a t i o n f o r supporting a c a r t e l system and a i d i n g the d e v e l -opment of i t s a l l i e s ' i n d u s t r i e s was a l s o l i n k e d t o U.S. s e c u r i t y i n t e r e s t s : i t wanted to ensure the f r i e n d s h i p of i t s a l l i e s . This m o t i v a t i o n was high-l i g h t e d by s e v e r a l i n c i d e n t s . The g r a n t i n g of extensive a i r route p r i v i l e g e s to l e s s developed c o u n t r i e s , i n conjunction w i t h the generous p r o v i s i o n of f i n a n c i a l and t e c h n i c a l a i d , was i n Straszheim's o p i n i o n p a r t i a l l y motivated by a d e s i r e t o counter Soviet a i d and secure a l l i e s (Straszheim 1969:28). U.S. behaviour i n response t o i t s d e c l i n i n g market shares and f o r e i g n r e s t r i c t i v e p r a c t i c e s may a l s o be explained i n terms of i t s reluctance t o 84 a l i e n a t e i t s f r i e n d s . Towards the end of the c o n s o l i d a t i o n period the United States became concerned w i t h the f a c t t h a t i t was l o s i n g i t s market share and t h a t c o u n t r i e s were i n d u l g i n g i n r e s t r i c t i v e p r a c t i c e s which d i s c r i m i n -ated a g a i n s t i t s c a r r i e r s . Jones, w r i t i n g i n 1960, commented: The "sacred Bermuda" p r i n c i p l e s were beginning to c o s t the U.S. a l o t of money. They were f i n e i n 1946 when we generated about 70% of the t r a n s a t l a n t i c and t r a n s p a c i f i c t r a f f i c , and c a r r i e d about 80% of i t . Now, these same " p r i n c i p l e s , " — " f i f t h freedom," plus " r e c i p r o c i t y of r a t e s , " " r e c i p r o c i t y of t r a f f i c centers" and "dog l e g routes" exposed the great U.S. t r a f f i c market to dozens of i n t e r n a t i o n a l a i r l i n e s of other n a t i o n s , many of which generated l i t t l e t r a f f i c , o perating c h i e f l y f o r reasons of p o l i t i c s and p r i d e , and dependent on the American t o u r i s t d o l l a r . Our own a i r l i n e s were c a r r y i n g about 40% of the t r a n s a t l a n t i c t r a f f i c , although the U.S. generated about 71% of i t . Were we t r a d i n g t r a n s a t l a n t i c d o l l a r s f o r P a r i s and Rome " f i f t h freedom" n i c k e l s ? (Jones 1960:234) Yet, the government was u n w i l l i n g t o take measures to p r o t e c t i t s a i r c r a f t ( i . e . , r e q u i r i n g f i l i n g of schedules wit h the CAB by f o r e i g n c a r r i e r s and requesting data on t r a f f i c a c t i v i t i e s ) by g i v i n g the CAB suspension power. The m o t i v a t i o n seems to have been p o l i t i c a l : i t was u n w i l l i n g t o a l i e n a t e i t s a l l i e s who protested s t r o n g l y a g a i n s t such measures, and was prepared to make economic s a c r i f i c e s to t h i s end. 85 S i m i l a r l y , U.S. behaviour v i s - a - v i s IATA a l s o suggests t h a t , when U.S. attempts t o lower p r i c e s were met w i t h f o r e i g n government p r o t e s t s , the United States was w i l l i n g t o back down i n order not to jeopardize i t s r e l a -t i o n s h i p w i t h i t s a l l i e s . This was p a r t i c u l a r l y evident i n the Chandler i n c i d e n t . The event a l s o o f f e r s i n t e r e s t i n g i n s i g h t i n t o U.S. a v i a t i o n policy-making: w i t h i n the U.S. government there was a d i v i s i o n between p o l i c i e s supported by the CAB and those supported by the State Department. The CAB was concerned with U.S. a i r c a r r i e r s ' economic i n t e r e s t s , while the State Department was o f t e n r e s p o n s i b l e f o r s u b v e r t i n g CAB proposals i n the i n t e r e s t of f o r e i g n p o l i c y . Indeed, i t was the Secretary of State who wrote to the CAB recommending t h a t i t withdraw i t s d i s a p p r o v a l of increased North A t l a n t i c f a r e s . The excuse the former gave f o r t h i s p o l i c y was o b v i o u s l y weak; f o r as Keynes p o i n t s out, the U.S. had the a u t h o r i t y t o suspend B r i t i s h s e r v i c e s . F i n a l l y , an economic concern may have a l s o motivated the United States to support the c a r t e l system. In the i n t e r e s t of f o s t e r i n g a demand f o r the products of i t s a i r c r a f t manufacturing i n d u s t r y , the United States was w i l l i n g t o support a system which would encourage the development of f o r e i g n i n d u s t r i e s . Thayer argues t h a t U.S. l i b e r a l route concessions were l i n k e d to t h i s m o t ivation. He w r i t e s : The vested i n t e r e s t [ s a l e of U.S. t r a n s p o r t plane] thus acquired makes i t i n e v i t a b l e t h a t the U.S. permit entry i n t o markets which enable those a i r l i n e s to pay on t h e i r loans. In a sense, the Ex-Im Bank has acted f o r some years as a promoter of f r e e r entry of f o r e i g n a i r l i n e s 86 i n t o the U.S. market, a f a c t o r o f t e n o f f i c i a l l y s t a t e d when new routes are awarded (qtd. i n Diamond 1975:436) L i s s i t z y n , more s p e c i f i c a l l y , when commenting on U.S. concessions made i n the s i g n i n g of the Dutch-American b i l a t e r a l b r i ngs a t t e n t i o n t o the comments of a State Department o f f i c i a l who claimed t h a t U.S. p o l i c y was i n f l u e n c e d by the lobbying of U.S. a i r c r a f t manufacturers who s t r e s s e d t h a t KLM was the l a r g e s t f o r e i g n purchaser of U.S. c i v i l a e r o n a u t i c a l equipment ( L i s s i t z y n 1964:254). Thus, throughout the twenty years of the "heyday" of the c a r t e l , the United States supported the c a r t e l f o r reasons a s s o c i a t e d w i t h i t s r o l e as hegemon, while other s t a t e s supported the system i n order to promote the development of t h e i r own i n t e r n a t i o n a l a i r c a r r i e r s . 87 NOTES 1 Predetermination r e q u i r e s p r i o r government determination or approval of c a p a c i t y before a i r s e r v i c e s commence. I t u s u a l l y s t i p u l a t e s c a p a c i t y , frequency of f l i g h t s , scheduling of f l i g h t s and/or types of a i r c r a f t used. According t o t h i s system, an a i r l i n e may e i t h e r reach an agreement on c a p a c i t y and r e l a t e d matters which w i l l be then subject to government approval, or the a i r l i n e may f i r s t be r e q u i r e d t o seek government approval of c a p a c i t y and frequency (Haanappel 1984:35). 2 The U.S. pointed out t h a t most of the European t r a f f i c across the North A t l a n t i c was not based on 'primary j u s t i f i c a t i o n ' ; i . e . , t h i r d and f o u r t h freedom t r a f f i c between the U.S. and the n a t i o n of the c a r r i e r . Rather, i n most cases, European c a r r i e r s c a r r i e d t r a f f i c between the U.S. and t h i r d c o u n t r i e s v i a t h e i r homeland. The U.S. argued t h a t t h i s was i n f a c t f i f t h freedom t r a f f i c and subject t o r e g u l a t i o n according to the Bermuda c a p a c i t y p r i n c i p l e s . The Europeans refused t o accept t h i s view, s t a t i n g t h a t t h i s t r a f f i c was merely a combination of t h i r d and f o u r t h freedoms, and t h e r e f o r e not s u b j e c t t o the r e s t r i c t i v e Bermuda standards ( L i s s i t z y n 1964: 256). 3 During the debate, i t was pointed out t h a t the major a v i a t i o n powers d i d not r e q u i r e U.S. c a r r i e r s t o f i l e schedules and submit data. This type of a c t i v i t y was p r i m a r i l y found i n L a t i n American c o u n t r i e s . In 1962, 32 c o u n t r i e s e x e r c i s e d c o n t r o l over U.S. c a r r i e r s by e i t h e r r e q u i r i n g t r a f f i c data, r e q u i r i n g schedules to be approved, or c o n t r o l l i n g c a p a c i t y . Nine of the 32 had no b i l a t e r a l s w i t h the U.S. and operated under temporary permits. Twenty-two had b i l a t e r a l s and these r e s t r i c t i o n s were imposed i l l e g a l l y . The 88 22 c o u n t r i e s were: Argentina, A u s t r i a , B r a z i l , C h i l e , Costa R i c a , E l Salvador, F i n l a n d , Ghana, Guatemala, Honduras, Greece, I n d i a , Indonesia, I r a n , I r a q , Japan, Korea, Lebanon, Mexico, New Zealand, Nicaragua, N i g e r i a , P a k i s t a n , Paraguay, P h i l i p p i n e s , P o r t u g a l , Spain, S w i t z e r l a n d , Thailand, Turkey, Uruguay, and Venezuela. 4 The C i v i l Aeronautics Act, 1938, had given the CAB power to d i s a l l o w d i s c r i m i n a t o r y charges. In a d d i t i o n , a l l agreements to which U.S. c a r r i e r s were p a r t y were t o be submitted f o r CAB approval. Without approval, they could be subject t o a n t i - t r u s t p rosecution. I t was according t o t h i s c ondi-t i o n t h a t the CAB had i n d i r e c t c o n t r o l over f a r e agreements f o r i t was not granted any d i r e c t a u t h o r i t y over r a t e s charged by American c a r r i e r s i n f o r e i g n a i r t r a n s p o r t a t i o n (Bebchick 1958:11). The 1958 Federal A v i a t i o n Act gave the CAB the power t o remove i n t e r n a t i o n a l d i s c r i m i n a t o r y t a r i f f s . With P a r t 213 of the CAB Economic Regulations enacted i n 1970, the CAB was given the power t o l i m i t the operation of f o r e i g n a i r c a r r i e r s , when the government under whose a u t h o r i t y c a r r i e r s operate has taken a c t i o n which i m p a i r s , l i m i t s , terminates or denies operating r i g h t s of U.S. c a r r i e r s . I t was not u n t i l 1972 t h a t l e g i s l a t i o n was enacted which granted the CAB power to sus-pend and r e j e c t i n t e r n a t i o n a l t a r i f f s . I t was not given the r i g h t to f i x them (Haanappel 1984:31, 45). 5 I l l e g a l d i s c o u n t i n g may take the form of a grant of excess mileage, a d d i t i o n a l stopovers, and excess baggage. In a d d i t i o n , a i r l i n e s may o f f e r t r a v e l agents rebates on t i c k e t s s o l d which are then passed on t o the con-sumer as p r i c e d i s c o u n t s . 89 4. THE WEAKENING OF THE CARTEL: mid-1960s-1977 DESCRIPTION I t i s not easy to des c r i b e developments i n the period from the mid-'60s to the mid-'70s. Hammarskjold has described these years as a time of change and fragmentation. In h i s words: I t was not u n t i l the e a r l y and m i d - s i x t i e s t h a t substan-t i a l changes—the beginnings of fragmentation began to occur i n the r e g u l a t o r y s t r u c t u r e (Hammarskjold 1979a: 48). The d i f f i c u l t y i n understanding the va r i o u s forces t h a t a f f e c t e d the weaken-i n g of the c a r t e l system i s t h a t many had t h e i r o r i g i n i n previous periods while others i n t e r a c t e d and fed on each other. As a consequence, not only i s i t i mpossible to r e s t r i c t d e s c r i p t i o n of c e r t a i n trends to the s p e c i f i c time period under d i s c u s s i o n , but i t i s a l s o very d i f f i c u l t t o consider these f o r c e s i n i s o l a t i o n . An attempt w i l l be made t o deal w i t h the former problem; but, due t o the l a t t e r d i f f i c u l t y , a c e r t a i n amount of bac k - t r a c k i n g w i l l be necessary. The d e s c r i p t i o n i s d i v i d e d i n t o two p a r t s . The f i r s t p a r t i d e n t i f i e s f i v e major developments t h a t had adverse a f f e c t s on the operation of the c a r t e l . The f i r s t three developments: the increase of i n t e r n a t i o n a l sched-ul e d operations due to d e c o l o n i z a t i o n ; the increase i n a v a i l a b l e c a p a c i t y due to t e c h n o l o g i c a l advances, and the o i l c r i s i s f o l l owed by a re c e s s i o n are important because they changed the environment i n which the c a r t e l system operated. The other two developments: the growing importance of non-IATA 90 i n t e r n a t i o n a l c a r r i e r s and the p r o l i f e r a t i o n of c h a r t e r operations are s i g -n i f i c a n t both because they changed the environment i n which the c a r t e l oper-ated, and because they s i g n a l l e d t h a t the c a r t e l system no longer operated i n c e r t a i n important s e c t o r s of the i n t e r n a t i o n a l market. The second p a r t examines how a i r l i n e s and governments responded u n i l a t -e r a l l y t o the challenges of the new environment. (Some responses v i o l a t e d the p r i n c i p l e s of the c a r t e l system w h i l e others d i d not.) I t then describes the e f f e c t t h a t these u n i l a t e r a l a c t i o n s had on the m u l t i l a t e r a l t a r i f f -f i x i n g operations of the IATA c a r t e l . The Increase i n International Scheduled Airlines In the l a t e '60s and throughout the '70s, the number of i n t e r n a t i o n a l a i r l i n e s increased d r a m a t i c a l l y . As was mentioned i n the previous s e c t i o n , many of the new a i r l i n e s were e s t a b l i s h e d by newly independent l e s s developed c o u n t r i e s . The increase i n scheduled a i r l i n e s , of course, l e d t o more compe-t i t i o n i n the i n d u s t r y and t r a n s l a t e d i n t o s h r i n k i n g market shares f o r many s t a t e s . Technological Change The i n t r o d u c t i o n of j e t s i n the 1960s had provided an almost 100% increase i n passenger seat miles a v a i l a b l e f o r i n t e r n a t i o n a l s e r v i c e (Jones 1960:240). This l e d t o overcapacity and, as described e a r l i e r , a i r l i n e s r e s o r t e d t o i l l e g a l d i s c o u n t i n g t a c t i c s . The problem had been re s o l v e d by increased demand. However, i t soon reemerged. Based on e x c e s s i v e l y o p t i m i s -t i c growth p r o j e c t i o n s (14-15%), a i r l i n e s had i n t o t a l ordered 1,000 j e t s t o 91 a r r i v e by 1970 (Slotemaker 1966:916). These added t o the overc a p a c i t y prob-lem which was aggravated by a new t e c h n o l o g i c a l i n n o v a t i o n : the long-range wide-bodied j e t . This type of a i r c r a f t increased a v a i l a b l e c a p a c i t y even f u r t h e r . In a d d i t i o n , i t required higher revenues to break even because i t s operating c o s t s were higher than those of other a i r c r a f t . (This was due to higher human and c a p i t a l resource inputs.) (Salacuse 1980:832) The Economist of August 6, 1966 reported t h a t , i n the f o l l o w i n g f i v e years (1966-1970), a i r l i n e s would have t o spend n e a r l y as much on new a i r c r a f t as they had done on the e x i s t i n g f l e e t which was bought over a period of 15 years (qtd. i n Slotemaker 1973:917). The f u e l c r i s i s The f u e l c r i s i s had a tremendous impact on the a i r l i n e i n d u s t r y . I n t e r -n a t i o n a l a v i a t i o n f u e l p r i c e s increased from US$0,125 per g a l l o n i n e a r l y 1973 t o US$0,406 per g a l l o n i n J u l y 1974 (IATA, 1975:3). F u e l c o n s t i t u t e d 12% of t o t a l o p erating costs i n 1973, while by 1974 t h i s f i g u r e had r i s e n t o 22% (IATA 1974:41). Each increase of 1C i n a v i a t i o n f u e l r a i s e d a i r l i n e c osts by $100 m i l l i o n (Diamond 1975:485). E s c a l a t i n g operating costs reduced c a r r i e r p r o f i t margins. In 1972 IATA a i r l i n e s ' o p erating p r o f i t was 1.6% of revenue. In 1973 t h i s rose t o 4.2%, but f o l l o w i n g the o i l shock, p r o f i t s f e l l t o -0.3% of revenue. They recovered i n 1975 w i t h p r o f i t s r i s i n g to 2.5% of revenue (The Economist October 4, 1975:75). The e f f e c t of economic reces-s i o n caused by the o i l c r i s i s was a l s o r e f l e c t e d i n t r a f f i c growth trends i n the '70s. T r a f f i c increases were lowest i n 1974 and 1975—the immediate post - r e c e s s i o n a r y years. (See Table 1.) 92 On the l u c r a t i v e North A t l a n t i c market, which represented 1/3 of t o t a l i n t e r n a t i o n a l t r a f f i c , the r e s u l t s of economic r e c e s s i o n were very evident. Taneja w r i t e s t h a t t o t a l t r a f f i c growth increased a t an annual r a t e of 9.7% between 1968 and 1978 (as compared w i t h the 15-20% r a t e of increase i n the 1950s and e a r l y 1960s. Between 1968 and 1973 the t o t a l (scheduled and cha r t e r ) r a t e of growth was 16%. Fo l l o w i n g the o i l c r i s i s , the r a t e of growth dropped to -6.0% from 1973 to 1975 (Taneja 1980:107). (See Table 4). Increased Non-IATA Scheduled Carriers During t h i s p eriod a growing number of non-IATA a i r l i n e s entered the i n t e r n a t i o n a l market—many engaging i n p r i c e - c u t t i n g a c t i v i t i e s . These a i r -l i n e s determined t h e i r t a r i f f s i n d i v i d u a l l y or a f t e r d i s c u s s i o n w i t h other a i r l i n e s f l y i n g s i m i l a r routes. As a r u l e p r i c i n g d e c i s i o n s were subject t o government approval. Haanappel w r i t e s t h a t a i r l i n e s stayed out of IATA f o r two reasons: p o l i t i c a l and economic. The f i r s t category i n c l u d e s a i r l i n e s such as Aero-f l o t , Balkan B u l g a r i a n Transport of B u l g a r i a , I n t e r f l u g of the German Demo-c r a t i c Republic, Malev of Hungary, and Tarom of Romania. These a i r l i n e s do not compete w i t h IATA r a t e s . They e x p l a i n t h e i r behaviour by a re l u c t a n c e to j o i n a " c a p i t a l i s t i c trade a s s o c i a t i o n of profit-minded i n t e r n a t i o n a l a i r -l i n e s " (Haanappel 1984:118). The second category, however, i s of great concern t o the IATA c a r t e l . A i r l i n e s such as L o f t l e i d e r ( I c e l a n d ) , A i r Bahama (a L o f t l e i d e r s u b s i d i a r y ) , and Luxavia (Luxemburg) engage i n extensive t a r i f f competition. Perhaps the most s i g n i f i c a n t t h r e a t came from a i r l i n e s o r i g i n a t i n g i n the Far East. These i n c l u d e d : Cathay P a c i f i c Airways (Hong Kong), China Airways (Taiwan and formerly an IATA member), Korean A i r l i n e s , 93 Malaysian A i r l i n e s System, Singapore A i r l i n e s , and Thai I n t e r n a t i o n a l . They formed the Or i e n t A i r l i n e s A s s o c i a t i o n (OAA) which organized r e g i o n a l meet-in g s . Some c a r r i e r s p a r t i c i p a t i n g i n t h i s o r g a n i z a t i o n kept dual membership i n the OAA and IATA. The Development of Charter S e r v i c e s Charters or " i r r e g u l a r s e r v i c e s " were i n operation i n the pre-World War I I p e r i o d ; however, i t was not u n t i l the mid-'60s t h a t these s e r v i c e s began to undermine s e r i o u s l y the a c t i v i t y of the c a r t e l . In order t o understand the development i t i s necessary to t r a c e the h i s t o r y of ch a r t e r r e g u l a t i o n . In the immediate post-war p e r i o d , the volume of c h a r t e r t r a f f i c was n e g l i g i b l e . Charters were considered t o be so i n s i g n i f i c a n t , t h a t s t a t e s d i d not even bother t o develop a comprehensive i n t e r n a t i o n a l r e g u l a t o r y framework t h a t would standardize the terms of cha r t e r entry, c a p a c i t y and p r i c i n g . The Chicago Convention e x p l i c i t l y gave s t a t e s the freedom t o l i m i t the commercial a c t i v i t i e s of non-scheduled i n t e r n a t i o n a l s e r v i c e s as they saw f i t . 1 Thus, ch a r t e r growth was not only a f u n c t i o n of demand, but was a l s o contingent on the degree to which s t a t e s made t h e i r n a t i o n a l l e g i s l a t i o n on ch a r t e r c e r t i -f i c a t i o n and entry r e s t r i c t i v e . Charter s e r v i c e s f i r s t e s t a b l i s h e d themselves i n the United States and Europe, and t h e i r p o p u l a r i t y continued t o be l o c a l i z e d i n these areas, p a r t i -c u l a r l y on the North A t l a n t i c market. Data c o l l e c t e d on ch a r t e r growth i n d i -cates t h a t i n 1959 ch a r t e r s held 12.2% of the i n t e r n a t i o n a l market, while by 1971 they held 32.2% (ICAO 1971:27,34). On the North A t l a n t i c , i n 1961 204,000 passengers t r a v e l l e d t o and from the U.S. while by 1971 the number had r i s e n t o 2.5 m i l l i o n and t o 3.7 m i l l i o n i n 1973 (Lindberg 324). The 94 i n c r e a s e i n t o t a l t r a f f i c on the North A t l a n t i c between 1968 and 1973 was only 13.8% f o r scheduled c a r r i e r s w h i le f o r the same period c h a r t e r s enjoyed a 24.1% growth r a t e (Taneja 1980:107). (See Table 4 and Table 5.) The huge growth i n c h a r t e r t r a f f i c was p r i m a r i l y the consequence of an increase i n the number of U.S. c h a r t e r operators. In 1971, the U.S. share of t o t a l i n t e r n a -t i o n a l non-scheduled t r a f f i c was almost 40% (ICAO B u l l e t i n May 1976:26). In order t o understand the sudden in c r e a s e i n world c h a r t e r operations r e s u l t i n g from the entry of U.S. c h a r t e r operators i n the mid-'60s, i t i s necessary to d e s c r i b e the changes i n U.S. n a t i o n a l c h a r t e r l e g i s l a t i o n . U.S. p o l i c y towards c h a r t e r s went through s e v e r a l phases. Wassenbergh describes them as f o l l o w s : . . . the U.S. f i r s t t r i e d to p r o t e c t the scheduled a i r -l i n e system a g a i n s t c h a r t e r competition, then s t a r t e d t o p r o t e c t c h a r t e r c a r r i e r s a g a i n s t scheduled competition, and allowed and pushed greater freedom f o r c h a r t e r c a r -r i e r s , and now favours p r i c e competition between sched-uled and c h a r t e r s e r v i c e s (Wassenbergh 1981:253). Fol l o w i n g World War I I , a l a r g e number of cheap surplus m i l i t a r y a i r -planes appeared on the market. The CAB a u t h o r i z e d operators of these c a r -r i e r s t o provide " i r r e g u l a r , l i m i t e d and sporadic s e r v i c e " (Goldklang 1961: 100). A f t e r September 10, 1947, the CAB p r o h i b i t e d i r r e g u l a r c a r r i e r s from engaging i n f o r e i g n a i r t r a n s p o r t a t i o n , although i t continued t o permit f o r e i g n f l a g c a r r i e r s and scheduled U.S. c a r r i e r s t o provide c h a r t e r ser-v i c e s . Two years l a t e r , the CAB modified i t s p o l i c y and s t a r t e d granting l i m i t e d exemptions to i r r e g u l a r c a r r i e r s to conduct t r a n s a t l a n t i c c h a r t e r f l i g h t s . Exemptions were given to "recognized e d u c a t i o n a l , r e l i g i o u s and 95 c h a r i t a b l e groups," and the CAB explained t h a t these s e r v i c e s would not compete w i t h scheduled operations f o r at the height of the t o u r i s t season demand f o r t r a n s p o r t a t i o n exceeded scheduled s e r v i c e supply (Goldklang 1961: 100). More exemptions were given i n 1950; however, the CAB began to be concerned w i t h the l a r g e i n c r e a se i n c h a r t e r t r a f f i c (e.g., c h a r t e r passen-gers across the A t l a n t i c increased from 5,600 i n 1950 to 12,000 i n 1951). The CAB reviewed p o l i c y and found t h a t extensive abuses of the " a f f i n i t y " requirement were t a k i n g place (e.g., names of c h a r i t a b l e groups turned out to be t r a v e l agencies, etc.) In March 21, 1951 the CAB announced t h a t i t would se v e r e l y c u r t a i l the a c t i v i t i e s of i r r e g u l a r c a r r i e r s (Goldklang 1961:109). The new p o l i c y p r o h i b i t e d i r r e g u l a r c a r r i e r s from engaging i n i n t e r n a t i o n a l operations (with the exception of the c a r r i a g e of m i l i t a r y and refugee groups). Furthermore, the CAB i n s i s t e d t h a t c e r t i f i c a t e d American c a r r i e r s ( i . e . , scheduled c a r r i e r s ) i n t e r e s t e d i n conducting c h a r t e r s e r v i c e s be o b l i g e d t o prove t h a t scheduled f l i g h t s d i d not provide reasonably adequate s e r v i c e s on the routes on which they wished to operate. The CAB a l s o l i m i t e d methods of s o l i c i t a t i o n by c h a r t e r groups, and c u r t a i l e d t r a v e l agent a c t i v i t y . Foreign c a r r i e r s remained the r e s p o n s i b i l i t y of IATA, although the CAB d i d ask the l a t t e r t o adopt a r e s o l u t i o n f i x i n g minimum r a t e s f o r sched-u l e d c a r r i e r s ' c h a r t e r f l i g h t s above the r a t e s charged f o r scheduled s e r -v i c e s . IATA, however, d i d not take t h i s step and c h a r t e r p r i c e s remained u n c o n t r o l l e d (Goldklang 1961:106). Another s h i f t i n p o l i c y occurred i n 1955 when the CAB announced t h a t i r r e g u l a r c a r r i e r s (or s u p p l e m e n t a l ) could once again o b t a i n exemptions and operate on the t r a n s a t l a n t i c market. Charter c a r r i a g e increased, and between 1958 and 1959 IATA c h a r t e r t r a f f i c rose from 96 90,000 to 172,000 passengers c a r r i e d (Goldklang 1961:116). This r i s e c o i n -cided w i t h the increased j e t surcharge placed on scheduled t a r i f f s . F o l l o w i n g the Chandler impasse, the years of wavering over c h a r t e r l i b e r a l i z a t i o n ended. The United States took i t s f i r s t d e c i s i v e step, i n a s e r i e s of measures cul m i n a t i n g i n the l a t e '70s, t o l i b e r a l i z e the r e g u l a t i o n of c h a r t e r operations. In October 1963 the CAB made two recommendations: t h a t the P r e s i d e n t c e r t i f y three non-IATA c a r r i e r s to s p e c i a l i z e i n c h a r t e r operations on the North A t l a n t i c f o r f i v e years; and t h a t " s p l i t c h a r t e r s " be a u t h o r i z e d on t r a n s a t l a n t i c s e r v i c e s . 2 As Lowenfeld w r i t e s , p r e s i d e n t i a l assent t o these p o l i c i e s marked the beginning of heightened competition f o r t o u r i s t t r a v e l on the North A t l a n t i c between supplemental and scheduled c a r r i e r s (Lowenfeld 1979:481). In 1968 Congress extended c h a r t e r r u l e s t o i n c l u d e I n c l u s i v e Tour Charters ( I T C s ) 3 which no longer r e q u i r e d p r i o r a f f i n i t y . However, ITCs, owing t o t h e i r h i g h l y r e s t r i c t i v e nature, proved to be l e s s popular than the a f f i n i t y c h a r t e r s which were becoming i n c r e a s i n g l y loose i n t h e i r r e q u i r e -ments (Lowenfeld 1979:481; Marx 1981/1982:136-137). The Nixon A d m i n i s t r a t i o n i s s u e d a p o l i c y statement two years l a t e r , u n d e r l i n i n g the importance of chartered s e r v i c e s 4 c l a i m i n g t h a t , according to the CAB, these operations were not a s u b s t a n t i a l t h r e a t to scheduled s e r v i c e s . 5 ITCs were followed by f u r t h e r schemes which promoted the expansion of the c h a r t e r market ( i . e . , T r a v e l Group Charters (TGC) i n 1972, 6 one stop I n c l u s i v e Tour Charters (ITC) i n 1975, 7 and Advanced Booking Charters (ABC) i n 1976. 8 The f o l l o w i n g year the requirements f o r ITCs and ABCs were l i b e r a l i z e d . 9 The c u l m i n a t i o n of U.S. c h a r t e r l i b e r a l i z a t i o n was the r e v o c a t i o n of o l d 97 c h a r t e r r u l e s i n 1979. ITCs, ABCs, TGCs and a f f i n i t y c h a r t e r s were replaced w i t h the P u b l i c C h a r t e r . 1 0 The l a t t e r c l o s e l y resembles a scheduled s e r v i c e . P o l i c y changes i n Europe throughout t h i s p e r i o d were minor. In the immediate post-war years w i t h a few exceptions (e.g., Belgium), European s t a t e s adopted a l i b e r a l p o l i c y to c h a r t e r s which they d i d not abandon i n subsequent years. Thus, one a t t r i b u t e s the increase i n European ch a r t e r s l e s s to changes i n n a t i o n a l l e g i s l a t i o n than to an increased demand f o r s e r v i c e s . This demand was a r e f l e c t i o n of a r i s i n g European standard of l i v i n g i n Europe. Beginning i n the l a t e 1940s, i n i t i a t i v e s were taken i n s e v e r a l i n t e r n a -t i o n a l forums to r e g u l a t e or at l e a s t t o standardize n a t i o n a l p r a c t i c e s w i t h regard t o i n t e r n a t i o n a l c h a r t e r s . As c h a r t e r s e r v i c e s gained importance, pressure on s t a t e s t o a r r i v e a t an i n t e r n a t i o n a l agreement on t h e i r r e g u l a -t i o n and i n p a r t i c u l a r to d e f i n e t h e i r r o l e v i s - a - v i s scheduled c a r r i e r s increased. In the f i r s t 10 years f o l l o w i n g Bermuda, ICAO took measures to standard-i z e n a t i o n a l r e g u l a t i o n s on c h a r t e r entry, and i t a l s o developed a d e f i n i t i o n f o r d i s t i n g u i s h i n g between c h a r t e r and scheduled s e r v i c e s . In 1949, ICAO r u l e d t h a t non-scheduled s e r v i c e s could operate i n member s t a t e s without o b t a i n i n g p r i o r permission. However, three years l a t e r , i t modified i t s p o s i t i o n by s t a t i n g t h a t c o n t r a c t i n g p a r t i e s could i n s i s t on p r i o r permission being r e q u i r e d as long as t h i s p r i v i l e g e was not "exercised i n such a way as t o render the operation of t h i s important form of a i r t r a n s p o r t impossible or n o n - e f f e c t i v e " (qtd. i n D r i s c o l l 1976:76). In the same year, ICAO produced a standard d e f i n i t i o n of scheduled a i r s e r v i c e s . I t suggested t h a t a scheduled 98 a i r s e r v i c e i s a s e r i e s of f l i g h t s possessing a l l of the f o l l o w i n g c h a r a c t e r -i s t i c s : i t passes through the a i r space of the t e r r i t o r y of more than one s t a t e ; i t i s performed by a i r c r a f t f o r the t r a n s p o r t of passengers, m a i l or cargo f o r remuneration i n such a manner t h a t each f l i g h t i s open t o use by members of the p u b l i c ; and i t i s operated so as t o serve t r a f f i c between the same two or more po i n t s e i t h e r according to a published t i m e t a b l e or w i t h f l i g h t s so r e g u l a r or frequent t h a t they c o n s t i t u t e a reco g n i z a b l e systematic s e r i e s (qtd. i n Marx 1981:133) IATA was p a r t i c u l a r l y concerned w i t h the operation of c h a r t e r s e r v i c e s and r i g h t l y p r e d i c t e d t h a t i f they were not r e s t r i c t e d , they would present a s u b s t a n t i a l competitive t h r e a t t o scheduled s e r v i c e s . IATA members pointed t o the f a c t t h a t c h a r t e r operators tended t o have lower operating costs than scheduled c a r r i e r s and could o f t e n operate a t very high loads ( s i n c e there were no requirements on r e g u l a r i t y of s e r v i c e , c h a r t e r s could l i m i t t h e i r operations t o times when they were able t o o b t a i n near or f u l l l o a d s ) . Con-sequently, they were more e f f i c i e n t and could e a s i l y and p r o f i t a b l y undercut scheduled f l i g h t s e r v i c e s . This view was challenged by c e r t a i n s t a t e s , and, of course, the c h a r t e r operators themselves, who argued t h a t t h e i r i r r e g u l a r -i t y of s e r v i c e and the various c o n d i t i o n s of t h e i r o p e r ation prevented them from posing any r e a l competitive t h r e a t to scheduled s e r v i c e s . Nevertheless, IATA adhered to i t s p o s i t i o n and t r i e d t o take measures t o p r o t e c t i t s member scheduled a i r l i n e s from c h a r t e r competition. In June 1947 c e r t a i n IATA members proposed t h a t c h a r t e r operators be allowed t o become members of IATA. In t h i s way, they argued, IATA would be abl e t o c o n t r o l c h a r t e r t a r i f f s . However, a m a j o r i t y of members r e j e c t e d t h i s proposal and advocated more extreme measures: they recommended t h a t governments crack down on non-99 scheduled operations and r e s t r i c t the c h a r t e r i n g of planes. They a l s o pro-posed t h a t scheduled a i r l i n e s not enter i n t o commercial agreements w i t h c h a r t e r operators. IATA soon found t h a t i t had l i t t l e power over non-IATA ch a r t e r s e r v i c e s ; however, i t was able t o r e s t r i c t IATA member ch a r t e r opera-t i o n s . In 1949, r u l e s r e g u l a t i n g the p r i c e s of ch a r t e r operations by sched-uled IATA members were proposed. R e s o l u t i o n 045 allowed scheduled a i r l i n e s to perform i n t e r n a t i o n a l a i r c h a r t e r s e r v i c e s . However, i f the rat e s were lower than IATA f a r e s charged f o r s i m i l a r s e r v i c e s , c e r t a i n r e s t r i c t i o n s were t o be made. The IATA r e s o l u t i o n allowed three kinds of c h a r t e r s : own use or s i n g l e e n t i t y c h a r t e r s , study group c h a r t e r s , and a f f i n i t y group c h a r t e r s . In the l a s t case, the c h a r t e r e r s e l l s space to a group: which has p r i n c i p a l purposes, aims and o b j e c t i v e s other than t r a v e l and s u f f i c i e n t a f f i n i t y p r i o r t o the a p p l i c a -t i o n f o r c h a r t e r t r a n s p o r t a t i o n to d i s t i n g u i s h i t and set i t apart from the general p u b l i c (qtd. i n Haanappel 1978: 147). R e s o l u t i o n 045 allowed IATA a i r l i n e s to perform I n c l u s i v e Tour Charters and m i l i t a r y c h a r t e r s i n c e r t a i n t r a f f i c areas sub j e c t to r e s t r i c t i o n s . The Re s o l u t i o n was not adopted u n t i l 1953 and dominated the market f o r the next nineteen years. Although the r e g u l a t i o n s only a p p l i e d to IATA members, i n the '50s and '60s many s t a t e s adopted these g u i d e l i n e s f o r the n a t i o n a l regu-l a t i o n of non-IATA a i r l i n e s (Haanappel 1979:148). As n a t i o n a l c h a r t e r r e g u l a t i o n was l i b e r a l i z e d i n the mid-'60s, non-IATA c h a r t e r operators found t h a t the new f l e x i b i l i t y gave them a competitive advantage v i s - a - v i s IATA c h a r t e r operators (the l a t t e r ' s a c t i v i t i e s being r e s t r i c t e d by R e s o l u t i o n 045). In order t o circumvent R e s o l u t i o n 045, IATA 100 scheduled members began c r e a t i n g non-IATA a f f i l i a t e s . (This p r a c t i c e was e s p e c i a l l y p r evalent among European a i r l i n e s . ) By the e a r l y 1970s, Resolu-t i o n 045 had become unenforceable and i n 1972 the United States disapproved of the l e g i s l a t i o n c l a i m i n g : "the time has come to recognize new concepts of c h a r t e r a i r t r a n s p o r t a t i o n " (Haanappel 1984:148). R e s o l u t i o n 045 remained v a l i d i n a number of other areas i n the world (e.g., i t was endorsed by the A f r i c a n C i v i l A v i a t i o n Conference i n 1975 (Haanappel 1978:149). A f i n a l attempt by IATA to gain c o n t r o l over c h a r t e r s e r v i c e s was made i n 1974 when once again membership f o r c h a r t e r - o n l y a i r l i n e s i n IATA was proposed. This time IATA members voted i n favour of the r e s o l u t i o n . They adopted a r e s o l u t i o n l i m i t i n g the p a r t i c i p a t i o n of c h a r t e r - o n l y a i r l i n e s t o T r a f f i c meetings d e a l i n g w i t h f a r e s and c o n d i t i o n s of s a l e and s e r v i c e f o r c h a r t e r f l i g h t s between North America and Europe. Charter operators would not be allowed t o vote on matters concerning scheduled a i r l i n e s . The CAB d i d not approve these r u l e s s t a t i n g t h a t they would have "a severe a n t i - c o m p e t i -t i v e and undesirable impact upon the e x i s t i n g i n t e r n a t i o n a l t a r i f f s t r u c t u r e " (Haanappel 1978:150-151). Not s u r p r i s i n g l y , few c h a r t e r operators found i t i n t h e i r i n t e r e s t to s u b j e c t t h e i r operations to the r e s t r i c t i v e c a r t e l p r i c e - f i x i n g r e g u l a t i o n s . F i n a l l y , some attempts were made to standardize n a t i o n a l p r a c t i c e s i n Europe, A s i a , and on the North A t l a n t i c through m u l t i l a t e r a l n e g o t i a t i o n s . At the 1954 ICAO Conference i n Strasbourg, i t was recommended th a t European s t a t e s adopt: a general p o l i c y t h a t a l l intra-European non-scheduled f l i g h t s t h a t do not a f f e c t the i n t e r e s t s of the scheduled s e r v i c e s could be f r e e l y admitted to t h e i r t e r r i t o r i e s , 101 without the imposition of 'regulations, conditions, or l i m i t a t i o n s ' referred to i n . . . A r t i c l e 5 of the (Chicago) Convention (qtd. i n Marx 1981:141). In addition, i t was suggested that freedom of operation be granted to: f l i g h t s f o r humanitarian needs, t a x i - c l a s s operations (less than four passen-gers and no r e g u l a r i t y ) , operations chartered by a s i n g l e i n d i v i d u a l or i n s t i t u t i o n , and operations confined to f r e i g h t carriage. As long as these services did not compete with scheduled f l i g h t s , no p r i o r approval was required (Marx 1981:141). At Strasbourg, the European Avi a t i o n Community (ECAC) was founded and one of i t s f i r s t achievements was the m u l t i l a t e r a l Paris Agreement of 1956 regulating charter transport. The agreement categor-ized types of f l i g h t s . The f i r s t included humanitarian, emergency, les s than s i x passenger f l i g h t s , s i n g l e e n t i t y chartered f l i g h t s , and i s o l a t e d f l i g h t s . The second comprised a l l f r e i g h t operations and passenger opera-tions between areas not having regular scheduled services. The t h i r d included a l l types. The f i r s t and second types were to have freedom of oper-ation, while the t h i r d category could be discontinued i f i t were seen to be harming scheduled services. The t h i r d type, which included ITCs and a f f i n i t y charters, could be subject to regulations, conditions or l i m i t a t i o n s (Marx 1981:142). The agreement did not i n f a c t bring i n any major l i b e r a l i z i n g changes. A s i m i l a r regional m u l t i l a t e r a l agreement on non-scheduled services was made between the South East Asian countries i n the 1971 ASEAN agreement ((Haanappel 1984:126). The huge increase i n charter services on the North A t l a n t i c i n the l a t e 1960s and early 1970s was of p a r t i c u l a r concern to scheduled c a r r i e r s , who saw t h e i r market share gradually shrinking. These c a r r i e r s pressed t h e i r 102 governments t o take new r e g u l a t o r y i n i t i a t i v e s . As a consequence, i n October 1972 the ECAC, Canada, and the United States met i n Ottawa t o seek an agree-ment on general p r i n c i p l e s f o r North A t l a n t i c c h a r t e r operations. They d i d not agree on p r i c i n g concepts and c h a r t e r p o l i c y (Hammarskjold 1979b:34). But they d i d agree to replace a f f i n i t y group c h a r t e r s by TGCs and ABCs i n Europe. The Canadian and Europeans abolished a f f i n i t y c h a r t e r s but i n the United States t h i s scheme continued u n t i l the i n t r o d u c t i o n of European type ABCs i n 1976 (Haanappel 1984:130). Further attempts were made to reach agreements between IATA c a r r i e r s and c h a r t e r - o n l y a i r l i n e s t o agree on m i n i -mum North American r u l e s through 1973 and 1974. A temporary agreement on a p r i c e f l o o r was reached a t Montreaux f o r 1974-1975, but four North American c h a r t e r operators withdrew. The n e g o t i a t i o n s were broken o f f and were not resumed. An agreement was almost reached between the ECAC, Canada and the U.S. governments on minimum c h a r t e r r a t e s , but the CAB withdrew on February 11, 1975. The huge in c r e a s e i n c h a r t e r operations l e d to f u r t h e r competition i n the a v i a t i o n market as scheduled c a r r i e r s s t r u g g l e d to p r o t e c t t h e i r market shares from the new incumbents. The operators of both s e r v i c e s became locked i n t o a fast-paced t a r i f f war which l e f t l i t t l e room f o r r i g i d IATA t a r i f f -f i x i n g mechanisms. IATA Member Response to the Changing Environment IATA members responded to increased competition, overcapacity, higher o p e r a t i n g costs and r e c e s s i o n i n three main ways. The f i r s t two: i n i t i a t i n g t h e i r own c h a r t e r s and i l l e g a l d i s c o u n t i n g , d i r e c t l y undermined the operation of the c a r t e l system by c r e a t i n g a c o l l e c t i o n of s e r v i c e s which d i d not adopt 103 the m u l t i l a t e r a l l y s et IATA f a r e s . The t h i r d : making scheduled p r i c e s meet ch a r t e r p r i c e s was a response which t r i e d t o operate w i t h i n the parameters set by the p r i n c i p l e s of the c a r t e l system. Therefore, i t d i d not d i r e c t l y c o n t r i b u t e to the weakening of the regime. Many scheduled a i r c a r r i e r s adopted the f i r s t s t r a t e g y : operating c h a r t e r s e r v i c e s . For example, Pan American and TWA became the l a r g e s t i n t e r n a t i o n a l c h a r t e r c a r r i e r s . European scheduled c a r r i e r s a l s o engaged i n c h a r t e r a c t i v i t y , and as mentioned e a r l i e r , many e s t a b l i s h e d non-IATA subsid-i a r i e s which provided c h a r t e r s e r v i c e s (Lowenfeld 1975a:43). The second s t r a t e g y : i l l e g a l d i s c o u n t i n g was a p r a c t i c e which had been popular i n the e a r l y 1960s. The Economist described the s i t u a t i o n on October 4, 1975 as f o l l o w s : The a i r l i n e s ' r e a c t i o n has been t o f i g h t l i k e w i l d c a t s f o r business a t any p r i c e . The c a r t e l has been coming apart a t the seams. Discounting has always been wide-spread i n places l i k e Hong Kong, but New York and London are the new centers f o r cheap a i r l i n e t i c k e t s (The Econo-mist October 4, 1975:75-76). Reports of d i s c o u n t i n g were widespread. At the IATA meeting i n Oslo i n October 1975 i t was reported t h a t c a r r i e r s were spending $300 m i l l i o n above what was allowed on discounts t o agents. TWA was reported to have funded a $300,000 scheme o f f e r i n g cars and colour TVs to t r a v e l agents' s a l e s s t a f f (The Economist October 4, 1975:75-76). With such widespread non-compliance, enforcement was not only c o s t l y but f o r the most pa r t i n e f f e c t i v e . The t h i r d s t r a t e g y adopted was to match c h a r t e r schemes w i t h new promotional f a r e s . In 104 the l a t e '60s and e a r l y '70s, there was a s h i f t from a two-class f a r e s t r u c -t u r e ( f i r s t c l a s s and economy) to a complicated system of excursion f a r e s : shoulder, peak and d i r e c t i o n a l f a r e s , group i n c l u s i v e t o u r s , and advanced booking or payment schemes (Lowenfeld 1975a:42-43). The competitive p o l i c i e s of scheduled a i r l i n e s during the seventies were very s u c c e s s f u l . In 1971 non-scheduled c a r r i e r s c a r r i e d the highest recorded share of i n t e r n a t i o n a l passenger t r a f f i c (32.2%), but by 1975 t h e i r share had f a l l e n t o 25.9% (ICAO B u l l e t i n May 1976:26). In terms of growth r a t e s , from 1966-1971 the average annual r a t e of growth f o r non-scheduled c a r r i e r s was 34% w h i l e between 1971 and 1976 t h i s f i g u r e had f a l l e n t o 7.1%. Of t h i s , f o r the f i r s t p e r i o d , c h a r t e r c a r r i e r s ' annual growth r a t e was 51% while the growth r a t e of scheduled c a r r i e r t r a f f i c was 16.1%. During the second p e r i o d , these f i g u r e s had dropped to 6.4% and 9%, r e s p e c t i v e l y . Nonetheless, many scheduled a i r l i n e s s u f f e r e d huge f i n a n c i a l l o s s e s i n the e a r l y 1970s. From 1968 to 1974, Pan American experienced f i n a n c i a l d i f f i c u l t i e s , and i n 1974 l o s t over $80 m i l l i o n . That same year, TWA l o s t $46 m i l l i o n i n i t s i n t e r n a t i o n a l operations. Japan A i r l i n e s , A l i t a l i a , and A i r France l o s t between $80 and $100 m i l l i o n ; and l a r g e l o s s e s were a l s o experienced by B r i t i s h Airways, Sabena, KLM and Olympic (Lowenfeld 1975a: 44-45). (See Table 2). Government Responses to the Changing Environment Governments responded to the changing environment i n a v a r i e t y of ways. As has already been described, they took measures to l i b e r a l i z e n a t i o n a l r e s t r i c t i o n s on c h a r t e r operations. They a l s o issued government o r d e r s l 1 enabling t h e i r a i r l i n e s t o adopt non-IATA f a r e s . Both these a c t i o n s d i r e c t l y 105 undermined the m u l t i l a t e r a l t a r i f f - f i x i n g p r i n c i p l e of the c a r t e l . They a l s o engaged i n r e s t r i c t i v e p r a c t i c e s . Some of these (e.g., d i s c r i m i n a t o r y prac-t i c e s ) countervened c a r t e l p r i n c i p l e s ; w h i l e others (e.g., r e l u c t a n c e to grant routes, the formation of pools, or more r e s t r i c t i v e i n t e r p r e t a t i o n s of the Bermuda p r i n c i p l e s i n general) were responses operating w i t h i n the para-meters of the regime. In other words, the l a t t e r were not signs of weakening support f o r the c a r t e l . Governments helped t h e i r scheduled c a r r i e r s by i s s u i n g government orders enabling them to adopt s p e c i a l competitive f a r e s o u t s i d e the IATA c o n t r o l (e.g., excursion, group, i n c l u s i v e tour, j o u r n a l i s t and t r a v e l agent t r a f f i c ) . Haanappel c i t e s the example of a June 1971 order to Sabena by the B e l g i a n government d i c t a t i n g the adoption of s p e c i a l , very low, non-IATA youth/student f a r e s on the North A t l a n t i c . Other governments, f e a r i n g t h i s competition, iss u e d s i m i l a r orders t o t h e i r n a t i o n a l c a r r i e r s . As a r e s u l t , t r a v e l i n the summer of 1971 f o r students was extremely cheap. IATA n a t u r a l l y t r i e d t o dissuade governments from i s s u i n g such orders (Haanappel 1984:122-123). Governments i n Europe continued to increase t h e i r r e s t r i c t i v e p o l i c i e s by l i m i t i n g entry t o f o r e i g n c a r r i e r s through heavy r e g u l a t i o n of market shares and by d i s c r i m i n a t o r y p r a c t i c e s a g a i n s t f o r e i g n c a r r i e r s . Measures taken by s t a t e s to p r o t e c t t h e i r i n d u s t r i e s from market for c e s were o f t e n hidden from the p u b l i c . An i n v e s t i g a t i o n i n t o b i l a t e r a l agreements between European s t a t e s by the Commission of the European Communities reported: These b i l a t e r a l agreements do not always s t a t e p r e c i s e l y the r e a l content of the d e c i s i o n s . They are o f t e n sup-plemented by c o n f i d e n t i a l l e t t e r s of understanding ex-changed between the a e r o n a u t i c a l a u t h o r i t i e s of the 106 states concerned. These letters interpret, specify or even modify the provisions of the agreements. These letters may concern the creation of commercial pools or c a l l for the creation of such pools (qtd. in Gardiner 1981:13). In the late '60s, two important combines or pools which shared routes, equipment, maintenance and revenue were formed. Atlas was composed of Air France, A l i t a l i a , Lufthansa, Sabena, and Union de Transports Ariens (UTA). While K.S .S . was a cooperative effort between KLM, Scandinavian Air l ine System and Swissair. These cooperative act iv i t ies were also symptomatic of a trend toward regionalism in Europe as seen by the establishment of the Common Market in 1957 (Jones 1960:236). P i l l a i explains that these particular pools were the "offshoot" of the Montparnasse Committee. This organization, formed of 11 a ir l ines in 1967, was established to exchange technical information. Its objective was to obtain a position to compete with the largest international flag carriers for long-haul passengers by having a maintenance base and training f a c i l i t y with the same competence and efficiency as their competitors (qtd. in P i l l a i 1969: 14-15). In addition to pools, a variety of other restr ic t ive measures were used by governments to protect their carriers from foreign competitors. They l imited: the number of foreign a ir l ines entering their terr i tory , route grants, frequencies, numbers of passengers carried on routes or route seg-ments, operation of a l l cargo services, amount of freight, days and hours that foreign carriers were allowed to operate on the routes used by national 107 c a r r i e r s , and operations of f o r e i g n c h a r t e r f l i g h t s (Wassenbergh, qtd. i n Diamond 1975:460). These measures were o f t e n d i r e c t e d a g a i n s t U.S. car-r i e r s . The Times (London) reported on J u l y 29, 1974: d i s c r i m i n a t o r y p r a c t i c e s by f o r e i g n governments are i n -c r e a s i n g l y preventing United States a i r l i n e s from being f u l l y competitive abroad (Times (London) J u l y 29, 1974:15). I t went on t o l i s t the ways i n which U.S. c a r r i e r s were being disadvantaged. U.S. c a r r i e r s were made to pay higher r a t e s f o r c a r r i a g e of i n t e r n a t i o n a l m a i l ; they were burdened with huge a i r p o r t and airway charges; they were given mediocre treatment a t a i r p o r t s ; and they were forced t o use expensive ground handling s e r v i c e s provided by the host s t a t e . In a d d i t i o n , f o r e i g n passengers were discouraged from t r a v e l l i n g on American c a r r i e r s by g i v i n g more hard currency to t o u r i s t s t r a v e l l i n g on n a t i o n a l c a r r i e r s . Corporate t r a v e l of n a t i o n a l i z e d companies was r e s t r i c t e d to n a t i o n a l c a r r i e r s . F i n a l l y , i n many cases, there were currency conversion and remittance delays (Times (London) J u l y 29, 1974:15). In g eneral, European p o l i c y toward the United States became more aggres-s i v e . According to a number of r e p o r t s i n A v i a t i o n Week and Space Technology from t h i s time, Europeans were seeking to increase t h e i r bargaining power by strengthening t h e i r o v e r a l l route systems. In p a r t i c u l a r , t h e i r a t t i t u d e t o the North A t l a n t i c market had changed and, i n the words of a European o f f i -c i a l , they no longer saw i t as: the backbone of the a i r l i n e i n d u s t r y . I t i s now the l i n k w i t h a l l major i n t e r n a t i o n a l routes and the stronger you are on those routes, the stronger you w i l l be on t r a n s -108 a t l a n t i c routes (qtd. i n A v i a t i o n Week and Space Tech- nology October 27, 1975:33). The Europeans began t o demand r e v i s i o n s i n e x i s t i n g b i l a t e r a l s . They wanted to see t i g h t e r c o n t r o l on f i f t h freedom, a more s t r i n g e n t d e f i n i t i o n of the c a p a c i t y p r i n c i p l e s , and a review of route p a t t e r n s . Their o b j e c t i v e i n the l a t t e r case was t o reduce the number of c i t i e s being served by U.S. c a r r i e r s i n Europe and to expand European access to U.S. markets. The Euro-peans again based t h e i r demands on the argument t h a t the United States through i t s f i f t h freedom p r i v i l e g e s was making f a r greater gains i n Europe than the Europeans were making from t h e i r l i m i t e d f i f t h freedom r i g h t s through the United States. They a l s o pointed to the f a c t t h a t the United States had s i x t h freedom r i g h t s from Europe through to South America and the P a c i f i c , and they argued t h a t t h e i r f l a g c a r r i e r s should be allowed t o c a r r y passengers from the United States through Europe t o A s i a and A f r i c a . In response t o American claims t h a t they had already been too generous i n a l l o w -ing European c a r r i e r s access t o h i g h l y l u c r a t i v e U.S. markets, the Europeans r e p l i e d t h a t the United States should consider r i g h t s gained, not on an i n d i -v i d u a l b a s i s , but i n terms of access to a very v a l u a b l e u n i f i e d market. For example, i n the past the Americans had argued t h a t U.S. f l a g c a r r i e r s were e n t i t l e d t o l a r g e r shares of the North A t l a n t i c business because t r a v e l e r s were mostly U.S. customers. Now the Europeans argued t h a t Europe as a whole was a very s u b s t a n t i a l t r a f f i c generator. (The f i r s t to r e f u t e U.S. claims of t h i s nature were the Japanese who pointed to the f a c t t h a t the m a j o r i t y of t r a v e l e r s on t r a n s p a c i f i c routes were Japanese) ( A v i a t i o n Week and Space  Technology October 27, 1975:33). Over the period 1965 t o 1976, the share of i n t e r n a t i o n a l t r a f f i c c a r r i e d by European a i r l i n e s f e l l from 47.9% t o 43.0%, 109 and the average annual growth r a t e f o r the period was 11.5% (ICAO B u l l e t i n October 1976:20). (See Table 6.) Not s u r p r i s i n g l y , the Arab Nations b e n e f i t e d from developments during the fragmentation p e r i o d . They pursued a p o l i c y of expansion while at the same time i n s i s t i n g on r e s t r i c t e d entry and p o o l i n g i n t h e i r markets (ICAO  B u l l e t i n May 1976:47; A v i a t i o n Week and Space Technology March 17:146). From 1970 t o 1975, the share of i n t e r n a t i o n a l t r a f f i c c a r r i e d by Middle Eastern a i r l i n e s increased from 3.4% t o 4.6% (ICAO B u l l e t i n May 1976:20). (See Table 6.) The L a t i n American a i r l i n e s a l s o prospered. Bogolasky w r i t e s : In recent years the L a t i n American a i r l i n e s have e x p e r i -enced s i g n i f i c a n t economic improvements due t o a i r c r a f t equipment replacement, b e t t e r a i r l i n e management, and a i r l i n e p o o l i n g agreement undertaken by L a t i n American a i r l i n e s w i t h long-haul s e r v i c e s (Bogolasky 1978:79). Between 1968 and 1976, the t r a f f i c c a r r i e d by i n t e r n a t i o n a l scheduled a i r -l i n e s r e g i s t e r e d i n L a t i n America and the Caribbean increased a t an average annual r a t e of 14.5% as compared w i t h the world average of 12.6% (Bogolosky 1978:78). Nevertheless, the L a t i n American s t a t e s a l s o continued wi t h t h e i r r e s t r i c t i v e p r a c t i c e s , p a r t i c u l a r l y towards the United States. For example, Peru t r i e d to l i m i t B r a n i f f ' s f l i g h t frequency a f t e r t h i s a i r l i n e refused t o pay a revenue percentage payment on t r a f f i c i t was c a r r y i n g from Peru to other areas i n South America. The United States and Peru were able to a r r i v e a t an agreement r e s t r i c t i n g frequencies. S i m i l a r l y , i n the mid-'70s Ecuador refused t o approve added frequencies t o B r a n i f f ' s operations. This time the United States warned i t would impose frequency r e s t r i c t i o n s on Ecuadorian 110 c a r r i e r s s e r v i n g the United S t a t e s ; and the c o n f l i c t was res o l v e d soon a f t e r -ward ( A v i a t i o n Week and Space Technology J u l y 7, 1975:26). (See Table 6.) A i r l i n e s o r i g i n a t i n g from the A s i a n / P a c i f i c r e g i o n a l s o extended t h e i r s e r v i c e s during t h i s p e r i o d . This r e g i o n experienced the l a r g e s t growth r a t e i n i n t e r n a t i o n a l scheduled t r a f f i c over the period 1966 t o 1976—21.5%. A i r -l i n e s o r i g i n a t i n g from t h i s area made l a r g e gains i n i n t e r n a t i o n a l t r a f f i c shares over the d i f f i c u l t e a r l y t o mid-'70s. Their operations expanded from h o l d i n g 11.2% of the i n t e r n a t i o n a l market i n 1970 t o 18.7% i n 1975 (ICAO  B u l l e t i n May 1976:20). (See Table 6.) These s t a t e s were p a r t i c u l a r l y eager to gain access t o U.S. markets. A U.S. o f f i c i a l complained: "Every country out there [ i n the P a c i f i c S e r v i c e area] i s t r y i n g t o get something from the U.S." (qtd. i n A v i a t i o n Week and Space Technology A p r i l 14, 1975:21-22). P o o l i n g and i l l e g a l d i s c o u n t i n g ( i n the case of IATA members) a l s o c h a r a c t e r -i z e d the i n t e r n a t i o n a l operations of a i r l i n e s o r i g i n a t i n g from t h i s r e g i o n ( A v i a t i o n Week and Space Technology January 13, 1975:27). The A f r i c a n s , l i k e the A s i a n / P a c i f i c s t a t e s , continued t h e i r r e s t r i c t i v e p r a c t i c e s throughout the fragmentation p e r i o d . The p r o t e c t i o n of t h e i r weak, uneconomical c a r r i e r s was seen as an important way of maintaining i n t e r n a -t i o n a l p r e s t i g e and enhancing n a t i o n a l i d e n t i t y . Furthermore, as expressed by E. K. K. Dwemsh, D i r e c t o r of C i v i l A v i a t i o n i n Ghana, n a t i o n a l c a r r i e r s were considered to be a p u b l i c s e r v i c e : A i r t r a n s p o r t i s a s e r v i c e r a t h e r than a producing indus-t r y , and pro f i t - m a k i n g should not be the c r i t e r i o n ; s e r -v i c e t o business, s e r v i c e t o the a c c e l e r a t i o n of s o c i a l progress, these matters o v e r r i d e subsidy cost i n many 111 cases. . . . ( A v i a t i o n Week and Space Technology May 17, 1975:151). A number of A f r i c a n a i r l i n e s , which had p r e v i o u s l y allowed European and American a i r l i n e s to operate u n i l a t e r a l l y , pressed f o r b i l a t e r a l agreement during t h i s p e r i o d . Even c o u n t r i e s having no i n t e n t i o n to serve the United States, l i k e Ghana, i n s i s t e d on making these agreements ( A v i a t i o n Week and  Space Technology September 8, 1975:29). In order t o strengthen t h e i r bar-g a i n i n g p o s i t i o n s , v i s - a - v i s the r e s t of the world, and t o enhance r e g i o n a l cooperation, t h i r t y - t w o A f r i c a n nations met f o r the f i r s t time during t h i s p e riod (1969) to e s t a b l i s h the A f r i c a n C i v i l A v i a t i o n A s s o c i a t i o n (AFCAC) ( P i l l a i 1969:14). From 1970 t o 1975 the share of i n t e r n a t i o n a l scheduled t r a f f i c c a r r i e d by a i r l i n e s o r i g i n a t i n g i n A f r i c a increased from 3.8% t o 4.5% (ICAO B u l l e t i n May 1977:27). (See Table 6.) The move towards increased p r o t e c t i o n i s m had i t s e f f e c t even on U.S. p o l i c y . M c C a r r o l l , w r i t i n g as e a r l y as 1963 noted: This tendency i s notable even i n the U.S. where the con-cern both i n the i n d u s t r y and i n the government over a sagging market share may be le a d i n g towards a more r e s -t r i c t i v e American p o l i c y toward commercial freedom (McCar r o l l 1963:117-118). Already by the mid-'60s the United States began t o experience balance of pay-ments problems and became concerned with the increased outflow of gold due t o U.S. t o u r i s t spending abroad. I t s f i r s t r e a c t i o n was t o t r y t o re g a i n a balance i n gold flow by encouraging f o r e i g n t r a v e l t o the United States. J u s t before the 1965 Bermuda T r a f f i c Conference, the CAB announced t h a t i t 112 would support the " v i s i t U.S.A." program proposed by TWA, which would provide s p e c i a l westbound excursion fares to the United States. The CAB stressed that t h i s would be a "valuable adjunct to the program f o r strengthening the U.S. balance of payments." U.S. c a r r i e r s were unsuccessful i n obtaining d i r e c t i o n a l fares on North A t l a n t i c and t r a n s p a c i f i c routes. The balance of payments problem grew more severe. P i l l a i reports estimates that i n 1967 U.S. t o u r i s t s were spending $1,015 b i l l i o n i n Europe while Europeans were spending only $260 m i l l i o n i n the United States. A s i m i l a r imbalance was seen i n foreign payments made to U.S f l a g c a r r i e r s ( P i l l a i 1969:44). In 1967 U.S. t o u r i s t s paid $795 m i l l i o n to foreign f l a g c a r r i e r s while foreign tour-i s t s paid $225 m i l l i o n to U.S. c a r r i e r s ( P i l l a i 1969:44). The following year, a P r e s i d e n t i a l Task Force on Travel submitted a report advising that the cost of t r a v e l to and within the United States be lowered i n order to increase t r a f f i c volumes (qtd. i n P i l l a i 1969:45). The President recommended a tax on U.S. t o u r i s t s outside the western hemisphere which was condemned by both the European Travel Commission and the P a c i f i c Area Travel Association. Congress blocked t h i s a ction ( P i l l a i 1969:45). A s h i f t i n U.S. p o l i c y became noticeable i n the early '70s. The United States became very aware of foreign discriminatory p r a c t i c e s . The Nixon p o l i c y statement issued i n 1969 a f t e r an extensive review of U.S. p o l i c y by the Department of Transport, stated: Attempts to r e s t r i c t United State's c a r r i e r operations abroad should be rigorously opposed, and where required, the United States should take appropriate measures against the c a r r i e r s of foreign countries r e s t r i c t i n g U.S. c a r r i e r operations i n v i o l a t i o n of the terms of 113 b i l a t e r a l agreements or of the p r i n c i p l e of r e c i p r o c i t y (qtd. i n Diamond 1975:482). Concrete steps were taken t o promote t h i s p o l i c y . In 1970 Pa r t 213 of the Economic Regulations of the CAB was adopted. According to t h i s l e g i s l a t i o n , the CAB could l i m i t operations of f o r e i g n a i r c a r r i e r s when governments under whose a u t h o r i t y the c a r r i e r s operated had "taken a c t i o n which impairs, l i m i t s , terminates or denies operating r i g h t s " of U.S. c a r r i e r s (Haanappel i 1984:45). This p o l i c y was underscored and strengthened by the adoption of the I n t e r n a t i o n a l A i r Tr a n s p o r t a t i o n F a i r Competition P r a c t i c e s Act of 1974 (Haanappel 1984:53-55) . In a d d i t i o n t o u n i l a t e r a l a c t i o n taken to r e s i s t d i s c r i m i n a t o r y prac-t i c e s , f o r the f i r s t time i n 1975 the CAB condoned the r e d u c t i o n of competi-t i o n between U.S. c a r r i e r s by agreeing to a route t r a n s f e r between Pan American and TWA on the North A t l a n t i c . I t explained t h a t t h i s step was "necessary . . . to avoid a c l e a r danger of major c e s s a t i o n [of the c a r r i e r s ' i n t e r n a t i o n a l operations] w i t h greater attendant d i s r u p t i o n " (qtd. i n Dempsey 1978:419). F i n a l l y , the CAB departed r a d i c a l l y from i t s p o l i c y of f o s t e r i n g compe-t i t i o n by a u t h o r i z i n g c a p a c i t y r e d u c t i o n agreements i n the e a r l y '70s between BA and Pan American and TWA on routes from London t o New York, Chicago, Boston and Washington. The government i n i t i a t e d n e g o t i a t i o n s f o r North A t l a n t i c reductions w i t h Belgium, the Netherlands, Scandinavian c o u n t r i e s , I t a l y , and Sw i t z e r l a n d . No agreement was reached on Sabena, A l i t a l i a and KLM re d u c t i o n s ; but SAS agreed v o l u n t a r i l y to reduce c a p a c i t y , and TWA and Swiss-a i r were able to come t o an agreement on schedules (ICAO B u l l e t i n May 1976: 57). Pan American and Quantas were able to reach an agreement r e g u l a t i n g 114 transpacific capacity. The United States also requested reductions by VARIG on the United States-Brazil route; and VIASA on the United States-Venezuela route (ICAO Bulletin May 1976:57). Opinions about U.S. policy towards Latin America were mixed. Some White House o f f i c i a l s said that the United States was developing "a harder stance" towards Latin American countries. However, in light of the fact that the President stayed a Peruvian schedule reduction proposed by the CAB and did not disapprove an Argentinian schedule as recom-mended by the CAB, the comments of an o f f i c i a l outside the White House: "If the U.S. i s developing a harder line, I haven't seen i t " seem more insightful (Aviation Week and Space Technology July 7, 1975:26). Over the period from 1966 to 1976, the share of the international market carried by North American carriers f e l l from 30.0% to 21.2%. The average annual growth rate for inter-national scheduled t r a f f i c carried by North American airlines was 9.5% (ICAO Bulletin October 1976:20). (See Table 6.) The culmination of the United States' movement towards a more restric-tive interpretation of the Bermuda capacity principles was the renegotiation with the British of the Bermuda I agreement. The new bilateral, Bermuda II, signed in 1977 was, in the words of Salacuse: a further departure from the limited free enterprise of Bermuda I in the direction of an internationally regu-lated industry, a position that the British had espoused at Chicago over thirty years before (Salacuse 1980:836). The British renounced the Bermuda I agreement on June 22, 1976. Taneja l i s t s several factors which drove them to take this step. First, the British f e l t that U.S. carriers were getting too large a share of the United States-United Kingdom market. For instance, they pointed out that during the 115 year ending March 31, 1976, the United Kingdom had earned only $127 m i l l i o n from the North A t l a n t i c s e r v i c e between the United States and the United Kingdom, while the United States had earned $183 m i l l i o n (Larsen 1977: 82-83). Second, t h e i r concern about t h e i r own competitiveness was increased by the f a c t t h a t B r i t i s h Airways d i d not have the f i n a n c i a l resources to acquire necessary wide-bodied a i r c r a f t . T h i r d , they were i n t e r e s t e d i n o b t a i n i n g entry r i g h t s to the North A t l a n t i c f o r B r i t i s h Caledonian and Laker Airways. Another concern was to l i m i t U.S. behind and beyond gateway t r a f f i c r i g h t s . A f t e r the route swap between Pan American and TWA, France and Germany ended with only one U.S. c a r r i e r s e r v i c i n g t h e i r t e r r i t o r y w h i l e the B r i t i s h had to continue competing w i t h m u l t i p l e U.S. c a r r i e r s . In the area of f a r e p o l i c i e s , the B r i t i s h disagreed w i t h the Americans on t r a n s a t l a n t i c passenger f a r e l e v e l s and s t r u c t u r e s and were p a r t i c u l a r l y annoyed w i t h the CAB f o r disapproving a t the l a s t minute IATA negotiated r a t e s . F i n a l l y , the B r i t i s h were uneasy about rumours t h a t the United States would not a l l o w Concorde to f l y over t h e i r t e r r i t o r y (Taneja 1980:21). As i n 1946, the United Kingdom and the United States h e l d d i f f e r i n g views on how the commercial aspects of i n t e r n a t i o n a l a v i a t i o n should be regu-l a t e d . On the question of market entry, the B r i t i s h f e l t t h a t each country should designate a s i n g l e c a r r i e r t o operate a major route. They a l s o con-tended t h a t route grants should be l i m i t e d t o the t h i r d and f o u r t h freedoms ( i . e . , they wanted t o see f i f t h freedom r i g h t s e l i m i n a t e d or d r a s t i c a l l y reduced). The United States on the other hand, opted f o r m u l t i p l e c a r r i e r d e s i g n a t i o n , although P r e s i d e n t Ford conceded i n h i s I n t e r n a t i o n a l A i r Trans-p o r t a t i o n P o l i c y Statement of September 8, 1976 (which may be seen as a response t o the B r i t i s h Bermuda I den u n c i a t i o n ) , t h a t "too many competitors 116 on some routes may undercut the economic v i a b i l i t y of s e r v i c e without bene-f i t i n g the p u b l i c . " But he underlined t h a t i f the q u a l i t y of s e r v i c e could be improved by competition, i t should be a u t h o r i z e d . I f the operation was p r o f i t a b l e , Ford argued, the United States should not r e s t r i c t d e s i g n a t i o n to a s i n g l e c a r r i e r per route. In l i n e w i t h previous U.S. p o l i c y statements, Ford argued a g a i n s t c u r t a i l i n g f i f t h freedom r i g h t s saying t h a t such a move would have a negative e f f e c t on s e r v i c e . The statement appealed t o market forces as the c r i t e r i o n f o r judging whether a c a r r i e r should begin or con-t i n u e to serve s p e c i f i c routes (Larsen 1977:86-89). On the i s s u e of r e g u l a t i n g market shares, there seems to have been more convergence between the two s t a t e s than at Bermuda I. B r i t a i n proposed a system of predetermination i n which the two s t a t e s would agree on a base l e v e l of c a p a c i t y . This could be increased provided t h a t the c a r r i e r s i n v o l v e d could agree on new l e v e l s . I f they f a i l e d to agree, the B r i t i s h proposed, c a p a c i t y l e v e l s should f a l l back t o the base l e v e l . Governments might or might not be i n v o l v e d i n these n e g o t i a t i o n s . Every two years the base l e v e l would be readjusted to r e f l e c t changing t r a f f i c trends. The United States was opposed to r e g u l a t i o n of c a p a c i t y , as i n Bermuda I; how-ever, the Ford P o l i c y Statement d i d accede to c e r t a i n r e s t r i c t i o n s . Ford s t a t e d t h a t the United States would permit i n t e r c a r r i e r agreements to reduce excess c a p a c i t y under three c o n d i t i o n s : f i r s t , i f excess c a p a c i t y s e r i o u s l y a f f e c t e d the v i a b i l i t y of a c a r r i e r ' s operating a p a r t i c u l a r route; second, i f r e s t r i c t i o n s were necessary to provide s u f f i c i e n t s e r v i c e s by scheduled c a r r i e r s ; and t h i r d l y , i f other means of c a p a c i t y r e d u c t i o n had been unsuc-c e s s f u l or would be d e t r i m e n t a l t o a c a r r i e r ' s competitive p o s i t i o n (Larsen 1977:86) . 117 On the i s s u e of f a r e s , the B r i t i s h wanted to see c l o s e r government involvement w i t h IATA i n producing r a t e agreements. They f e l t t h a t the system of p r i c e - f i x i n g needed t o be strengthened. The United States favoured more f a r e experimentation. The Ford P o l i c y Statement suggested t h a t c a r r i e r s should set t a r i f f s according t o market f o r c e s . I t c r i t i c i z e d the IATA frame-work f o r being i n s u f f i c i e n t l y s e n s i t i v e to market f o r c e s . In p a r t i c u l a r , the Americans emphasized the need f o r lower f a r e s (Larsen 1977:87). Bermuda I I , which was signed on J u l y 23, 1977, e s t a b l i s h e d a more r e s -t r i c t i v e regime governing United States-United Kingdom a v i a t i o n r e l a t i o n s . The agreement favoured the B r i t i s h p o s i t i o n . Haanappel w r i t e s : The 1977 compromise, however, seems t o be s l i g h t l y more i n favor of the B r i t i s h than was the 1946 compromise. This then perhaps r e f l e c t s the stronger bargaining p o s i -t i o n of the U.K. i n 1976/1977: although a f t e r the d e c o l -o n i z a t i o n process deprived of most of i t s overseas t e r r i -t o r i e s , i t s a i r l i n e s and a v i a t i o n i n d u s t r y i n general are no doubt i n a much stronger economic p o s i t i o n than imme-d i a t e l y a f t e r the Second World War (Haanappel 1977: 140-141) . The Bermuda I I agreement i n p r i n c i p l e allowed u n r e s t r i c t e d m u l t i p l e d e s i g n a t i o n of c a r r i e r s on routes. However, r e s t r i c t i o n s were t o be placed on d e s i g n a t i o n i n the North A t l a n t i c market: each party would only be allowed to designate more than one c a r r i e r on two North A t l a n t i c r o u t e s . 1 2 On other North A t l a n t i c routes, m u l t i p l e d e s i g n a t i o n would only be allowed i f t o t a l t r a f f i c exceeded 600,000 passengers per year; or i f one c a r r i e r , 118 regardless of the a c t i v i t y of another c a r r i e r , t r ansported more than 450,000 per year; or i f one c a r r i e r d i d not compete a t a l l (Haanappel 1977:142-143). The B r i t i s h were granted entry to four new gateway c i t i e s i n the United St a t e s : A t l a n t a , D a l l a s / F o r t Worth, Houston, and S e a t t l e , and they were per-mitted t o serve San F r a n c i s c o on a non-stop route from B r i t a i n ( p r e v i o u s l y , an en route stop i n New York was r e q u i r e d ) . The United States was allowed to serve B r i t a i n from f i v e new p o i n t s i n the United States: the four above-men-t i o n e d c i t i e s and another c i t y t o be named l a t e r . In a d d i t i o n , U.S. c a r r i e r s were given u n l i m i t e d r i g h t s behind designated U.S. gateways f o r through-plane s e r v i c e s . On the i s s u e of f i f t h freedom r i g h t s , the United States e x p e r i -enced s i g n i f i c a n t l o s s e s . F i f t h freedom r i g h t s beyond London t o A u s t r i a , Belgium, the Netherlands, and Scandinavia were t o be withdrawn. On P a c i f i c a i r routes the United States a l s o gave up c e r t a i n f i f t h freedom r i g h t s but i t gained important f i f t h freedom r i g h t s between Hong Kong and Singapore. B r i t i s h c a r r i e r s were allowed t o p i c k up or discharge t r a f f i c en route i n Canada on c e r t a i n North A t l a n t i c passenger a i r routes. They were a l s o granted f i f t h freedom r i g h t s between Hong Kong and Singapore and from Anchorage t o Japan. On the i s s u e of market sharing, f o r a l l routes except the North A t l a n -t i c , i t was agreed t h a t a i r l i n e s would i n i t i a l l y determine c a p a c i t y and f r e -quency sub j e c t to ex post facto review. No government would be allowed t o r e s t r i c t c a p a c i t y or frequency u n i l a t e r a l l y . In the case of North A t l a n t i c routes, however, a predetermination scheme was agreed on. 13 The Bermuda I I agreement allowed f o r rate-making through the IATA t r a f f i c conference system, and l i k e Bermuda I c a l l e d f o r government approval of t a r i f f s (Haanappel 1977: 144-146). 119 U n l i k e most other b i l a t e r a l s , Bermuda I I contained p r o v i s i o n s r e l a t i n g t o c h a r t e r s e r v i c e s between the United States and the United Kingdom. I t a l s o i n c o r p o r a t e d the Memorandum of Understanding on Passenger Charter A i r S e r v i c e s between the United Kingdom and the United S t a t e s . This document proposed country of o r i g i n r u l e s f o r charterworthiness and s t r e s s e d the need f o r a m u l t i l a t e r a l arrangement f o r c h a r t e r a i r s e r v i c e s on the North A t l a n t i c market (Haanappel 1977:146-147). 1 4 The Bermuda I I agreement was not met by enthusiasm and, u n l i k e the Bermuda I agreement, the renegotiated b i l a t e r a l d i d not provide a model f o r f u t u r e agreements. Changes in IATA While s t a t e s adopted r e s t r i c t i v e measures t o r e g u l a t e market entry and c a p a c i t y , p r i c e s were i n c r e a s i n g l y r e f l e c t i n g market f o r c e s . The p r o l i f e r a -t i o n of d i f f e r e n t f a r e s (e.g., over 25 d i f f e r e n t types on the North A t l a n t i c ) complicated n e g o t i a t i o n w i t h i n IATA. The a d d i t i o n a l problem of increased competition from c h a r t e r s and extensive i l l e g a l d i s c o u n t i n g p r a c t i c e s of the scheduled a i r l i n e s undercut the p r i c e f i x i n g c a p a b i l i t y of the c a r t e l . Agreement on t r a f f i c r a t e s became very d i f f i c u l t to o b t a i n , and open r a t e s i t u a t i o n s became the norm f o r s e v e r a l t r a f f i c conferences ( p a r t i c u l a r l y the North A t l a n t i c Conference where competition was most pronounced) (Taneja 1980:102). In an attempt t o f a c i l i t a t e agreement i n i t i a t i v e s were taken at the IATA Annual General Meeting i n Oslo (1975) to introduce greater f l e x i b i l -i t y i n t o v o t i n g procedures. IATA members approved the r e s t r u c t u r i n g of l a r g e r e g i o n a l conferences i n t o sub-areas. With t h i s m o d i f i c a t i o n , a s i n g l e c a r r i e r w i t h a f r i n g e i n t e r e s t could be prevented from breaking the unanimity of the l a r g e r r e g i o n a l conference w i t h a veto. In l a r g e conferences ( i . e . , 120 Europe, Middle East, and the North A t l a n t i c ) a s i n g l e or small minority veto was to be ignored (Aviation Week and Space October 6, 1975). Summary From the mid-'60s to the mid- 170s the c a r t e l system was under attack. The p r i n c i p l e of negotiating market entry on the basis of a b i l a t e r a l agree-ment was not challenged; however, various forces undermined the two other fundamental p r i n c i p l e s of the regime: the 40-60 market-sharing scheme and m u l t i l a t e r a l t a r i f f - f i x i n g . Certain discriminatory practices and the i n t r o -duction of charter services can be seen as attempts by states to v i o l a t e the former. Using these two s t r a t e g i e s , states t r i e d to secure larger shares of the i n t e r n a t i o n a l market than those a l l o c a t e d to them i n t h e i r b i l a t e r a l agreements. Whether i n f a c t these practices resulted i n t h e i r securing more than a 60% share of the market on major routes i s d i f f i c u l t to judge. I t may be that such action was an attempt to v i o l a t e the c a r t e l p r i n c i p l e s but de facto d i d not do so. Several forces challenged the m u l t i l a t e r a l t a r i f f -f i x i n g p r i n c i p l e of the c a r t e l system. These were: the operation of charter services, government orders, and i l l e g a l discounting. They created, i n e f f e c t , a sector of t r a f f i c services which were not under the authority of IATA p r i c e - s e t t i n g . The operation of non-IATA scheduled c a r r i e r s , may or may not have belonged to t h i s category since there i s evidence that at l e a s t some non-IATA c a r r i e r s followed IATA pr i c e guidelines. (This point i s discussed further i n the analysis.) Other developments described: the increase i n scheduled a i r c r a f t ; overcapacity; and the f u e l c r i s i s were important not because they d i r e c t l y contributed to c a r t e l breakdown, but because they created an environment i n which a i r l i n e s and states were tempted to take 121 a c t i o n s which weakened the c a r t e l . F i n a l l y , s t a t e s ' r e s t r i c t i v e p r a c t i c e s (e.g., t h e i r r e l u c t a n c e to grant routes, t h e i r r e s o r t t o pooling agreements or c a p a c i t y reduction) u n l i k e many other developments described during t h i s p e r i o d , d i d not challenge the c a r t e l system. Rather, they represented s h i f t s i n s t a t e s ' i n t e r p r e t a t i o n of the Bermuda c a p a c i t y p r i n c i p l e s . For example, the r e n e g o t i a t i o n of the Bermuda I I agreement r e f l e c t e d an attempt by the B r i t i s h to secure a 50-50 s p l i t i n i t s market with the United S t a t e s . The developments of the period generated a great deal of t e n s i o n i n the system which was r e f l e c t e d i n the i n a b i l i t y of the IATA c a r t e l t o c l o s e many of i t s r a t e conferences. In response, i t t r i e d t o f a c i l i t a t e consensus by i n t r o d u c i n g greater f l e x i b i l i t y i n t o i t s t a r i f f - s e t t i n g process. This modi-f i c a t i o n was not s u f f i c i e n t , as could be seen i n the next pe r i o d . In conclu-s i o n , i t was c l e a r t h a t during t h i s p e r i o d , the c a r t e l system had begun to break down. O f f i c i a l l y , s t a t e s supported i t s p r i n c i p l e s ; u n o f f i c i a l l y , they took a c t i o n s which allowed a l a r g e volume of t r a f f i c to operate outside the system. 122 ANALYSIS A number of forc e s behind the weakening of the IATA c a r t e l have been described: competition from non-IATA c a r r i e r s , competition from c h a r t e r operations, t e c h n i c a l change and the o i l c r i s i s l e a d i n g to r e c e s s i o n . How-ever, they do not i n themselves e x p l a i n the und e r l y i n g dynamic f u e l l i n g the new competitive environment which challenged the c a r t e l . To make sense of t h i s p e r i o d , c e r t a i n questions must be answered, such as: why d i d s t a t e s a l l o w c a r r i e r s t o operate outside the IATA c a r t e l ? Or why d i d s t a t e s encour-age non-IATA c h a r t e r operators to enter the market? Or why d i d n ' t s t a t e s cooperate t o solv e t h e i r f i n a n c i a l d i f f i c u l t i e s ensuing from overcapacity, higher f u e l c o s t s and r e c e s s i o n , i n s t e a d of engaging t h e i r c a r r i e r s i n r a t e wars? In other words, why d i d s t a t e s weaken t h e i r support of the c a r t e l ? The f i r s t p o s s i b l e explanation f o r weakening c a r t e l support l i e s i n a change i n economic philosophy r e s u l t i n g from new economic s t u d i e s or a d i f f e r e n t c o n c e p t u a l i z a t i o n of the i n d u s t r y . Although during t h i s time, new e m p i r i c a l s t u d i e s on the e f f e c t of r e g u l a t i o n were being published i n U.S. academic j o u r n a l s , they have not been shown t o have had a major i n f l u e n c e on the d i r e c t i o n taken by a v i a t i o n p o l i c y . The second explanatory v a r i a b l e , proposes t h a t support f o r the c a r t e l weakens because s t a t e s no longer view blanket support as promoting the d e v e l -opment of t h e i r r e s p e c t i v e i n d u s t r i e s . T h i s , i n f a c t , appears to provide p a r t of the answer. States a l l o w i n g c a r r i e r s to operate outside the IATA c a r t e l b e l i e v e d t h a t these c a r r i e r s could make competitive gains by under-c u t t i n g IATA p r i c e s . Underlying t h i s development was the necessary c o r o l l a r y t h a t c e r t a i n c a r r i e r s could operate p r o f i t a b l y a t p r i c e s below IATA l e v e l s . This was c l e a r l y the case i n the h i g h l y e f f i c i e n t c h a r t e r operations. 123 A s l i g h t l y d i f f e r e n t v a r i a b l e probably played a r o l e i n e x p l a i n i n g why c e r t a i n s t a t e s i n the A s i a n / P a c i f i c region allowed t h e i r c a r r i e r s to operate outside the c a r t e l system. Much of t h e i r t r a f f i c c a r r i a g e was r e g i o n a l , and there seems t o have been a consensus on the part of these s t a t e s t h a t they wanted to l i m i t the power which a i r l i n e s from Europe and America had over t h e i r r e g i o n a l r a t e - s e t t i n g a c t i v i t i e s . I t i s i n t e r e s t i n g t o note t h a t f o r the most p a r t , non-IATA a i r l i n e s i n t h i s r e g ion followed IATA t a r i f f l e v e l s e s t a b l i s h e d f o r IATA c a r r i e r s operating i n the area. I t would appear t h a t t h e i r l a c k of support of IATA was more a matter of p r i n c i p l e than a response t o a c t u a l t a r i f f l e v e l s . Once cha r t e r operations began t o erode scheduled c a r r i e r s ' market shares, there was an increased i n c e n t i v e f o r some scheduled c a r r i e r s to cut t h e i r l o s s e s by t r y i n g t o meet c h a r t e r p r i c i n g . Other c a r r i e r s r e s i s t e d the attempt t o lower IATA p r i c e l e v e l s because t h e i r scheduled c a r r i e r s were not e f f i c i e n t enough to operate a t the proposed l e v e l s without extensive govern-ment s u b s i d i e s . Consequently, agreements i n many t r a f f i c conference regions could not be reached. The p r a c t i c e of r a t e - c u t t i n g became a v i c i o u s downward s p i r a l i n which c a r r i e r s i n an attempt t o preserve at l e a s t some p o r t i o n of t h e i r market share were forced to operate at p r o g r e s s i v e l y lower p r i c e s , f o r even the most e f f i c i e n t c a r r i e r s , t h i s e v e n t u a l l y r e s u l t e d i n f i n a n c i a l l o s s e s . The i n i t i a t i o n of t h i s v i c i o u s c i r c l e could have been prevented, or stopped, i f the hegemon had taken a c t i o n to enforce the r u l e s of the IATA c a r t e l . The question must then be posed: why d i d n ' t the United States take p r e v e n t a t i v e a c t i o n ? Did i t no longer have the power to shape the a v i a t i o n regime, or d i d i t no longer f i n d i t s i n t e r e s t s promoted through c a r t e l support? I f answers to these questions are p o s i t i v e , the second explanatory 124 v a r i a b l e i s not s u f f i c i e n t . Complete understanding of the dynamic behind developments of t h i s p eriod r e q u i r e s d i s c u s s i o n of hegemonic s t a b i l i t y ^ theory. Thornton provides some i n s i g h t i n t o U.S. behaviour. He w r i t e s : We can suspect t h a t the p r o s p e r i t y of the United States i n t e r n a t i o n a l a i r l i n e s and the q u a l i t y of a i r l i n e s e r v i c e w i l l become high p r i o r i t y U.S. o b j e c t i v e s once the p r e v i -ously o v e r r i d i n g defense needs have disappeared (Thornton 1970:683). As the European s t a t e s became economically stronger, one of the main reasons f o r the United States t o support a system t h a t d i d not promote the i n t e r e s t of i t s own a i r l i n e s and i t s economic welfare ceased t o be opera-t i v e . Thus, the l i n k between U.S. s e c u r i t y i n t e r e s t s and the economic wel-f a r e of i t s a l l i e s weakened. Developments i n nuclear technology ( i . e . , long-range m i s s i l e s ) and, consequently, the d e c l i n i n g importance of c e r t a i n s t r a t e g i c bases around the world a l s o had an impact on changing U.S. s e c u r i t y needs. The United States was no longer i n a p o s i t i o n i n which i t f e l t i t needed t o secure access t o these bases by p r o v i d i n g a v i a t i o n concessions. F i n a l l y , i t i s probably not c o i n c i d e n t a l t h a t U.S. a c t i o n c h a l l e n g i n g the c a r t e l i n t e n s i f i e d during a pe r i o d of detente w i t h the Soviet Union. These s e c u r i t y i n t e r e s t s a s i d e , the United States was i n t e r e s t e d i n c r e a t i n g an environment i n which i t s c a r r i e r s would prosper ( i . e . , one i n which i t s c a r r i e r s could undercut p r i c e s s et by l e s s e f f i c i e n t a i r l i n e s ) . The United States had made some attempt to introduce low p r i c e s i n the previous p e r i o d , but had been ra t h e r unsuccessful as was demonstrated by the Chandler Rate Controversy. I t now adopted a new t a c t i c which i t hoped would be more s u b t l e 125 and would not r a i s e the i r e of i t s a l l i e s : the i n t r o d u c t i o n of cha r t e r s e r v i c e s . Taneja p o i n t s t o the d i r e c t connection between the Chandler Rate Controversy and c h a r t e r s : The CAB having given i n t o demands of the European government f o r higher f a r e s decided to s h i f t i t s s t r a t e g y to implement lower f a r e s . Beginning i n 1963, the CAB decided to have a very l i b e r a l a t t i t u d e towards c h a r t e r s , thus f o r c i n g the IATA c a r r i e r s to reduce t h e i r f a r e s (Taneja 1980:90). This s t r a t e g y was even acknowledged by the CAB at the T r a n s a t l a n t i c Charter I n v e s t i g a t i o n i n 1964: the conduct of cha r t e r s e r v i c e s by a group of c e r t i f i -cated s p e c i a l i s t s should be a s u b s t a n t i a l b e n e f i t i n maintaining and/or i n c r e a s i n g low cost s e r v i c e s i n the t r a n s a t l a n t i c market (qtd. i n Keynes 1964:189-190). Competition from c h a r t e r s n a t u r a l l y provided an i n c e n t i v e f o r scheduled c a r r i e r s t o decrease r a t e s . However, f o r many l e s s e f f i c i e n t c a r r i e r s , decreased r a t e s meant deep cuts i n p r o f i t s . Disagreements on what c o n s t i -t u t e d "a f a r e r a t e of r e t u r n " r e s u l t e d i n s t a t e s being unable to agree on f a r e l e v e l s during t r a f f i c conferences. Consequently, i n many regions no fares were set and s t a t e s were forced t o negotiate r a t e s on a b i l a t e r a l b a s i s . Moreover, increased competition from c h a r t e r s made many scheduled a i r l i n e s r e s o r t t o i l l e g a l d i s c o u n t i n g which f u r t h e r undermined IATA r a t e -f i x i n g a u t h o r i t y . 126 I t i s not s u r p r i s i n g t h a t i n a d d i t i o n to lowering p r i c e s , c h a r t e r s had an immediate p o s i t i v e e f f e c t on U.S. market shares. Lowenfeld p o i n t s out t h a t although: the share of i n t e r n a t i o n a l t r a f f i c being c a r r i e d by scheduled U.S. f l a g c a r r i e r s kept d e c l i n i n g , the o v e r a l l share of t r a f f i c c a r r i e d by U.S. f l a g c a r r i e r s began to r i s e again, because the supplementals were predominantly American (Lowenfeld 1975a:42) (In 1971, the North American share of t o t a l world i n t e r n a t i o n a l non-scheduled t r a f f i c was 40.5% r/ICAO B u l l e t i n May 1976:26].) In a d d i t i o n t o the explanation t h a t the change i n U.S. behaviour was p r i m a r i l y a consequence of a s h i f t i n i t s s e c u r i t y i n t e r e s t s , or r a t h e r the d e l i n k i n g of s e c u r i t y i n t e r e s t s from c a r t e l support, i t a l s o appears th a t U.S. concern about the apparent d e c l i n e i n i t s power a l s o a f f e c t e d i t s a v i a -t i o n p o l i c y . For the f i r s t time, the United States experienced a balance of payments problem at the end of the 1960s. I t s i n t e r n a t i o n a l and domestic confidence was undermined by the d i s g r a c e of Vietnam. U.S. suspension of gold c o n v e r t i b i l i t y f o r the d o l l a r i n 1971 f u r t h e r e d doubts about U.S. l e a d -e r s h i p . These were augmented as the o i l c r i s i s followed by economic reces-s i o n u nderlined U.S. v u l n e r a b i l i t y . F i n a l l y , the United States found t h a t i t s economic and p o l i t i c a l leverage was being challenged by the r i s i n g eco-nomic s t r e n g t h of Japan and Europe. In the p a r t i c u l a r sphere of a v i a t i o n , d e c l i n i n g U.S. f l a g c a r r i e r market shares and diminished t r a f f i c generation made U.S. policy-makers seek ways to improve t h e i r own economic p o s i t i o n . This new s t r a t e g y was r e f l e c t e d i n the increased importance of the CAB as 127 opposed to the State Department i n formulating U.S. a v i a t i o n p o l i c y . Ana-l y s t s w r i t ing f or Aviation Week and Space Technology i n 1973 observed: [The] CAB's influence on negotiations conducted by the State Department with other governments has increased s u b s t a n t i a l l y i n recent months, p r i n c i p a l l y because of i t s stand that exchanges of routes or t r a f f i c r i g h t s should be considered only i f they are shown to be econom-~> i c a l l y b e n e f i c i a l to the U.S. [This compares to the] State Department's former view that a i r l i n e operations are business ventures, subordinate to foreign r e l a t i o n s [which] i s being r a p i d l y revised as the U.S. economic p o s i t i o n abroad continues to weaken (qtd. i n Diamond 1975:483). An important i n d i c a t i o n that the United States was concerned about i t s market shares was made p a r t i c u l a r l y apparent i n the early '70s when i t agreed to capacity reduction schemes—a s i g n i f i c a n t departure from i t s previous p o l i c i e s . The question then a r i s e s , what was more instrumental i n e f f e c t i n g a s h i f t i n U.S. p o l i c y : a change i n sec u r i t y i n t e r e s t s r e s u l t i n g i n a choice made by a dominant actor, or a decision brought about by concern for U.S. economic welfare? Was the U.S. no longer able to continue paying the costs of i n d i r e c t l y s ubsidizing the development of foreign countries' a v i a t i o n p o l i c i e s ? Although evidence from t h i s period which might provide a d e f i n i -t i v e answer to t h i s question i s d i f f i c u l t to f i n d , i t i s i n t e r e s t i n g that i n c e r t a i n cases where economic development continued to be linked to sec u r i t y i n t e r e s t s ( i . e . , i n the case of developing countries and c e r t a i n L a t i n American s t a t e s ) , the United States continued to grant concessions (e.g., i n 128 the stay of the Peruvian schedule r e d u c t i o n proposed by the CAB, and the approval of the A r g e n t i n i a n schedule by the State Department). Although there are some dangers i n drawing e x c e s s i v e l y f a r reaching conclusions from such i n s t a n c e s , they do suggest t h a t i n the f i n a l a n a l y s i s s e c u r i t y i n t e r e s t s r a t h e r than economic welfare was the d e c i s i v e f a c t o r i n determining U.S. p o l i c y . U.S. concessions t o B r i t a i n i n the Bermuda I I agreement, would a l s o appear t o p a r t i a l l y support the view t h a t concern f o r the economic welfare of U.S. c a r r i e r s would continue t o be ignored i f U.S. s e c u r i t y i n t e r e s t s were at stake. Taneja w r i t e s : There were b a s i c a l l y three options f o r the United States: 1) secure a compromised but s a t i s f a c t o r y agreement, 2) s t i c k t o i t s o r i g i n a l demands and, i f necessary, l e t the a i r s e r v i c e between the two c o u n t r i e s terminate, and 3) exert pressure on the B r i t i s h o u t s ide of the a v i a t i o n f i e l d . Given the d e s i r e to continue commerce with a strong a l l y , maintain a i r s e r v i c e , and avoid what could have amounted t o a major c o n f r o n t a t i o n , the U.S. delega-t i o n s e l e c t e d the f i r s t o p t i o n (Taneja 1980:21). This development prompts a f u r t h e r observation. Now, when the United States made economic concessions to i n d u s t r i a l i z e d s t a t e s , i t s behaviour was motivated not by a s e c u r i t y i n t e r e s t i n b o l s t e r i n g i t s a l l i e s ' economies, but by a s e c u r i t y i n t e r e s t i n preserving the good w i l l of i t s a l l i e s . In r e t r o s p e c t , the developments of t h i s p eriod and the two decades preceding i t support, at l e a s t i n p a r t , the hegemonic s t a b i l i t y theory. As long as the hegemon has an i n t e r e s t i n maintaining a regime and i s w i l l i n g to 129 pay co s t s a s s o c i a t e d w i t h t h i s a c t i o n , the arrangement w i l l continue t o oper-ate. However, once i t los e s i n t e r e s t i n maintaining the arrangement, the regime begins to fragment unless another s t a t e (or s t a t e s ) i s able and w i l l -i n g t o take over i t s r o l e and ensure t h a t the previous hegemon abides by the r u l e s of the o l d regime. The d e f e c t i o n of the hegemon, argue the hegemonic s t a b i l i t y t h e o r i s t s , i s a s i g n of a weakening hegemon. However, as has been suggested, weakening of the hegemon may be l e s s i n s t r u m e n t a l than a change i n the e x t e r n a l environment which decreases the value of the o l d regime as a means by which the hegemon achieves i t s o b j e c t i v e s . 130 NOTES 1 In a r t i c l e 5 of the Chicago Convention, c o n t r a c t i n g p a r t i e s granted non-scheduled s e r v i c e s t r a n s i t r i g h t s . However, i f the c a r r i e r was engaged i n commercial a c t i v i t y ( i . e . , c a r r i a g e of passengers, cargo, or mail f o r remuneration or h i r e ) , s t a t e s agreed t h a t i t s a c t i v i t y would be subject to the r e g u l a t i o n s , c o n d i t i o n s or l i m i t a t i o n s imposed by the s t a t e of embarka-t i o n and the s t a t e of discharge. 2 S p l i t c h a r t e r s allowed two groups of a smaller number of passengers t o share i n a c h a r t e r of a plane. These were s t i l l a f f i n i t y groups (Lowenfeld 1979:481). 3 I n c l u s i v e Tour Charters (ITCs) included a r e t u r n f l i g h t and ground s e r v i c e s ; i . e . , accommodation and ground t r a n s p o r t a t i o n . They a l s o r e q u i r e d stopovers i n at l e a s t three c i t i e s 50 or more miles apart; a minimum 10-day stay, and f a r e s had t o cover a t l e a s t 110% of the lowest f a r e charged by a scheduled c a r r i e r f o r a s i m i l a r route (Lowenfeld 1979:481: Marx 1981:137). 4 The Nixon Statement of P o l i c y read: Charter s e r v i c e s by scheduled and supplemental c a r r i e r s have been u s e f u l i n h o l d i n g f a r e and r a t e l e v e l s and expanding passenger and cargo markets. They o f f e r oppor-t u n i t i e s t o e x p l o i t the inherent e f f i c i e n c y of planeload movement and the e l a s t i c i t y of demand f o r i n t e r n a t i o n a l a i r t r a n s p o r t . They can provide low-cost t r a n s p o r t a t i o n of a s o r t f i t t e r t o the needs of a s i g n i f i c a n t p o r t i o n of the t r a v e l i n g p u b l i c . Charter s e r v i c e s are a most v a l u -able component of the i n t e r n a t i o n a l a i r t r a n s p o r t a t i o n 131 system, and they should be encouraged. I f i t appears t h a t there i s l i k e l y to be a s u b s t a n t i a l impairment of char t e r s e r v i c e s , i t would be appr o p r i a t e , where neces-sary, to avoid p r e j u d i c e to the p u b l i c i n t e r e s t , to take steps to prevent such impairment (qtd. i n Marx 1981:137). 5 The Nixon P o l i c y Statement s t a t e d t h a t the CAB f e l t there was "no per-suasive reason showing t h a t sound and dependable t r a n s a t l a n t i c scheduled operations are being jeopardized and t h a t impairment i s p r i m a r i l y . . . a t t r i b u t a b l e to c h a r t e r c a r r i e r s " (qtd. i n Marx 1981:137). 6 TGCs r e q u i r e d no p r i o r a f f i n i t y ; a group of a t l e a s t 40, 10 days m i n i -mum t r i p o u t s ide the U.S., a 60-day advance payment, and a pro rat a c o s t -sharing plan (Lowenfeld 1979:482). 7 ITCs r e q u i r e d no p r i o r a f f i n i t y ; a ground package, a minimum group of 40, one stopover, a minimum 7-day t r i p and prepayment 30 days before departure (Lowenfeld 1979:482). 8 ABCs r e q u i r e d no p r i o r a f f i n i t y ; no ground package, a minimum group of 40, a minimum stay of 7 days, prepayment at l e a s t 45 days before, and the p o s s i b i l i t y of making s u b s t i t u t i o n s i n the passenger l i s t up t o a l i m i t of 20% of seats contracted f o r (Lowenfeld 1979:483). < 9 In November/December 1977 the CAB - e l i m i n a t e d the 30-day purchase requirement f o r i n t e r n a t i o n a l ITCs - reduced advance purchase requirement f o r ABCs from 45 to 15 days - e l i m i n a t e d 7 day requirement f o r ABCs and ITCs - reduced ABC and ITC requirement of group s i z e from 40 to 20 - allowed 15% l a s t minute f i l l - u p s a l e on ABCs (Lowenfeld 1979:483-484). 132 1 ^ The P u b l i c Charter r e q u i r e d no minimum group s i z e , no advance pur-chase, no requirement f o r group accommodation, no length of stay r u l e s , no minimum c h a r t e r p r i c e , and no round t r i p requirement. A l l bases f o r discount p r i c e s on scheduled s e r v i c e s were t o be allowed (e.g., c h i l d r e n , s e n i o r c i t i -zen, standby) on P u b l i c Charters (Lowenfeld 1979:484) 1 1 IATA recognizes the r i g h t of governments t o order t h e i r n a t i o n a l car-r i e r s and sometimes f o r e i g n a i r c a r r i e r s t o provide s p e c i a l t a r i f f s f o r s p e c i f i c c a t e g o r i e s of t r a f f i c . These included c a r r i a g e of d i p l o m a t i c and government o f f i c i a l s , emigrants, p i l g r i m s , m i s s i o n a r i e s , d i p l o m a t i c cargo, and m a i l , e t c . The ordering of t a r i f f s f o r commercial s e r v i c e s can be seen as an abuse of t h i s r i g h t (Haanappel 1984:122). 1 2 Both p a r t i e s agreed to double d e s i g n a t i o n on the New York-London and London-Los Angeles routes. Pan American and TWA were designated U.S. r i g h t s . B r i t i s h Airways and Laker were chosen t o serve the former and B r i t i s h Airways and B r i t i s h Caledonian Airways the l a t t e r (Haanappel 1977: 142-143) . 1 3 Each c a r r i e r was to make t r a f f i c f o r e c a s t s f o r the f o l l o w i n g season and f i l e them with the a e r o n a u t i c a l a u t h o r i t i e s . I f disagreement on these p r o j e c t i o n s e x i s t e d , then c o n s u l t a t i o n would occur between the s t a t e s . In the event t h a t consensus d i d not occur, s t a t e s would be allowed t o in c r e a s e t h e i r frequencies i n accordance w i t h the mean of the two t r a f f i c f o r e c a s t s . An a d d i t i o n of 20 round t r i p frequencies during summer and 15 round t r i p s d u r i n g winter would be allowed (Haanappel 1977:144). 1 4 Bermuda I d i d not r e f e r to the r e g u l a t i o n of c h a r t e r s ; nor d i d most post-Bermuda b i l a t e r a l s , with the exception of b i l a t e r a l r e g u l a t i o n s d e v e l -oped between the United States and other s t a t e s . I n i t i a l l y , these agreements 133 took the form of a Memorandum of Understanding (MoUs). In the e a r l y '70s, the United States signed MoUs with Belgium, U.K., West Germany, France and the Netherlands. The agreements s t r e s s e d country of o r i g i n r u l e s f o r c e r t i -f i c a t i o n of a i r w o r t h i n e s s and the need t o reduce a d m i n i s t r a t i v e procedures. With the exception of the B e l g i a n agreement, c o n s u l t a t i o n on p r i c e s was r e q u i r e d i n the event t h a t t a r i f f s were seen to be unreasonably high or low (Marx 1981:145-147). I f a disagreement on p r i c e s could not be r e s o l v e d , the s e r v i c e s could be suspended (Haanappel 1984:132). The United States a l s o signed b i l a t e r a l agreements w i t h Canada, Yugo-s l a v i a and Jordan i n the e a r l y 1970s r e g u l a t i n g c h a r t e r s e r v i c e s . These agreements designated types of c h a r t e r s allowed to operate, accepted country of o r i g i n r u l e s on a i r w o r t h i n e s s , required t h a t c a r r i e r s be l i c e n s e d , s p e c i -f i e d r i g h t s to be granted, and allowed c a r r i e r s to operate without p r i o r approval of each f l i g h t . As i n the case of the MoU arrangements, c a r r i e r s f i l e d p r i c e s w i t h ^ c o n t r a c t i n g p a r t i e s and c o n s u l t a t i o n was r e q u i r e d i f p r i c e s were found to be unreasonable. I f no agreement could be negotiated, s e r v i c e s could be suspended (Haanappel 1984:132). 134 5. THE BREAKDOWN OF THE IATA CARTEL AND ITS RESTRUCTURING: 1977-1981  DESCRIPTION Fo l l o w i n g Bermuda I I , the i n t e r n a t i o n a l r e g u l a t i o n of c i v i l a v i a t i o n was r e v o l u t i o n i z e d . Lowenfeld w r i t e s : Not si n c e the c l o s e of World War I I has there been a p e r i o d so marked by i n s t i t u t i o n a l changes i n i n t e r n a -t i o n a l c i v i l a v i a t i o n as was the time span of 1977 to 1978 (Lowenfeld and Mendelsohn 1979:480). The main developments of the pe r i o d were: the U.S. adoption of a h i g h l y pro-competitive p o l i c y ; the renewed involvement of ICAO i n the r e g u l a t i o n of the commercial aspects of c i v i l a v i a t i o n , and i t s emergence as a forum f o r d i s -c u ssion of the concerns of small a v i a t i o n powers, p a r t i c u l a r l y the l e s s developed c o u n t r i e s ; and, t h i r d l y , the breakdown and r e c o n s t r u c t i o n of the IATA c a r t e l . Although the end of the decade d i d not h e r a l d the advent of an "open s k i e s " regime, i t d i d see the p a r t i a l demise of the c a r t e l system and s i g n i -f i c a n t l i b e r a l i z a t i o n . The trend towards greater r e l i a n c e on market f o r c e s l o s t momentum i n the 1980s as the United States, the c a t a l y s t of the changes i n the l a t e '70s, tempered i t s challenge to the IATA c a r t e l and returned t o more r e s t r i c t i v e p o l i c i e s . U.S. Procompetitive P o l i c y The change i n American p o l i c y was both r e f l e c t e d i n and pursued through the enactment of procompetitive U.S. l e g i s l a t i o n , the CAB Show Cause Order and the s i g n i n g of l i b e r a l b i l a t e r a l s . These a c t i o n s challenged the c a r t e l 135 system p r i n c i p l e s of an i m p l i c i t agreement on market-sharing w i t h i n the 40-60 parameters, and m u l t i l a t e r a l t a r i f f - f i x i n g . The movement toward d e r e g u l a t i o n f i r s t took root i n the domestic arena and then s p i l l e d over i n t o U.S. i n t e r -n a t i o n a l p o l i c y . In October 1975, the Ford A d m i n i s t r a t i o n submitted t o Congress the A v i a t i o n Act of 1975. The o b j e c t i v e of the proposed l e g i s l a t i o n was: to ensure t h a t the United States had the most e f f i c i e n t a i r l i n e system i n the world p r o v i d i n g the American p u b l i c w i t h the best p o s s i b l e s e r v i c e a t the lowest p o s s i b l e cost (MacAvoy and Snow 1977:i). The United States advo-cated l i b e r a l i z i n g market entry and g i v i n g a i r l i n e s greater p r i c i n g f l e x i -b i l i t y . The Congressional Hearings of Senators Kennedy and Cannon from 1975 to 1976 on a v i a t i o n reform were p a r t i c u l a r l y important i n b r i n g i n g the ques-t i o n of d e r e g u l a t i o n to the f o r e f r o n t and gave r i s e to a number of a v i a t i o n reform proposals introduced by Senator Kennedy, Senator Cannon, Congressman Anderson, and even the CAB. By 1976 f i v e reform b i l l s had been c i r c u l a t e d and towards the end of the year P r e s i d e n t Ford issued a new i n t e r n a t i o n a l a v i a t i o n p o l i c y statement. In i t he s t r e s s e d t h a t U.S. p o l i c y should be guided by three key p r i n c i p l e s : greater r e l i a n c e on market f o r c e s ; p r o v i s i o n f o r t r a n s p o r t a t i o n where s u b s t a n t i a l need e x i s t s ; and support f o r a p r i v a t e , v i a b l e and e f f i c i e n t a v i a t i o n i n d u s t r y (qtd. i n R o s e n f i e l d 1982:470). Presi d e n t Ford h i n t e d a t the extension of the procompetitive domestic p o l i c y to the i n t e r n a t i o n a l arena by s t a t i n g : The United States seeks an i n t e r n a t i o n a l economic e n v i -ronment and a i r t r a n s p o r t a t i o n s t r u c t u r e conducive to healthy competition among a l l our c a r r i e r s . We s h a l l r e l y upon competitive market forces to the g r e a t e s t extent f e a s i b l e . . . . (qtd. i n R o s e n f i e l d 1982:470). 136 The A v i a t i o n Act of 1975 was not passed, and P r e s i d e n t Ford l o s t the 1976 p r e s i d e n t i a l e l e c t i o n ; however, P r e s i d e n t Carter adopted d e r e g u l a t i o n and gave impetus to the movement. The f i r s t piece of i n t e r n a t i o n a l pro-deregulation l e g i s l a t i o n was passed i n November 1977: The A i r Cargo Reform Act of 1977. This was followed by an o f f i c i a l statement " P o l i c y f o r the Conduct of I n t e r n a t i o n a l A i r Transporta-t i o n " i n e a r l y 1978, i n which P r e s i d e n t Carter s t r e s s e d the need f o r the United States to pursue the expansion of a i r t r a n s p o r t a t i o n and the r e d u c t i o n of p r i c e s through a s t r a t e g y of t r a d i n g competitive o p p o r t u n i t i e s r a t h e r than r e s t r i c t i o n s (Shubat and Toh 1985:46). Fo l l o w i n g the s i g n i n g of the f i r s t two l i b e r a l b i l a t e r a l s w i t h the Netherlands and I s r a e l , C a r t e r i s s u e d a p o l i c y statement on the Conduct of I n t e r n a t i o n a l A i r T r a n s p o r t a t i o n Negotia-t i o n s i n August 1978 i n which he e s t a b l i s h e d seven goals f o r U.S. p o l i c y . These were: 1) meeting the needs of consumers through i n n o v a t i v e and compet-i t i v e p r i c i n g by a i r l i n e s ; 2) l i m i t i n g government r e g u l a t i o n seeking t o prevent d i s c r i m i n a t o r y or predatory p r a c t i c e s ; 3) l i b e r a l i z i n g c h a r t e r opera-t i o n s ; 4) e l i m i n a t i n g r e s t r i c t i o n s on c a p a c i t y , frequency, routes and operat-i n g r i g h t s of scheduled a i r l i n e s ; 5) ensuring f a i r and equal opportunity f o r U.S. c a r r i e r s i n i n t e r n a t i o n a l markets through the a r r e s t of d i s c r i m i n a t o r y p r a c t i c e s ; 6) encouraging m u l t i p l e d e s i g n a t i o n and i n c r e a s i n g U.S. gateways; and 7) p r o v i d i n g f l e x i b i l i t y to permit the development and f a c i l i t a t i o n of competitive a i r cargo s e r v i c e s (qtd. i n Taneja 1980:56; qtd. i n Haanappel 1984:51). The f o l l o w i n g month the A i r l i n e Deregulation Act of 1978 was passed which c a l l e d f o r the t e r m i n a t i o n of domestic entry and e x i t c o n t r o l s on routes, the c e s s a t i o n of domestic t a r i f f c o n t r o l s and the disbanding of the CAB as of January 1, 1985. The Departments of J u s t i c e , State and T r a n s p o r t a t i o n were to take over c o n t r o l of CAB f u n c t i o n s once i t had been "sunsetted" (Haanappel 1984:51). The 1979 I n t e r n a t i o n a l A i r Tra n s p o r t a t i o n Competition Act, which was passed i n February 1980, entrenched the seven p o l i c y goals s et by Carter's p o l i c y statement of August 1978 and added three f u r t h e r goals: 1) t o strengthen the competitive p o s i t i o n of U.S. a i r c a r r i e r s and increase t h e i r p r o f i t a b i l i t y ; 2) to i n t e g r a t e domestic and i n t e r n a t i o n a l a i r t r a n s p o r t a t i o n ; and 3) t o provide o p p o r t u n i t i e s f o r f o r e i g n a i r l i n e s t o increase, t h e i r access t o U.S. po i n t s of exchange f o r b e n e f i t s of s i m i l a r magnitude f o r U.S. c a r r i e r s , w i t h permanent l i n k a g e between r i g h t s granted and r i g h t s given away (qtd. i n Shubat and Toh 1985:47; Haanappel 1984:52-53). The 1979 Act a l s o gave "teeth" t o the 1974 A i r Tra n s p o r t a t i o n F a i r Competitive P r a c t i c e s Act. The l a t t e r had recognized t h a t the United States had been subjected to d i s -c r i m i n a t o r y and u n f a i r competitive p r a c t i c e s and had c a l l e d on the Depart-ments of Sta t e , Treasury, Transport and the CAB t o keep these p r a c t i c e s under review and take " a l l appropriate a c t i o n s w i t h i n i t s j u r i s d i c t i o n to e l i m i n -ate" such a c t i v i t y (qtd. i n R o s e n f i e l d 1982:488). However, the 1974 Act d i d not provide enforcement t o o l s f o r such a c t i o n . The 1979 Act remedied the s i t u a t i o n . I t s t r e s s e d t h a t the CAB could p r o t e c t U.S. c a r r i e r s when f o r e i g n c a r r i e r s or the government had "impaired, l i m i t e d or denied the operating r i g h t s of U.S. c a r r i e r s . " The CAB could suspend f o r e i g n c a r r i e r permits or a l t e r , modify, amend, c o n d i t i o n or l i m i t operations under a permit. The CAB was allowed to take such a c t i o n when through e i t h e r i t s own i n i t i a t i v e or an out s i d e complaint a government or c a r r i e r was found to be engaged i n u n j u s t i -f i a b l e , unreasonably d i s c r i m i n a t o r y , predatory or a n t i - c o m p e t i t i v e p r a c t i c e s 138 a g a i n s t U.S. c a r r i e r s or had imposed u n j u s t i f i a b l e or unreasonable r e s t r i c -t i o n s on the access of U.S. c a r r i e r s to f o r e i g n markets ( R o s e n f i e l d 1982: 488-489). On June 9, 1978, the CAB announced i t s i n t e n t i o n to withdraw a n t i - t r u s t immunity from the operation of the IATA c a r t e l unless IATA and i n t e r e s t e d persons could "show cause" as t o why the CAB should not r u l e t h a t i t s i n t e r -n a t i o n a l t a r i f f agreements were no longer i n the p u b l i c i n t e r e s t and there-f o r e should be disapproved (Shubat and Toh 1985:47). In January 1979 IATA responded to the U.S. order w i t h an 82 page rep o r t defending i t s a c t i v i t i e s . The rep o r t c r i t i c i z e d the CAB f o r t r y i n g t o force U.S. a n t i - t r u s t p o l i c y on the r e s t of the world, and f o r i n c o r r e c t l y assuming th a t a p o l i c y adapted to domestic a i r s e r v i c e would be e q u a l l y appropriate f o r i n t e r n a t i o n a l a i r s e r v i c e . Furthermore, i t st r e s s e d t h a t m u l t i l a t e r a l c o o r d i n a t i o n and s t a n d a r d i z a t i o n i n many areas of commercial a i r t r a n s p o r t was e s s e n t i a l f o r e f f i c i e n t o perations. The IATA response warned th a t U.S. a c t i v i t y was i n e f f e c t going a g a i n s t the p u b l i c i n t e r e s t and was r a p i d l y l e a d i n g the way towards economic and p o l i t i c a l chaos i n the a v i a t i o n i n d u s t r y (Gidwitz 1980:98-99; A v i a t i o n Week and Space Technology January 8, 1979:27). A few months l a t e r i n November, IATA r e s t r u c t u r e d i t s t r a f f i c machinery and submitted the New P r o v i s i o n s f o r the Conduct of the IATA T r a f f i c Conferences to the CAB f o r approval. The CAB gave i n t e r i m approval t o the IATA changes. I t dropped i t s challenge t o the IATA "trade a s s o c i a t i o n " a c t i v i t i e s , and on May 14, 1979 set an order to hear evidence and presentations on whether the U.S. should continue to approve IATA rate-making and r e l a t e d a c t i v i t i e s . The CAB announced th a t passenger and cargo agency programs would be subject to separate i n v e s t i g a t i o n s ( A v i a t i o n Week and Space Technology May 21, 1979:28). 139 Meanwhile, U.S. a c t i o n had generated a great deal of controversy abroad and many governments resented the attempt a t e x t r a - t e r r i t o r i a l i m p o s i t i o n of U.S. a n t i - t r u s t laws. This sentiment was p a r t i c u l a r l y evident a t the ICAO S p e c i a l T r a f f i c Conferences, as w i l l be seen l a t e r . The statement of a Euro-pean embassy o f f i c i a l i n terviewed by A v i a t i o n Week and Space Technology e p i t -omized the widely held view of U.S. i n i t i a t i v e s : The U.S. i s saying t h a t i t i s our p o s i t i o n take i t or leave i t . That i s t o t a l l y unacceptable. We w i l l not accept i t t h a t our government does not have the f i n a l say on f a r e s (qtd. i n A v i a t i o n Week and Space Technology May 21, 1979:38). As p a r t of the Show Cause proceedings, intergovernmental c o n s u l t a t i o n s were held i n Bogota, B r u s s e l s , and N a i r o b i . U.S. o f f i c i a l s found during the course of these meetings t h a t almost f o r t y nations voiced t h e i r o p p o s i t i o n t o the Show Cause Order ( A v i a t i o n Week and Space Technology August 6, 1979:27). In documents f i l e d w i t h the CAB s t a t e s made three major complaints. They s a i d t h a t the U.S. withdrawal of immunity was an a f f r o n t to the sovereignty of nations and the i n t e r n a t i o n a l community; i t v i o l a t e d b i l a t e r a l agreements, the Chicago Convention and i n t e r n a t i o n a l law; and i t would harm the economic development and s e l f - s u f f i c i e n c y of many c o u n t r i e s . In a d d i t i o n , these governments pointed to the i n c o n s i s t e n c i e s i n U.S. p o l i c y : the United States was a l l o w i n g l i b e r a l i z i n g procedures i n a v i a t i o n because t h i s favoured U.S. commercial i n t e r e s t s w h i l e i t prevented d e r e g u l a t i o n i n the shipping i n d u s t r y where i t d i d not hold a competitive advantage. Foreign governments warned the U.S. State Department t h a t U.S. p o l i c y would provoke them i n t o t a k i n g r e t a l i a t o r y a c t i o n which would " i n e v i t a b l y a f f e c t the o v e r a l l tenor of t h e i r 140 r e l a t i o n s w i t h the U.S." (qtd. i n A v i a t i o n Week and Space Technology August 27, 1979:23). IATA o f f i c i a l s warned the CAB t h a t government measures could i n c l u d e : 1) r e f u s a l of la n d i n g r i g h t s to U.S. c a r r i e r s or those c a r r i e r s not p a r t i c i -p a t i n g i n t r a f f i c conferences; 2) higher landing fees or c o s t l y operating procedures f o r U.S. c a r r i e r s ; 3) withdrawal of f i f t h freedom r i g h t s ; 4) requirements t h a t the United States be forced t o use c o s t l y n a t i o n a l ground s e r v i c e s ; 5) the l i n k a g e of i n t e r n a t i o n a l a v i a t i o n n e g o t i a t i o n s to nonavia-t i o n commerce with p o s s i b l e r e t a l i a t i o n a gainst U.S. shipping and sugar i n d u s t r i e s ; and 6) the purchase of m i l i t a r y hardware and important exports from other c o u n t r i e s as a statement a g a i n s t U.S. a v i a t i o n p o l i c y ( A v i a t i o n  Week and Space Technology October 29, 1979). The State Department pointed out the seriousness of these t h r e a t s i n s t a t i n g : There i s i n c r e a s i n g evidence t h a t f o r e i g n governments w i l l not h e s i t a t e to take these measures where they b e l i e v e i t s u i t s t h e i r i n t e r e s t s , and i n doing so, they may r e c e i v e the support of other governments w i t h i n t h e i r regions, so they could achieve an app r e c i a b l e impact on U.S. i n t e r e s t s (qtd. i n A v i a t i o n Week and Space Tech- nology August 27, 1979:24). Consequently, i n a s e c u r i t y c l a s s i f i e d document, the State Department advised the CAB t o tone down i t s challenge to the c a r t e l by suspending Show Cause proceedings pending m u l t i l a t e r a l d i s c u s s i o n s of governments a f t e r one year of the new IATA r a t e mechanism (the one year t r i a l p e riod had been suggested by European r e p r e s e n t a t i v e s a t the Brusse l s conference J u l y 26-27, 1979) ( A v i a t i o n Week and Space Technology August 6, 1979:27). The State 141 Department s t r e s s e d t h a t U.S. p o l i c y "has had and w i l l continue t o have a s e r i o u s a f f e c t on the f o r e i g n r e l a t i o n s of the U.S." (qtd. i n A v i a t i o n Week  and Space Technology August 27, 1979:23). By the end of August, the CAB issued an order l i m i t i n g the Show Cause proceedings even f u r t h e r t o a i r t r a n s p o r t a t i o n to and from the United States ( R o s e n f i e l d 1983:477). On December 5, 1979 the CAB announced i t s i n t e n t i o n to i s s u e an order g r a n t i n g approval and a n t i - t r u s t immunity t o the IATA r a t e -making machinery f o r a p e r i o d of two years subject t o s e v e r a l c o n d i t i o n s . The CAB ordered t h a t i t be allowed t o create a committee which would monitor IATA a c t i v i t i e s and study t a r i f f agreements. Most im p o r t a n t l y , the CAB d i d not a l l o w U.S. c a r r i e r s t o p a r t i c i p a t e i n rate-making agreements on the North A t l a n t i c during t h i s time. This d e c i s i o n preceded a s e r i e s of U.S. l i b e r a l b i l a t e r a l n e g o t i a t i o n s w i t h s e v e r a l major nations i n c l u d i n g two key opponents of i t s new p o l i c i e s : the United Kingdom and Japan. The t i m i n g was not c o i n -c i d e n t a l f o r as CAB members admitted, "the d e c i s i o n to remove a n t i - t r u s t immunity f o r a l l IATA t r a f f i c conferences could have l e d 'to r e a c t i o n s t h a t might hinder the movement toward a more competitive era i n i n t e r n a t i o n a l a v i a t i o n ' " ( A v i a t i o n Week and Space Technology December 10, 1979:35). At the ICAO Second A i r Transport Conference, Mr. Cohen (CAB chairman), i n a speech on February 12, 1980, explained t h a t immunity had been given to the new IATA p r i m a r i l y due to d i p l o m a t i c c o n s i d e r a t i o n s . The CAB, i n i t s " d e s i r e to work with and not a g a i n s t other n a t i o n s , " f e l t t h a t a two-year t e s t p e r i o d of the new IATA would be a d v i s a b l e . Cohen explained t h a t i n order t o assess the impact of the new IATA i t would be u s e f u l to l e t one conference area develop on i t s own outside the conference system. Conse-quently, the North A t l a n t i c - E u r o p e area was chosen. Cohen went on t h a t two 142 f a c t o r s were d e c i s i v e i n the choice of t h i s market. F i r s t , the North A t l a n -t i c had experienced an open r a t e s i t u a t i o n f o r some time and he maintained t h a t the s i t u a t i o n was f a r from " c h a o t i c . " And second, general f o r e i g n p o l i c y concerns ( i . e . , f e a r t h a t the existence of a government's a v i a t i o n i n d u s t r y would be jeopardized by a f u l l y competitive s i t u a t i o n and would lead t o economic hardship) d i d not apply i n t h i s area s i n c e the c a r r i e r s operating the routes were the strongest and most e f f i c i e n t i n the g l o b a l system (qtd. \ i n Haanappel 1984:160-161). The t e n t a t i v e CAB order was issued i n A p r i l 1980, and i n v i t e d f u r t h e r comments from i n t e r e s t e d p a r t i e s . In a d d i t i o n t o preventing U.S. a i r c a r r i e r s from p a r t i c i p a t i n g i n North A t l a n t i c IATA T r a f f i c Conferences, the CAB i n s i s t e d t h a t CAB and ICAO r e p r e s e n t a t i v e s be allowed to attend and observe a l l IATA conference sessions. A f i n a l order was i s s u e d May 21, 1981 which was t o be s u b j e c t t o review i n two years time. The CAB stayed the order u n t i l September 1981 on the request of the State Department and Department of T r a n s p o r t a t i o n . Both the A s s i s t a n t Secretary of State and P r e s i d e n t Reagan wrote l e t t e r s to CAB c h a i r -man, Mr. Cohen, asking f o r a stay u n t i l other forms of t a r i f f c o o r d i n a t i o n had been explored. The former underlined the f a c t t h a t the ECAC and LACAC had made requests of t h i s nature to the U.S. government, while Reagan wrote t h a t i t was " e s s e n t i a l t h a t the U.S. take every reasonable step t o reassure the i n t e r n a t i o n a l a v i a t i o n community of our w i l l i n g n e s s to address matters of common concern i n a cooperative manner" (Haanappel 1984:162). Meanwhile, IATA f i l e d a motion f o r the stay of the May 1981 order pending j u d i c i a l review which i t withdrew a f t e r the CAB once again delayed the e f f e c t i v e n e s s of the order u n t i l January 15, 1982 (Haanappel 1984:162-164). 143 In a d d i t i o n t o l e g i s l a t i v e changes i n U.S. n a t i o n a l a v i a t i o n law and the i s s u e of the Show Cause Orders, the t h i r d p i l l a r of the U.S. procompetitive p o l i c y s t a r t e d to be put i n place beginning i n l a t e 1977: the n e g o t i a t i o n of l i b e r a l b i l a t e r a l agreements. These took the form of formal b i l a t e r a l agreements, p r o t o c o l s to e x i s t i n g agreements, memoranda of understanding, or exchanges of d i p l o m a t i c notes. The CAB i n 1978 described the philosophy behind i t s p o l i c y i n i t i a t i v e s : While the United States has not always shown unfla g g i n g devotion t o the p r i n c i p l e s of competition, i t has sought a f r e e r regime more c o n s i s t e n t l y than most. In any event, during the past year the p r i n c i p l e s of f r e e compe-t i t i o n have c l e a r l y been r e a f f i r m e d i n the U.S. n e g o t i a t -i n g s t r a t e g y . The p o l i c y of our government i s t o trade l i b e r a l i z a t i o n s r a t h e r than r e s t r i c t i o n s , o f f e r access to U.S. markets i n r e t u r n f o r guarantees of pro-competitive r u l e s w i t h respect t o p r i c i n g , c a p a c i t y and other eco-nomic d e c i s i o n s by the c a r r i e r s of a l l s t a t e s . The unde r l y i n g premise i s t h a t expansion of competitive o p p o r t u n i t i e s f o r a l l c a r r i e r s — f o r e i g n as w e l l as U.S.— b e n e f i t s everyone, p a r t i c u l a r l y the consumer. This has been the domestic experience, and i t i s e q u a l l y a p p l i c -able i n t e r n a t i o n a l l y , i f governments w i l l a l l o w (qtd. i n Dempsey 1978:442). More c o n c r e t e l y , CAB Chairman K a h n 1 — t h e main author of U.S. procompeti-t i v e p o l i c y — s u m m a r i z e d U.S. p o l i c y o b j e c t i v e s i n l i b e r a l b i l a t e r a l n egotia-t i o n s as being (1) the e l i m i n a t i o n of a n t i c o m p e t i t i v e r e s t r i c t i o n s on 144 c h a r t e r s and supplemental c a r r i e r s ; (2) the expansion of o p p o r t u n i t i e s f o r new low-fare scheduled s e r v i c e s ; (3) the o b t a i n i n g of maximum access to markets by expansion of the number of nonstop U.S. gateways; (4) the secu r i n g of adequate m u l t i p l e c a r r i e r d e s i g n a t i o n s ; (5) the avoidance of r e s t r i c t i o n s on c a p a c i t y and frequency; and (6) the a c q u i s i t i o n of maximum f l e x i b i l i t y f o r U.S. f l a g c a r r i e r s t o operate t o intermediate and beyond p o i n t s (qtd. i n Dempsey 1978:442) . Chairman Kahn i n October 1977 st r e s s e d t h a t i n order f o r the United States t o promote i t s procompetitive p o l i c y i t was e s s e n t i a l t h a t i t a c t i v e l y seek out and engage i n n e g o t i a t i o n s w i t h r e c e p t i v e b i l a t e r a l partners: i n s t e a d of r e a c t i n g p a s s i v e l y to i n d i v i d u a l requests by f o r e i g n governments f o r d i s c u s s i o n s [the United S t a t e s ] would canvass the world, s e l e c t out the p o t e n t i a l p a r t -ners o f f e r i n g them the most promising of o p p o r t u n i t i e s , and a c t i v e l y seek out n e g o t i a t i o n s w i t h them on a b i l a t -e r a l or m u l t i l a t e r a l b a s i s (qtd. i n Harbison 1982:45). In the p u r s u i t of l i b e r a l i z a t i o n the United States adopted a two-pronged s t r a t e g y . F i r s t , i t o f f e r e d an exchange of routes f o r r a t e s . Previous nego-t i a t o r s , Kahn explained, had negotiated on the ba s i s of o b t a i n i n g equal bene-f i t s through a route f o r route exchange. In h i s words, they took a "niggardly view" asking the question " w e l l what have you got t o o f f e r us?" and d e f i n i n g "what have you got" i n terms of routes they had to o f f e r . Kahn, however, f e l t t h a t , i n s t e a d , i n exchange f o r access to U.S. markets, the United States should ask f o r cha r t e r l i b e r a l i z a t i o n , f l e x i b l e p r i c i n g r u l e s and low fare-scheduled s e r v i c e s (qtd. i n Gray 1978:19). When d i f f i c u l t i e s 145 arose i n o b t a i n i n g t h i s k i n d of exchange, the U.S. adopted a second s t r a t e g y : d i v i d e and conquer. This p o l i c y was based on the p r i n c i p l e t h a t l e s s com-p l i a n t s t a t e s could be pressured i n t o accepting more l i b e r a l arrangements through d i v e r t i n g t r a f f i c t o s t r a t e g i c a l l y l o c a t e d neighbouring c o u n t r i e s . The l a t t e r , of course, would have to be w i l l i n g to accept procompetitive arrangements. This p o l i c y was made p u b l i c through the leak of Michael E. Levine's memo dated February 26, 1979. (At the time, Levine held the p o s i -t i o n of D i r e c t o r o f • t h e Bureau of P r i c i n g and Domestic A v i a t i o n . ) In i t he noted t h a t pressure could be placed on I t a l y and France, two r e s i s t o r s t o U.S. procompetitive advances, through increased competition f u e l l e d by nego-t i a t i o n s w i t h Greece, Spain, P o r t u g a l and Yugoslavia. S i m i l a r l y , the B r i t i s h could be pressured by d i v e r t i n g t r a f f i c to other European gateways which allowed l i b e r a l i z e d scheduled and char t e r s e r v i c e s , e.g., Belgium, the Netherlands, and F i n l a n d . Although not e x p l i c i t l y mentioned i n the memo, a s i m i l a r method was probably envisioned as a way of f o r c i n g the Japanese to make concessions. By s i g n i n g l i b e r a l b i l a t e r a l s w i t h South Korea, Singapore, and Thailand (Shubat and Toh 1985:50-51; A v i a t i o n Week and Space Technology May 21, 1979:28) . From 1978 t o 1981 over 20 l i b e r a l b i l a t e r a l s were signed. The terms of these agreements d i f f e r e d s u b s t a n t i a l l y . In general, however, the U.S. exchanged f i r s t time access and/or a d d i t i o n a l gateways f o r concessions i n a l l o w i n g market fo r c e s t o determine market entry, market shares and t a r i f f s . Charter s e r v i c e s were a l s o brought under the terms of the agreements, and measures were taken t o l i b e r a l i z e t h e i r r e g u l a t i o n . F i n a l l y , c e r t a i n agree-ments incorporated p r o v i s i o n s t h a t promoted f a i r competitive p r a c t i c e s . 146 In order to achieve i t s l i b e r a l i z i n g o b j e c t i v e s , the United States o f f e r e d c o u n t r i e s f i r s t time access to U.S. gateways and a d d i t i o n a l gate-ways. For example, the Netherlands r e c e i v e d two new p o i n t s i n March 1978; the B e l g i a n s , three new p o i n t s (November 1978); West Germany, s i x new p o i n t s (November 1978); Jamaica, ten new p o i n t s ( A p r i l 1979); and Singapore, s i x new p o i n t s (June 1979) (Taneja 1980:65). Gateways were o f f e r e d under one of four c o n d i t i o n s . F i r s t , a country might be granted a s p e c i f i c number of gateways i n the United States t o be s e l e c t e d at i t s own d i s c r e t i o n . These points could be changed on short n o t i c e . Rover-points, as these gateways were' c a l l e d , were very v a l u a b l e s i n c e they allowed a i r c a r r i e r s t o respond to the o f t e n u n p r e d i c t a b l e changes i n t r a f f i c demand. Jamaica, i n A p r i l 1979, was the f i r s t country to r e c e i v e such a p r i v i l e g e and was granted ten u n s p e c i f i e d p o i n t s which could be changed a t i n t e r v a l s of not l e s s than s i x months w i t h 60 days' n o t i c e to the U.S. government. A second type of agreement simply s p e c i f i e d the new gateways, o f t e n i n c l u d i n g a clause a l l o w i n g f o r t h e i r "phasing i n " over s e v e r a l years. A t h i r d agreement might s p e c i f y c e r t a i n new gateways and provide u n s p e c i f i e d gateways t o be s e l e c t e d by the f o r e i g n country. While a f o u r t h o p t i o n would simply provide u n s p e c i f i e d gateways to be chosen by the f o r e i g n country without the e x t r a p r i v i l e g e of r o v e r - p o i n t s (Haanappel 1984:140-141). In order t o l i b e r a l i z e market entry and weaken s t r i c t market-sharing arrangements the United States was i n t e r e s t e d i n o b t a i n i n g agreements which allowed m u l t i p l e d e s i g n a t i o n , permissive route awards, and reduced r e s t r i c -t i o n s on f i f t h freedom and beyond r i g h t s . Although the Bermuda I agreement d i d not s p e c i f i c a l l y c a l l f o r s i n g l e d e s i g n a t i o n , m u l t i p l e d e s i g n a t i o n i n post-Bermuda I b i l a t e r a l s was r a r e . The United States f e l t t hat i n c r e a s i n g 147 d e s i g n a t i o n would "create a more competitive environment." Many c o u n t r i e s had opposed such i n i t i a t i v e s f o r u n l i k e the United States they only possessed a s i n g l e designated i n t e r n a t i o n a l c a r r i e r and feared t h a t the entry of s e v e r a l U.S. c a r r i e r s i n t o t h e i r markets would leave them a t a competitive disadvantage. However, the United States was able t o acquire m u l t i p l e d e s i g -n a t i o n r i g h t s i n s e v e r a l agreements (e.g., w i t h South Korea [September 1978], Singapore [June 1979], F i n l a n d [March 1980], and Belgium [October 1980]). Permissive route awards gave c o u n t r i e s the r i g h t t o a l l o w c a r r i e r s to enter or leave the market a t w i l l . In other words, a i r l i n e s designated to serve i n t e r n a t i o n a l routes had no p u b l i c s e r v i c e o b l i g a t i o n t o a c t u a l l y perform the s e r v i c e s they had acquired. Such a p r o v i s i o n was i n c o r p o r a t e d i n t o l i b e r a l b i l a t e r a l s signed w i t h Belgium (November 1978) and the Netherlands (March 1978). Harbison p o i n t s out t h a t the United States i s the only s t a t e a c t u a l l y using t h i s p r i v i l e g e (Harbison 1982:56). I n t e r e s t i n weakening market-shar-in g arrangements, and i n p a r t i c u l a r i n c r e a s i n g U.S. c a r r i e r s ' market shares l e d the United States to pursue reductions on r e s t r i c t i o n s placed on f i f t h freedom and beyond r i g h t s . I t was able to get such concessions from smaller c o u n t r i e s and p a r t i c u l a r l y those c a r r y i n g themselves a l a r g e volume of f i f t h freedom t r a f f i c (e.g., Singapore [June 1979]). In a d d i t i o n , U.S. procompeti-t i v e p o l i c y , c a l l e d f o r no l i m i t a t i o n s on c a p a c i t y , frequency or gauge. In c o n t r a s t t o the Bermuda c a p a c i t y c l a u s e s , l i b e r a l b i l a t e r a l s i n c o r p o r a t i n g t h i s c o n d i t i o n made no d i s t i n c t i o n s w i t h respect t o c a p a c i t y on t h i r d , f o u r t h and f i f t h freedoms. This was p a r t i c u l a r l y important s i n c e i t removed d i s -agreements over c a p a c i t y p r i n c i p l e s w i t h regard to s i x t h freedom operations. L i b e r a l i z e d c a p a c i t y p r i n c i p l e s were found i n agreements w i t h South Korea 148 / (September 1978), Singapore (June 1979), F i n l a n d (March 1980) and Belgium (October 1980). L i b e r a l b i l a t e r a l s used one of three d i f f e r e n t p r i c i n g schemes: double d i s a p p r o v a l , country of o r i g i n and "zones of reasonableness" or "fare bands." A i r l i n e s were encouraged to f i l e low scheduled t a r i f f s i n response to the market. No e x p l i c i t reference was made to the rate-making machinery of IATA and l i k e the Show Cause Order, these p r o v i s i o n s i n p a r t i c u l a r provided a d i r e c t challenge to the IATA c a r t e l . A double d i s a p p r o v a l clause s t i p u l a t e d t h a t f a r e s could only be disap-proved i f both governments agreed t o do so. Since such agreement was h i g h l y u n l i k e l y , t h i s arrangement was viewed as the most l i b e r a l , almost r e p l i c a t i n g a market c o n t r o l s i t u a t i o n . Agreements with I s r a e l (August 1978), South Korea (September 1978), Belgium (November 1978), Jamaica ( A p r i l 1979), Singa-pore (June 1979), Thailand (June 1979), Costa R i c a (August 1979), Taiwan (October 1979), the Netherlands A n t i l l e s (January 1979), F i n l a n d (March 1980), and Jordan (June 1980) incorporated such a clause. A second, l e s s l i b e r a l v a r i a t i o n , was country of o r i g i n p r i c i n g . Under such an arrangement a government had e x c l u s i v e c o n t r o l over t a r i f f s on t r a f f i c o r i g i n a t i n g i n i t s t e r r i t o r y . Thus a country could prevent the e f f e c t i n g of r a t e s f o r t h i r d freedom t r a f f i c and round t r i p s o r i g i n a t i n g i n i t s t e r r i t o r y . Country of o r i g i n p r i c i n g c h a r a c t e r i z e d agreements with the Netherlands (March 1978), Papua New Guinea (October 1978), Germany (November 1978), F i j i (May 1979), and A u s t r a l i a (December 1978 and May 1980). F i n a l l y , i n the 1980s, a new form of p r i c i n g arrangement appeared: "zones of reasonableness" or "fare band" systems. These were based on the establishment of reference p r i c e s . D i f f e r e n t types of p r i c e c o n t r o l were used i n s p e c i f i e d zones around 149 reference p o i n t s . In other words, w i t h i n a c e r t a i n band or zone above and below a reference p r i c e , one p r i c i n g r u l e e x i s t e d , (e.g., double di s a p p r o v a l ) while o u t s i d e t h i s zone another r u l e a p p l i e d , (e.g., country of o r i g i n r u l e s ) . This system c h a r a c t e r i z e d agreements with China (September 1980) and the P h i l i p p i n e s (October 1980). A l l three schemes t r i e d to l i m i t government i n t e r v e n t i o n to the preven-t i o n of predatory p r a c t i c e s or d i s c r i m i n a t o r y p r i c i n g , t o the p r o t e c t i o n of consumers from unduly high monopoly f a r e s and to the p r o t e c t i o n of a i r l i n e s I. from p r i c e s t h a t were a r t i f i c i a l l y low due to government s u b s i d i e s . Harbison describes U.S. c h a r t e r p o l i c y as being d i r e c t e d by four objec-t i v e s . F i r s t , the United States wanted to ensure t h a t scheduled and c h a r t e r s e r v i c e s could d i r e c t l y compete ( i . e . , be allowed to match each other's p r i c e s ) . Second, i t wanted t o l i b e r a l i z e c h a r t e r r u l e s so t h a t competitive r e s t r i c t i o n s were removed. T h i r d , the United States wanted t o expand ch a r t e r o p p o r t u n i t i e s . And f i n a l l y , i t wanted to remove any c a p a c i t y r e s t r a i n t s on c h a r t e r s e r v i c e s (Harbison 1982:42-43). The l i b e r a l b i l a t e r a l agreements promoted such o b j e c t i v e s by a l l o w i n g c o u n t r i e s to e x p l i c i t l y designate c h a r t e r c a r r i e r s . P r e v i o u s l y , c h a r t e r operations had been subject to a v a r i e t y of i n f o r m a l r u l e s which had made them vu l n e r a b l e to unpredictable t e r m i n a t i o n or suspension of operating r i g h t s . U n l i k e scheduled s e r v i c e s , c h a r t e r s were not l i m i t e d to operating on s p e c i f i e d routes and could c a r r y t r a f f i c between a l l p o i n t s i n both c o u n t r i e s . Under l i b e r a l b i l a t e r a l agree-ments c h a r t e r s were placed under country of o r i g i n r u l e s or double country of o r i g i n r u l e s . In the former, any c h a r t e r f l i g h t (one-way or round t r i p ) i s governed by the n a t i o n a l r u l e s of the s t a t e from which i t s f l i g h t o r i g i n a t e s while i n the l a t t e r a country i s allowed to use e i t h e r i t s own r u l e s or those 150 of the country from where the t r a f f i c o r i g i n a t e s . Most l i b e r a l b i l a t e r a l s a l s o a l l o w c h a r t e r s t o operate t h i r d and f o u r t h freedom (one-way or round t r i p f l i g h t s w i t h u n l i m i t e d stopovers). They a l s o grant beyond r i g h t s and the p r i v i l e g e of stopover or t r a n s i t i n the s t a t e g r a n t i n g the beyond r i g h t . For a l l these r i g h t s , most-favoured-nation r u l e s a p p l y ; ( i . e . , the country of o r i g i n must apply uniform l i b e r a l r u l e s t o s i m i l a r c h a r t e r s ) . This, of course, ensured equal opportunity i n competition. L i b e r a l b i l a t e r a l s do not u s u a l l y grant c h a r t e r s f i f t h or s i x t h freedom t r a f f i c r i g h t s unless a s p e c i -f i c clause i s i n c l u d e d a l l o w i n g the extension of such p r i v i l e g e s on the b a s i s of "comity and r e c i p r o c i t y . " L i b e r a l b i l a t e r a l s a l s o permitted "matching" of c h a r t e r p r i c e s w i t h scheduled p r i c e s . In other words, a l l designated c a r -r i e r s of one country could meet any p r i c e o f f e r e d by t h e i r b i l a t e r a l p a r t -ner's a i r l i n e (Harbison 1984:67-70). Some of these l e s s r e s t r i c t i v e c harter measures were incorp o r a t e d i n t o agreements with South Korea (September 1978), Singapore (June 1979), Thailand (June 1979), F i n l a n d (March 1980), and Belgium (October 1980). F i n a l l y , i n almost a l l l i b e r a l b i l a t e r a l s signed during t h i s p e r i o d , c o n t r a c t i n g p a r t i e s agreed not to engage i n d i s c r i m i n a t o r y p r a c t i c e s . The exception was Argentina, which refused t o s i g n such a clause. However, as Shubat and Toh p o i n t out i n t h e i r a n a l y s i s of b i l a t e r a l s signed between 1978 and 1983, de facto these agreements had l i t t l e impact. The authors r e f e r t o the r e p o r t of the Congressional House Committee hearing on d i s c r i m i n a t o r y p r a c t i c e s a g a i n s t the U.S. ( J u l y 1981-May 1982). The study found s e v e r a l s t a t e s i n v o l v e d i n the f o l l o w i n g d i s c r i m i n a t o r y p r a c t i c e s : Aer Lingus ( I r e l a n d ) , A l i t a l i a ( I t a l y ) , SAS (Scandinavian c o u n t r i e s ) were h e a v i l y sub-s i d i z e d ; Canada charged the United States d i s c r i m i n a t o r y f u e l p r i c e s ; E n g l i s h 151 and A u s t r a l i a n a i r p o r t s charged the United States d i s c r i m i n a t o r y user fees; I t a l y , Argentina, Canada, Ecuador, Japan, Kenya and Peru o f f e r e d the United States the use of poor, expensive ground handling s e r v i c e s ; Belgium, Canada, France, West Germany, I t a l y , Mexico, Taiwan, Japan, South Korea and the United Kingdom p r a c t i c e d warehouse and custom d i s c r i m i n a t i o n a g a i n s t U.S. t r a f f i c ; France, I t a l y and Germany used biased computerized r e s e r v a t i o n systems which d i d not give access to data on U.S. c a r r i e r operations; and Ghana, I n d i a , Kenya, N i g e r i a , P a k i s t a n , Taiwan, and Z a i r e were slow i n U.S. currency conversion and remittance (Shubat and Toh 1985:53). As was noted e a r l i e r , l i b e r a l b i l a t e r a l s took a v a r i e t y of d i f f e r e n t forms. To f u r t h e r d i s t i n g u i s h trends and a r r i v e a t some general conclusions i t i s u s e f u l to r e f e r t o Harbison's study of l i b e r a l b i l a t e r a l s . Relevant in f o r m a t i o n has been summarized and set out i n t a b u l a r form: F i r s t L i b e r a l B i l a t e r a l s D e s i g n a t i o n C a p a c i t y S c h e d u l e d P r i c i n g C h a r t e r R u l e s Comments U n i t e d S t a t e s -N e t h e r l a n d s M arch 1978: p r o t o c o l No r e s t r i c t i o n No r e s t r i c t i o n s C o u n t r y of o r i g i n C o u n t r y o f o r i g i n ' . N e t h e r l a n d s : - r e c e i v e d two new r o u t e s - depended h e a v i l y on f i f t h and s i x t h f r e e d o m t r a f f i c - agreement impeded ECAC de v e l o p m e n t o f m u l t i l a t e r a l c h a r t e r r u l e s on N o r t h A t l a n t i c U n i t e d S t a t e s -I s r a e l A u g u s t 1978: p r o t o c o l No r e s t r i c t i o n s No r e s t r i c t i o n s D ouble d i s a p p r o v a l C o u n t r y o f o r i g i n I s r a e l r e c e i v e d f o u r new gateways expand ed beyond and i n t e r m e d i a t e a u t h o r i t y - depended on f i f t h and s i x t h f reedom r i g h t s U n i t e d S t a t e s -K o r e a September 1978: Memorandum o f U n d e r s t a n d i n g No r e s t r i c t i o n s No r e s t r i c t i o n s C o u n t r y o f o r i g i n C o u n t r y o f o r i g i n - f i r s t l i b e r a l b i -l a t e r a l o u t s i d e N o r t h A t l a n t i c - r e c e i v e d one new gateway - was p o t e n t i a l t h r e a t t o J a p a n w h i c h was r e s i s t -i n g U.S. l i b e r a l i z a t i o n - K o r e a depended on f i f t h and s i x t h f r eedom r i g h t s U n i t e d S t a t e s -Papua New G u i n e a O c t o b e r 1978 No r e s t r i c t i o n s No r e s t r i c t i o n s C o u n t r y o f o r i g i n C o u n t r y of o r i g i n Papua New G u i n e a r e c e i v e d two new gateways - was a s i x t h f r e e -dom c o u n t r y - was p o t e n t i a l t h r e a t t o ' A u s t r a l i a U n i t e d S t a t e s -F i j i May 1979 No r e s t r i c t i o n s No r e s t r i c t i o n s C o u n t r y of o r i g i n C o u n t r y of o r i g i n R e c e i v e d two new gateways and expand-ed i n t e r m e d i a t e r i g h t s - was a s i x t h f r e e -dom c o u n t r y - was p o t e n t i a l t h r e a t t o A u s t r a l i a F i r s t L i b e r a l D e s i g n a t i o n C a p a c i t y S c h e d u l e d C h a r t e r Comments B i l a t e r a l s P r i c i n g R u l e s U n i t e d S t a t e s - No r e s t r i c t i o n s No r e s t r i c t i o n s C o u n t r y o f C o u n t r y o f Germany r e c e i v e d s i x Germany ( e x c e p t f i f t h o r i g i n o r i g i n new p o i n t s and un-p r o t o c o l : f reedom s u b j e c t l i m i t e d i n t e r m e d i -November 1978 t o Bermuda I c a p a c i t y p r i n -c i p l e s ) a t e and beyond r i g h t s - U n i t e d S t a t e s g o t v a l u a b l e r i g h t s t o more t h a n one major gateway ( o n l y agreement where t h i s o c c u r r e d ) 154 F u l l y L i b e r a l D e s i g n a t i o n C a p a c i t y S c h e d u l e d C h a r t e r Comments P r i c i n g R u l e s U n i t e d S t a t e s - No r e s t r i c t i o n s No r e s t r i c t i o n s D o uble D o u b l e - l a s t f o r m a l l i b e r -B e l g i u m : d i s a p p r o v a l c o u n t r y o f a l i z a t i o n on N o r t h p r o t o c o l o r i g i n A t l a n t i c November 1978 - B e l g i u m r e c e i v e d two new r o u t e s U n i t e d S t a t e s - No r e s t r i c t i o n s No r e s t r i c t i o n s D o uble Double J a m a i c a : J a m a i c a d i s a p p r o v a l c o u n t r y o f - r e c e i v e d t e n p r o t o c o l o r i g i n s c h e d u l e d gateways A p r i l 1979 and beyond r i g h t s t o any t h r e e p o i n t s i n Canada and any one p o i n t i n Europe - gateways were ( r o v e r p o i n t s - some r e s t r i c t i o n s on U.S. i n t e r m e d -i a t e and beyond r i g h t s > U n i t e d S t a t e s - No r e s t r i c t i o n s No r e s t r i c t i o n s D o uble Double S i n g a p o r e S i n g a p o r e d i s a p p r o v a l c o u n t r y o f - r e c e i v e d t h r e e new June 1979 o r i g i n g ateways ( r o v e r -p o i n t s ) and u n l i m -i t e d i n t e r m e d i a t e r i g h t s - was t o i n c r e a s e p r e s s u r e on l a r g e r m a r k e t s of P h i l i p -I p i n e s and J a p a n U n i t e d S t a t e s - No r e s t r i c t i o n s No r e s t r i c t i o n s D o uble D o u b l e r e c e i v e d one new T h a i l a n d d i s a p p r o v a l c o u n t r y o f r o u t e w i t h i n t e r -J une 1979 o r i g i n m e d i a t e r i g h t s v i a Tokyo U n i t e d S t a t e s - R e s t r i c t i o n s R e s t r i c t i o n s C o u n t r y of C e r t a i n - f i r s t L a t i n A m e r i -C o s t a R i c a O r i g i n r e s t r i c - can agreement Memorandum o f t i o n s - r e c e i v e d new g a t e -U n d e r s t a n d i n g ways A u g u s t 1979 155 F u l l y L i b e r a l D e s i g n a t i o n C a p a c i t y S c h e d u l e d P r i c i n g C h a r t e r R u l e s Comments U n i t e d S t a t e s -T a i w a n November 1979 No r e s t r i c t i o n s No r e s t r i c t i o n s D o uble d i s a p p r o v a l D ouble c o u n t r y o f o r i g i n - g o t f i r s t - t i m e s c h e d u l e d a u t h o r -i t y t o t h e U n i t e d S t a t e s - T a i w a n r e c e i v e d r i g h t s t o seven U.S. gateways v i a i n t e r m e d i a t e p o i n t s and beyond t o one p o i n t i n Europe and one p o i n t i n c e n t r a l o r S o u t h A m e r i c a - was t o i n c r e a s e p r e s s u r e on J a p a n U n i t e d S t a t e s -N e t h e r l a n d s A n t i l l e s p r o t o c o l J a n u a r y 1980 C e r t a i n r e s t r i c t i o n s C e r t a i n r e s t r i c t i o n s D o uble d i s a p p r o v a l D ouble c o u n t r y o f o r i g i n - r e c e i v e d new g a t e -ways U n i t e d S t a t e s -F i n l a n d p r o t o c o l F e b r u a r y 1980 Double d i s a p p r o v a l ( w i t h c e r -t a i n r e s -t r i c t i o n s ) ( Double c o u n t r y o f o r i g i n - U.S. f l a g s e r v i c e d i d n o t e x i s t , nor was i t i m m e d i a t e l y e x p e c t e d - F i n l a n d r e c e i v e d t h r e e new gateways U . S . - J o r d a n F e b r u a r y 1980 Double d i s a p p r o v a l ( w i t h c e i — t a i n r e s -t r i c t i o n s ) D o uble c o u n t r y of o r i g i n J o r d a n g r a n t e d r o u t e s t o f o u r new gateways v i a t h r e e r o v e r p o i n t s 156 R e s t r i c t i v e L i b e r a l B i l a t e r a l s D e s i g n a t i o n C a p a c i t y S c h e d u l e d P r i c i n g C h a r t e r R u l e s Comments U n i t e d S t a t e s -A u s t r a l i a Exchange of N o t e s December 1978/ May 1980 R e s t r i c t i o n s R e s t r i c t i o n s C o u n t r y of o r i g i n R e s t r i c t i o n s - I m p o r t a n t t r a f f i c g e n e r a t o r i n S o u t h P a c i f i c - A u s t r a l i a r e -c e i v e d new g a t e -way U n i t e d S t a t e s -New Z e a l a n d Memorandum o f C o n s u l t a t i o n s A p r i l 1980 R e s t r i c t i o n s C o u n t r y o f o r i g i n C o u n t r y \of o r i g i n - s i x t h f reedom c o u n t r y - New Z e a l a n d r e -c e i v e d two new gateways ( r o v e r -p o i n t s ) w i t h i n -t e r m e d i a t e p o i n t s i n S o u t h P a c i f i c and beyond r i g h t s t o Canada, Europe and t h e U.K. U n i t e d S t a t e s -U n i t e d Kingdom J u l y 1977 S o m e L i b e r a l i z a t i o n - Bermuda I I M a r c h / A p r i l 1978 U n i t e d Kingdom a c c e p t e d U n i t e d S t a t e s low f a r e s u g g e s t i o n s p r o b a b l y i n p a r t due t o p r e s s u r e f r o m B e l i g i a n and N e t h e r l a n d s agreement March 1980 - f o r m a l Bermuda I I framework r e -t a i n e d U n i t e d S t a t e s -C h i n a September 1980 R e s t r i c t i o n s R e s t r i c t i o n s Band p r i c i n g C o u n t r y of o r i g i n s u b -j e c t t o s p e c i f i c a p p r o v a l U n i t e d S t a t e s -P h i 1 i p p i n e s O c t o b e r 1980 R e s t r i c t i o n s R e s t r i c t i o n Band p r i c i n g C h a r t e r s n o t i n c l u d e d - f o r 20 y e a r s had no f o r m a l a g r e e -ment P h i 1 i p p i n e s : - r e c e i v e d i n t e r -m e d i a t e p o i n t s i n J a p a n and two new gateways w i t h one new p o i n t beyond 157 Several important observations can be made about the liberal bilaterals described. First, the United States in a l l cases "paid" in some way for con-cessions given: as mentioned earlier usually in the form of giving access to new U.S. gateways and often granting intermediate and beyond rights. Second, the most lib e r a l agreements were signed in the i n i t i a l phases of U.S. procom-petitive crusade. Shubat and Toh point out that the more liberal agreements were signed with smaller nations, many of which depended on f i f t h and sixth freedom t r a f f i c , e.g., Israel, Korea, Belgium, Jamaica, Singapore, Thailand, and Taiwan. Thirdly, the United States was willing to agree to several restrictive measures in certain negotiations with weak air powers, e.g., Costa Rica, and the Netherlands Antilles. Fourthly, in i t s negotiations with larger air powers which depended more heavily on third and fourth freedom t r a f f i c , the United States was able to get limited liberalization, e.g., Australia, United Kingdom, and China. It did not reach liberalizing agree-ments with African countries, most Latin American countries (with the excep-tion of Cost Rica), Japan, France, and Italy. Finally, U.S. attempts to use the threat of t r a f f i c diversion to get agreement from less compliant states had only limited success. The United States was able to exert some pressure on the United Kingdom through the signing of bilaterals with Belgium, the Netherlands, and Germany, although French and Italian markets were not opened. Similarly, liberal bilaterals signed with F i j i , Papua New Guinea and Taiwan seemed to have encouraged the Philippines to engage in a liberalizing bilateral, although they had l i t t l e effect on the U.S. major target in the Pacific—Japan. The signing of a li b e r a l bilateral with Finland had l i t t l e success in softening the adamant opposition to U.S deregulation maintained by the other Scandinavian countries. U.S. negotiations with New Zealand placed 158 l i m i t e d pressure on A u s t r a l i a , although i t i s more l i k e l y t h a t v a l u a b l e new access t o U.S. markets provided the key i n c e n t i v e . F i n a l l y , the l i b e r a l r u l e s of these b i l a t e r a l s c o n s t i t u t e d a break from the norms e s t a b l i s h e d by the c a r t e l system. S p e c i f i c a l l y , they allowed market shares and p r i c e s to be the product of competitive f o r c e s . ICAO and Economic Regulations As was pointed out e a r l i e r , ICAO's involvement i n economic r e g u l a t i o n was minimal u n t i l the mid-1970s. The attempt to i n v o l v e ICAO i n the economic r e g u l a t i o n of c i v i l a v i a t i o n d i d not undermine the p r i n c i p l e s of the c a r t e l system. Rather, i t provided a new forum where s t a t e s could seek market-shar-i n g schemes and m u l t i l a t e r a l p r i c e - f i x i n g agreements. At the 21st s e s s i o n of the ICAO Assembly i n 1974, i t was decided t h a t the C o u n c i l should examine the problems a s s o c i a t e d w i t h the r e g u l a t i o n of f l a g c a r r i e r s ' economic a c t i v i -t i e s . The Assembly set up a Panel of Experts on the Machinery f o r the Estab-lishment of I n t e r n a t i o n a l Fares and Rates whose mandate was t o develop an i n t e r n a t i o n a l ICAO standard t a r i f f clause on an i n t e r n a t i o n a l agreement embodying such a clause (Azzie 1980:10). Debate a t the 21st Assembly a l s o provided the impetus f o r the c a l l i n g of an ICAO S p e c i a l A i r Transport Confer-ence to be h e l d i n Montreal from A p r i l 13 to 26, 1977. For many years l e s s developed c o u n t r i e s had f e l t t h a t t h e i r i n t e r e s t s were being overlooked a t IATA conferences. U.S. c a r r i e r s comprised over 10% of the IATA membership and the concerns of the l a r g e r U.S. and European a i r -l i n e s predominated. As e a r l y as 1959, a C e n t r a l A f r i c a n Airways executive complained t h a t at the IATA Annual General Meetings: 159 there was a tendency i n the T r a f f i c Conferences to ask the small c a r r i e r s to set aside t h e i r own problems u n t i l the big c a r r i e r s had reached a measure of agreement, then when that stage was reached, the smaller c a r r i e r s were expected to agree or else shoulder the whole r e s p o n s i b i l -i t y f o r f a i l u r e of the Conference to reach unanimity (qtd. i n P i l l a i 1969:89,197). On several occasions, as has been previously described, Third World nations attempted to involve ICAO i n economic regulation for they f e l t that the majority voting scheme prevalent i n t h i s forum would favour t h e i r i n t e r e s t s ( i . e . , a one country, one vote r e s o l u t i o n c a r r i e d by a simple majority allowed bloc voting); moreover, unlike i n IATA, developed states could not veto r e s o l u t i o n s . In the 1970s there were over 140 ICAO" members and the United States, whose t r a f f i c comprised 40% of the world t o t a l , only held one vote. Once again, i n the mid-1970s, the Third World led the attempt to bring back issues of economic regulation i n t o ICAO. Its renewed i n i t i a t i v e s were part of a general wave of attempted assertiveness on the part of the Third World following the OPEC c r i s i s . Claiming that concepts of economic competi-t i o n and comparative advantage were "doctrines that merely allow r i c h nations to become r i c h e r at the expense of the poor," Third World nations demanded the establishment of a "new i n t e r n a t i o n a l economic order" whose p r i n c i p l e s were expressed i n the Charter of Economic Rights and Duties of States presented and accepted at the General Assembly of the United Nations i n 1975 (qtd. i n Salacuse 1980:834). This p a r t i c u l a r document did not mention a v i a -t i o n concerns s p e c i f i c a l l y ; however, the p o s i t i o n of the Third World nations at the ICAO Special Transport Conferences was very much a r e f l e c t i o n of the 160 f o r general theme of the need to take measures to encourage the r e d i s t r i b u t i o n of wealth w i t h i n the i n t e r n a t i o n a l economy. Not s u r p r i s i n g l y , these conferences became a forum f o r sharp c r i t i c i s m of the U.S. procompetitive p o l i c y which was seen as a n t i t h e t i c a l to such concerns. The preparatory work f o r the F i r s t S p e c i a l A i r Transport Conference was done by the ICAO S e c r e t a r i a t and the Panel of Experts s e l e c t e d a t the 1974 ICAO meeting. The l a t t e r met i n December 1976 and compiled both a l i s t of complaints a g a i n s t IATA and a l i s t of recommendations. In t h e i r c r i t i q u e of the IATA mechanism the fourteen experts s t a t e d t h a t the major d e f i c i e n c i e s of the o r g a n i z a t i o n were: (1) t h a t governments could u n i l a t e r a l l y and i n d i r e c t l y i n t e r f e r e w i t h and hinder IATA t a r i f f agreement; (2) t h a t governments had no d i r e c t means to p a r t i c i p a t e i n n e g o t i a t i o n s ; (3) t h a t governments' d i f f e r e n t p h i l o s o p h i e s i n t e r f e r e d w i t h agreement; (4) t h a t IATA was i n s u f f i c i e n t l y concerned w i t h consumer i n t e r e s t ; (5) t h a t IATA was tardy i n i t s decision-making and d i d not give governments s u f f i c i e n t time t o review proposals; (6) t h a t non-IATA members competed but d i d not p a r t i c i p a t e i n t a r i f f - s e t t i n g a c t i v i t i e s ; (7) t h a t non-scheduled c a r r i e r s d i d not p a r t i -c i p a t e i n t a r i f f s e t t i n g and consequently t h a t i t was d i f f i c u l t t o manage the r e l a t i o n s h i p between scheduled and non-scheduled c a r r i e r s ; (8) t h a t non-scheduled c a r r i e r s were subject t o d i f f e r e n t r e g u l a t i o n s from scheduled c a r r i e r s ; (9) t h a t IATA v o t i n g procedures were inadequate; (10) t h a t IATA members were able t o take r e s t r i c t i v e a c t i o n i n markets t h a t they dominated; (11) t h a t t a r i f f enforcement i n p r a c t i c e was i n e f f e c t i v e ; (12) t h a t IATA members d i d not consider non-IATA members' i n t e r e s t s nor the needs of d e v e l -oping c o u n t r i e s ; and (13) t h a t IATA was unable to o b t a i n adequate cost data 161 t a r i f f development ( A v i a t i o n Week and Space Technology January 10, 1977: 24-25). In order t o compensate a t l e a s t p a r t i a l l y f o r IATA shortcomings, the panel of experts made ten recommendations. These were: (1) t h a t ICAO should develop r e g i o n a l cost and revenue data so th a t members could analyze d i f f e r -ences among regions; (2) t h a t governments i n t h e i r review of t a r i f f s take i n t o c o n s i d e r a t i o n the needs of non-IATA members; (3) t h a t ICAO encourage c a r r i e r s t o meet on a r e g i o n a l b a s i s t o ensure t h a t non-IATA members' views were represented a t IATA t r a f f i c conferences; (4) t h a t ICAO encourage reg u l a r meetings between scheduled and non-scheduled c a r r i e r s ; (5) t h a t governments provide appropriate enforcement machinery t o ensure compliance with t a r i f f agreements; (6) t h a t governments r e f r a i n from t a k i n g u n i l a t e r a l a c t i o n d i s -r u p t i n g t a r i f f agreements; (7) t h a t ICAO pressure IATA to s i m p l i f y i t s t a r i f f s t r u c t u r e and reduce the number of conferences to one annual meeting; (8) t h a t governments r e q u i r e 60 days' advance n o t i c e of t a r i f f changes and t h a t c a r r i e r s meet w i t h governments t o di s c u s s p o s s i b l e t a r i f f proposals; (9) th a t governments a c t s w i f t l y on t a r i f f agreements; and (10) t h a t governments accept j o i n t t a r i f f agreements submitted by c a r r i e r s ( A v i a t i o n Week and Space  Technology January 10, 1977:24). With these recommendations i n view, r e p r e s e n t a t i v e s from 97 c o n t r a c t i n g s t a t e s , 2 non-contracting s t a t e s , and 11 i n t e r n a t i o n a l o r g a n i z a t i o n s met t o dis c u s s four general agenda items: t a r i f f enforcement; non-scheduled a i r t r a n s p o r t p o l i c y ; c a p a c i t y r e g u l a t i o n ; and t a r i f f - s e t t i n g machinery (ICAO  B u l l e t i n J u l y 1977:14-15). The conference adopted a number of r e s o l u t i o n s d e a l i n g w i t h these i s s u e areas. The f i r s t agenda item gave r i s e to recom-mendations t h a t s t a t e s enforce t a r i f f agreements, take measures to prevent 162 i l l e g a l d i s c o u n t i n g , and support the IATA enforcement machinery. In a d d i -t i o n , according to a proposal put forward by Canada, Japan, the P h i l i p p i n e s , Spain, S w i t z e r l a n d , the United Kingdom, the U.S., and Venezuela, i t was agreed t h a t ICAO should engage i n the study of t a r i f f enforcement (ICAO  B u l l e t i n J u l y 1977:16). In the area of non-scheduled a i r t r a n s p o r t , i t was recommended t h a t the ICAO c o u n c i l undertake s t u d i e s which would provide a s u i t a b l e r e d e f i n i t i o n of scheduled versus non-scheduled s e r v i c e s and which would propose p o l i c y f o r the r e g u l a t i o n of i n t e r n a t i o n a l non-scheduled s e r v i c e s (ICAO B u l l e t i n J u l y 1977:17). Although most delegates agreed t h a t the r e g u l a t i o n s governing c a p a c i t y were no longer adequate si n c e they d i d not r e l a t e supply to demand and d i d not provide a i r c a r r i e r s w i t h " f a i r and equal opportunity," they d i d not agree on how the system should be changed. The developing nations pressed f o r predetermination (or a more r e s t r i c t i v e i n t e r -p r e t a t i o n of the Bermuda c a p a c i t y p r i n c i p l e s ) , w h i le the United States supported by Norway and Sweden, upheld a more l i b e r a l i n t e r p r e t a t i o n of the Bermuda p r i n c i p l e s . The conference proposed that the ICAO Cou n c i l undertake s t u d i e s t o e s t a b l i s h g u i d e l i n e s f o r c a p a c i t y r e g u l a t i o n of both scheduled and non-scheduled s e r v i c e s w i t h a view t o producing a model c a p a c i t y clause which could be i n c o r p o r a t e d i n t o b i l a t e r a l agreements. The c o u n c i l agreed t h a t such a p r o j e c t should be guided by four c o n s i d e r a t i o n s : r e l a t i n g c a p a c i t y t o demand; p r o v i d i n g f o r " e q u a l i t y and mutual b e n e f i t " f o r c a r r i e r s of both c o u n t r i e s ; encouraging development and expansion of a i r t r a n s p o r t according t o "a sound economic b a s i s " ; and r e l a t i n g c a p a c i t y to the long-term planning needs of a i r l i n e s and a i r p o r t s . Lebanon supported by the developing b l o c a l s o suggested t h a t the study be guided by p r i n c i p l e s of c a p a c i t y pre-deter-mination and r e s t r i c t e d g r a n t i n g of f i f t h freedom r i g h t s ( A v i a t i o n Week and 163 Space Technology May 2, 1977:32-33). F i f t e e n recommendations were made with reference t o i n t e r n a t i o n a l a i r f a r e s and r a t e s . The most important i n c l u d e d : t h a t ICAO r e p r e s e n t a t i v e s be sent as observers to IATA; t h a t r e g i o n a l meet-ings between IATA and non-IATA c a r r i e r s be encouraged; t h a t a i r l i n e s have advance d i s c u s s i o n s w i t h governments p r i o r to t r a f f i c conferences; and t h a t ICAO study r a t e and f a r e determination by scheduled and non-scheduled c a r r i e r s and determine whether a new intergovernmental system should be e s t a b l i s h e d (Haanappel 1984:168; A v i a t i o n Week and Space Technology May 2, 1977:33). The F i r s t S p e c i a l A i r Transport Conference proposed t h a t a second conference be held i n 1980. Throughout the i n t e r i m , numerous ICAO committees met t o f u l f i l l 1977 conference mandates. During t h i s time, the most import-ant ICAO achievement was the adoption i n March 1978 of a model t a r i f f clause which could be incorporated by s t a t e s i n t o t h e i r b i l a t e r a l agreements. According t o the proposal, t a r i f f was defined t o i n c l u d e "charges and condi-t i o n s f o r agency and other a u x i l i a r y s e r v i c e s . " The clause advised t h a t t a r i f f s be discussed among a i r l i n e s and w i t h government a u t h o r i t i e s p r i o r to the f i l i n g stage. I t held t h a t a i r l i n e s f i l i n g t a r i f f s should be prepared to provide a e r o n a u t i c a l a u t h o r i t i e s w i t h j u s t i f i c a t i o n f o r t h e i r proposals. The clause c a l l e d f o r a m u l t i l a t e r a l t a r i f f - m a k i n g mechanism but d i d not s p e c i f i -c a l l y r e f e r to IATA. F i n a l l y , i t encouraged governments t o ensure the e x i s t -ence of an e f f e c t i v e t a r i f f enforcement machinery. The adoption of t h i s t a r i f f clause was o p t i o n a l (Azzie 1980:10). The Second S p e c i a l A i r Transport Conference held i n Montreal, from February 12 t o 28, 1980, underlined the r a d i c a l d i f f e r e n c e between U.S. and other nations' a v i a t i o n p o l i c y and c l e a r l y became a forum f o r the expression 164 of discontent over U.S. attempts to deregulate i n t e r n a t i o n a l markets and increase competition through the signing of l i b e r a l b i l a t e r a l s and the Show Cause Orders. Conference recommendations were developed i n the course of the discussion of two agenda items: Regulation of International A i r Transport Services and International A i r Transport Fares and Rates. The f i r s t item was concerned with developing guidelines for determining the d i s t i n c t i o n between scheduled and non-scheduled service and with the regulation of capacity. Although the F i r s t Special A i r Transport Conference had suggested that a new d e f i n i t i o n of scheduled services be adopted, the second conference decided to continue to accept the 1952 d e f i n i t i o n with a few modifications (e.g., states were allowed to c l a s s i f y at t h e i r own d i s c r e -t i o n as "scheduled services" operations where a charter contract covering the e n t i r e capacity of the a i r c r a f t with one or more charterers existed and oper-ated frequently and with r e g u l a r i t y , and were required to assess the scope of "openness" to the public which would q u a l i f y the operation as being sched-uled) (Haanappel 1984:16). The United States presented a working paper proposing free determination of capacity. In the vote which followed the U.S. proposal supported by I s r a e l , West Germany, Sweden, Switzerland, Singapore, Finland, Iceland, Jamaica, Belgium, and the Netherlands was overwhelmingly rejected by ICAO. The conference came out i n favour of predetermination (Aviation Week and  Space Technology February 25, 1980:30; A i r Transport World, A p r i l 1980:21). The United States suffered a s i m i l a r setback during the discussion of rate regulation. I t submitted a working paper suggesting that concepts of "double disapproval" and "country of o r i g i n " be recognized i n ICAO b i l a t e r a l t a r i f f clauses. This proposal was met with such strong opposition that the 165 United States withdrew i t . The conference ordered the study of s e v e r a l "suggestions" f o r s o l v i n g i n t e r n a t i o n a l a v i a t i o n p o l i c y w i t h a view to having these i n c o r p o r a t e d i n t o the Chicago Convention as annexes or laws at some l a t e r date. These proposals i n c l u d e d : approval of a standard f a r e a r t i c l e i n agreements between nations c a l l i n g f o r dual approval of f a r e s by c o u n t r i e s i n v o l v e d , the adoption of a Bermuda-type agreement as an ICAO standard, and the establishment of an ICAO t a r i f f commission which would serve as an o f f i c i a l observer a t IATA conferences. Throughout the d i s c u s s i o n i t was c l e a r t h a t the T h i r d World was p r e s s i n g f o r a m u l t i l a t e r a l approach to a v i a t i o n problems. This was r e f l e c t e d i n three of the r e s o l u t i o n s adopted by the conference. The f i r s t recommended the use of the m u l t i l a t e r a l IATA t r a f f i c conferences as a f i r s t choice i n e s t a b l i s h i n g i n t e r n a t i o n a l f a r e s . The second s t r e s s e d the need to i n v o l v e the whole i n t e r n a t i o n a l a v i a t i o n community i n the study and establishment of any new m u l t i l a t e r a l t a r i f f systems and c r i t i c i z e d u n i l a t e r a l a c t i o n s . On the l a t t e r p o i n t , member c o u n t r i e s came out s t r o n g l y against U.S. i n i t i a -t i v e s , c l a i m i n g t h a t : U n i l a t e r a l a c t i o n s which d i s r u p t e d m u l t i l a t e r a l t a r i f f n e g o t i a t i o n s were contrary to the s p i r i t of the Chicago Convention, placed i n t e r n a t i o n a l cooperation i n p e r i l and, through t h e i r d e s t a b i l i z i n g i n f l u e n c e , threatened economic performance of the i n t e r n a t i o n a l system as a whole (qtd. i n Dempsey 1987:578). The t h i r d recommendation emphasized t h a t any t a r i f f s e s t a b l i s h e d r e g i o n a l l y should take i n t o c o n s i d e r a t i o n the i n t e r e s t s of the world-wide m u l t i l a t e r a l system ( A i r Transport World A p r i l 1980:21). However, as a U.S. State 166 Department o f f i c i a l commenting on t h i s strong trend toward m u l t i l a t e r a l i s m s a i d : "There was a good deal of t a l k about m u l t i l a t e r a l i s m , but not how to go about s e t t i n g f a r e s . " He then added, "I b e l i e v e ICAO wants t o look a t the IATA system and see what developments there are. I f i t doesn't work, what would s u b s t i t u t e f o r i t ? " (qtd. i n A v i a t i o n Week and Space Technology October 13, 1980:35). Another State Department o f f i c i a l admitted t h a t the United States had seen the Second S p e c i a l A i r Transport Conference provide a good opportunity to g a in s t a t e support f o r i t s l i b e r a l i z i n g campaign ( A v i a t i o n Week and Space  Technology February 25, 1980:30). However, i n s t e a d , the proceedings of the conference and i n p a r t i c u l a r the r e j e c t i o n of U.S. recommendations i n both i s s u e areas made i t c l e a r t h a t such support would not be forthcoming. A re p o r t i n A i r Transport World on the conference a n a l y z i n g the p o s i t i o n s taken by many s t a t e s , s a i d : i t appeared t h a t U.S. pressures on IATA and other parts of the i n t e r n a t i o n a l community had the e f f e c t of f r i g h t -ening n a t i o n s , e s p e c i a l l y smaller ones, i n t o adopting a more con s e r v a t i v e approach than they o r d i n a r i l y might have ( A i r Transport World, A p r i l 1980:20). The State Department saw t h i s response as a "setback but not a roadblock" to i t s attempts to deregulate the i n t e r n a t i o n a l i n d u s t r y . I t commented t h a t , although d i s p l e a s u r e a t the IATA i n c i d e n t was evident, some s t a t e s were beginning to modify t h e i r stance and "no longer [had] hard f e e l i n g s as they once d i d " ( A v i a t i o n Week and Space Technology February 25, 1980:30). The U.S. government throughout the proceedings and afterwards continued to v o i c e i t s d i s a p p r o v a l a t the involvement of ICAO i n economic r e g u l a t i o n . 167 At a Congressional hearing f o l l o w i n g the conference, a Department of Trans-p o r t a t i o n o f f i c i a l a r t i c u l a t e d t h i s general sentiment: ICAO i s b a s i c a l l y r e s p o n s i b l e f o r s a f e t y and f a c i l i t a t i o n of i n t e r n a t i o n a l a i r t r a n s p o r t a t i o n . Recently, e f f o r t s have been made t o expand ICAO j u r i s d i c t i o n to economic matters i n c l u d i n g d e t a i l e d t r a f f i c and f i n a n c i a l r e p o r t -i n g . This must be r e s i s t e d . ICAO should have no r o l e i n these matters (qtd. i n Dempsey 1987:539). Fo l l o w i n g the approval of the conference r e s u l t s a t the ICAO Assembly of September-October 1980, a T h i r d S p e c i a l Conference was not scheduled, although the c o u n c i l was given the mandate of c a l l i n g such a meeting a t i t s d i s c r e t i o n (see Appendix IV). In the two ICAO conferences held during t h i s p e r i o d , i t seemed apparent t h a t the United States, Canada, the United Kingdom, and Scandinavia had l o s t a great deal of i n f l u e n c e . Opposition t o U.S. p o l i c y was p a r t i c u l a r l y e v i -dent when on numerous occasions developing nations c o n s o l i d a t e d t h e i r power by using b l o c v o t i n g t a c t i c s t o defeat U.S. proposals. However, i n p r a c t i c a l terms, the conferences had l i t t l e r e a l impact on the commercial operations of the a v i a t i o n i n d u s t r y . The United States and many western European a i r powers were opposed t o ICAO involvement i n economic matters and refused t o lend t h e i r support to many r e s o l u t i o n s . I t i s important t o note t h a t ICAO r e s o l u t i o n s were only unenforceable recommendations. The Breakdown and R e s t r u c t u r i n g of IATA The previous s e c t i o n has described how from the mid-1960s on, forces arose which began to challenge the operation of the c a r t e l system. F i r s t , ) 168 there were d i f f i c u l t i e s a s s o c i a t e d w i t h the f a c t t h a t many important a i r l i n e s both scheduled and ch a r t e r , operated outside IATA j u r i s d i c t i o n . Second, beginning i n the 1960s, but p a r t i c u l a r l y g a i n i n g impetus i n the 1970s, the c o n f l i c t between developing and developed nations over a v i a t i o n p o l i c i e s developed. Both p a r t i e s , f o r d i f f e r e n t reasons, held t h a t IATA m u l t i l a t e r a l p r i c e - f i x i n g a c t i v i t y was u n s a t i s f a c t o r y . As seen a t the S p e c i a l A i r Trans-port Conferences the developing nations f e l t t hat IATA was too responsive to the i n t e r e s t s of the major a v i a t i o n powers and was not d e a l i n g adequately with changes i n the economic environment: increased competition i n the market; over c a p a c i t y accompanied by d i s c r i m i n a t o r y p r a c t i c e s ; i l l e g a l d i s -counting; and general l a c k of adherence to IATA agreements; as w e l l as r i s i n g o perating c o s t s . Although the a v i a t i o n powers had some s i m i l a r concerns ( i . e . , r i s i n g c o s t s , d i s c r i m i n a t o r y p r a c t i c e s , and i l l e g a l d i s c o u n t i n g ) , they f e l t t h a t IATA, i n s t e a d of i n c r e a s i n g and en f o r c i n g p r o t e c t i v e measures as suggested by many l e s s developed c o u n t r i e s , should l i b e r a l i z e i t s p o l i c i e s . The c u l m i n a t i o n of the process of c a r t e l weakening was the adoption of the procompetitive p o l i c y by the United States through changes i n i t s n a t i o n a l l e g i s l a t i o n , through the s i g n i n g of l i b e r a l b i l a t e r a l s and the i s s u e of the Show Cause Order. The d e f e c t i o n of major U.S. a i r l i n e s from the c a r t e l com-p l e t e l y undermined p r i c e - f i x i n g a c t i v i t i e s . The d r a s t i c e f f e c t of these forces on IATA a c t i v i t y was evident i n the ICAO B u l l e t i n summary of IATA t r a f f i c conference agreements i n 1977: Passenger fa r e s were open f o r a l l or most of the year i n more than h a l f of the i n t e r n a t i o n a l conference n e g o t i a t -i n g areas and sub-areas d e s p i t e a long s e r i e s of confer-ences and meetings and va r i o u s other e f f o r t s to achieve 169 c l o s e d s i t u a t i o n s , i n c l u d i n g use of the l i m i t e d agreement approach. In many cases the agreements reached d i d not apply t o c e r t a i n s t a t e s or t e r r i t o r i e s , mainly due to government disa p p r o v a l s (ICAO B u l l e t i n May 1978:40). The r e p o r t noted t h a t IATA was l e a s t s u c c e s s f u l on the North A t l a n t i c route which had remained almost e n t i r e l y open throughout the year. Instead, p r i c e s were f i x e d through u n i l a t e r a l and b i l a t e r a l f i l i n g s which i n t e n s i f i e d w i t h the i n t r o d u c t i o n of the non-IATA Laker Skytrain.2 F o l l o w i n g a t h r e a t by Pan American t h a t i t would leave the IATA c a r t e l i f changes were not made, the November 1977 IATA Annual General Meeting i n Madrid decided to s e t up a five-man task f o r c e to study the o r g a n i z a t i o n and provide recommendations f o r i t s r e s t r u c t u r i n g . I t presented nine recommenda-t i o n s a t the f i r s t open S p e c i a l IATA General Meeting on June 30 and J u l y 1, 1978 i n Montreal. These were: (1) t h a t IATA a c t i v i t i e s be grouped i n t o two c a t e g o r i e s : trade a s s o c i a t i o n and t a r i f f c o o r d i n a t i o n , membership being man-datory i n the former and o p t i o n a l i n the l a t t e r ; (2) t h a t the three i n d i v i d -u a l t r a f f i c conferences and four j o i n t conferences be r e t a i n e d but t h a t sub-area p r i o r i t i e s be redefined i n response t o r e g i o n a l market dynamics; (3) t h a t the p r o v i s i o n s of l i m i t e d agreements be a f f i r m e d and be b i n d i n g on members not present a t conferences where such agreements are adopted; (4) t h a t t r a f f i c conferences recognize the prime i n t e r e s t of t h i r d and f o u r t h freedom c a r r i e r s i n e s t a b l i s h i n g the f a r e l e v e l s f o r t r a f f i c c a r r i e d at the lowest f a r e s without veto from other i n t e r e s t e d members; (5) t h a t members be allowed t o introduce i n n o v a t i v e f a r e s on t h i r d and f o u r t h freedom routes i n response t o changes i n the market without r e s c i n d i n g e x i s t i n g f a r e agree-ments; (6) t h a t c o n d i t i o n s of s e r v i c e be e l i m i n a t e d from the scope of the 170 t r a f f i c conference r e g u l a t i o n ; (7) t h a t the ICAO S e c r e t a r i a t be given observer s t a t u s and t h a t t h i r d p a r t i e s be allowed to present t h e i r p o s i t i o n s a t t r a f f i c conferences; (8) t h a t the compliance program be redefined to place more emphasis on pr e v e n t a t i v e as opposed t o p u n i t i v e measures; and (9) t h a t the executive committee r e d e f i n e the IATA's t r a f f i c committee's terms of reference i n order to embrace new changes (Taneja 1980:92-93; A i r Transport  World August 1978:29). In order to guarantee wide acceptance of these proposals, the committee attempted to e s t a b l i s h a framework i n which the goals of the major c i v i l a v i a t i o n powers would be promoted while at the same time some of the concerns of the smaller a i r l i n e s (e.g., from the Middle East and A f r i c a ) would be accommodated. To t h i s end, the a c t u a l task f o r c e chosen was composed i n such a way as t o represent a wide-range of opinions ( i . e . , the f i v e members were executives from A i r Canada, A i r I n d i a , A l i t a l i a , B r i t i s h Airways, and TWA). I n i t i a l l y , i t seemed as .though the recommendations would not be sup-ported by a m a j o r i t y of delegates. The A f r i c a n and Middle Eastern A i r l i n e s provided the most v o c a l o p p o s i t i o n . They complained t h a t the new changes were being introduced i n order t o accommodate the i n t e r e s t s of the l a r g e r members and were p a r t i c u l a r l y designed to appease the United S t a t e s . One c h i e f executive commented t h a t only "card holders" (members of the Executive Committee) would have any r e a l say i n the changes (qtd. i n A i r Transport  World, August 1978:90). The proposals seemed f o r the most pa r t t o be r e s -ponses t o developments i n the North A t l a n t i c market and were f e l t by many s t a t e s as having l i t t l e relevance to t h e i r markets. This complaint was d i r e c t e d e s p e c i a l l y a t i n n o v a t i v e f a r e s . A r e p r e s e n t a t i v e from Middle East A i r l i n e s s a i d t h a t t h i s recommendation was " t r e s p a s s i n g on the v o t i n g r i g h t s " 171 of IATA members where "markets are t i d y " merely because of the c h a o t i c s i t u a -t i o n on the North A t l a n t i c (qtd. i n A i r Transport World, August 1978:30). Representatives from A i r A f r i q u e a l s o complained t h a t the a b i l i t y of a member to i n i t i a t e i t s own low fa r e s i n response to a competitor's a c t i o n would reduce IATA a c t i v i t y to a "facade" (qtd. i n A i r Transport World. August 1978:30). On the other hand, executives from E l A l and A i r I n d i a supported the proposals arguing t h a t i f IATA d i d not adapt to the hew environment, govern-ments were l i k e l y to become more s t r o n g l y i n v o l v e d i n f a r e - s e t t i n g . The vote swung i n favour of the proposals w i t h the unexpected support of c e r t a i n more conservative European a i r powers. A i r France gave i t s approval s t a t i n g t h a t the scheme was a " l e s s e r e v i l " w h i l e KLM suggested t h a t i t would help avoid the "jungle of the North A t l a n t i c " ( A i r Transport World August 1978:31). Even A l i t a l i a ' s r e p r e s e n t a t i v e , Umberto Nordio cautioned IATA members "we are not the governors of the market, but the servants of the market." He f u r t h e r emphasized t h a t IATA members were faced with "market problems, not p o l i t i c a l or p h i l o s o p h i c a l problems" (qtd. i n A i r Transport World, August 1978:90). The proposals were given f i n a l approval at the Geneva, Annual General Meeting i n November 1978. P r i o r to the meeting, IATA f i l e d the new s t r u c t u r e and procedures w i t h the CAB and obtained i n t e r i m approval. This measure was seen as e s s e n t i a l to the v i a b i l i t y of the agreement. Summary A f t e r 1977 challenges t o the r i g i d market-sharing and m u l t i l a t e r a l t a r i f f - f i x i n g p r i n c i p l e s of the c a r t e l system l e d to i t s breakdown. As the ICAO B u l l e t i n reported i n 1978, more than h a l f of the i n t e r n a t i o n a l t r a f f i c 172 conference regions i n 1977 were open (ICAO B u l l e t i n May 1978:40). In other words, the r a t e s adopted by c a r r i e r s i n these areas were not the product of m u l t i l a t e r a l t a r i f f n e g o t i a t i o n s w i t h i n IATA. The r e s t r u c t u r i n g of IATA introduced more f l e x i b i l i t y i n t o m u l t i l a t e r a l r a t e - s e t t i n g . F i r s t , s t a t e s were not o b l i g e d to adhere to IATA r a t e s , and second, they were allowed to introduce i n n o v a t i v e f a r e s . In e f f e c t , both these measures authorized c a r r i e r s t o v i o l a t e the m u l t i l a t e r a l t a r i f f - s e t t i n g p r i n c i p l e . Nevertheless, many c a r r i e r s continued f o r the most pa r t to support m u l t i l a t e r a l - t a r i f f agreements. S i m i l a r l y , many s t a t e s i n t h e i r b i l a t e r a l n e g o t i a t i o n s w i t h each other d i d not challenge the r i g i d market-sharing p r i n c i p l e s of the c a r t e l system. The United States was the major exception. Changes i n i t s n a t i o n a l l e g i s l a t i o n r e f l e c t e d U.S. di s a p p r o v a l of market-sharing and t a r i f f - s e t t i n g by non-market f o r c e s . I t s l i b e r a l b i l a t e r a l s were aimed both a t i n t r o d u c i n g greater p r i c i n g f l e x i b i l i t y and l e s s r e s t r i c t i v e market-sharing schemes ( i . e . , i t negotiated removal of r e s t r i c t i o n s on f i f t h freedom c a r r i a g e , c a p a c i t y , frequency, and gauge determination). Even U.S. n e g o t i a t i o n of ro v e r - p o i n t s and u n s p e c i f i e d gateways may be seen as a p a r t i a l v i o l a t i o n of the c a r t e l system p r i n c i p l e of b i l a t e r a l n e g o t i a t i o n on market entry. (In the c a r t e l system routes were s p e c i f i e d i n the b i l a t e r a l agreement. They were not t o be determined or operated according to d i r e c t market forces.) Through these p o l i c i e s the United States ensured t h a t i t s markets would not operate w i t h i n the c a r t e l system. In a d d i t i o n to the l i b e r a l b i l a t e r a l s , the United States t r i e d t o undermine the c a r t e l system more g e n e r a l l y by using the Show Cause Order. In t h i s way, i t sought to undermine the p r i n c i p l e of m u l t i l a t e r a l t a r i f f - s e t t i n g , not only i n i t s own markets, but a l s o i n a l l i n t e r n a t i o n a l markets. The other development of t h i s p e r i o d which was 173 discussed was the T h i r d World attempt to move the r e s p o n s i b i l i t y of the economic r e g u l a t i o n of the a v i a t i o n i n d u s t r y from IATA i n t o the ICAO forum. This i n i t s e l f d i d not r e f l e c t a weakening of support f o r c a r t e l p r i n c i p l e s on i t s p a r t . Rather, the T h i r d World f e l t t h a t w i t h i n ICAO measures which would enforce r i g i d market-sharing and m u l t i l a t e r a l p r i c e - s e t t i n g were more l i k e l y t o be taken. In c o n c l u s i o n , one can g e n e r a l i z e t h a t a f t e r 1979 the c a r t e l system continued t o operate, although weakened, i n most m a r k e t s — t h e main exception being those i n t e r n a t i o n a l markets i n which the United States played a dominant r o l e . \ 174 ANALYSIS During the period from 1977 to 1981, the operation of the IATA c a r t e l was s e r i o u s l y challenged by U.S. i n i t i a t i v e s : the Show Cause Order and the s i g n i n g of l i b e r a l b i l a t e r a l s . For the most pa r t , the United States was alone i n i t s o p p o s i t i o n t o the IATA c a r t e l , although i t s a c t i v i t y was to a c e r t a i n extent helped by the w i l l i n g n e s s of c e r t a i n s t a t e s t o s i g n l i b e r a l b i l a t e r a l s . States s i g n i n g l i b e r a l b i l a t e r a l s , whose a i r c a r r i e r s were IATA members, were w i l l i n g t o see increased p r i c e f l e x i b i l i t y but d i d not support the attempts of the United States to dismantle the IATA c a r t e l completely. This was evident i n the very v o c a l o p p o s i t i o n to the Show Cause Order. The strongest defenders of the IATA c a r t e l were the A f r i c a n , Middle Eastern, L a t i n American, and more conservative European s t a t e s . In order to understand the developments during t h i s p e r i o d , s p e c i f i c a l l y the breakdown of IATA T r a f f i c Conferences, i t i s necessary to t u r n to the three explanatory v a r i a b l e s which provide i n s i g h t i n t o why s t a t e s continue or cease to support a c a r t e l . States t h a t continued t o support IATA a c t i v i t y , r e i t e r a t e d economic arguments t h a t they had used to j u s t i f y c a r t e l operations i n previous periods. These s t a t e s warned t h a t d e r e g u l a t i o n would lead to chaos i n the i n d u s t r y and to c o s t l y subsidy wars. They argued t h a t i n the long run dereg-u l a t i o n would be de t r i m e n t a l t o consumers f o r not only would they have t o bear the burden of greater s u b s i d i z a t i o n through government taxes, but the i n d u s t r y would e v e n t u a l l y be monopolized by the most e f f i c i e n t c a r r i e r s who would then be able t o increase p r i c e s . These s t a t e s asserted t h a t , i f neces-sary, they would support t h e i r f l a g c a r r i e r s ' o p e r ation through s u b s i d i e s . The o f f i c i a l economic j u s t i f i c a t i o n f o r such a c t i v i t y was the p u b l i c u t i l i t y 175 argument which maintained t h a t a f l a g c a r r i e r was an e s s e n t i a l n a t i o n a l s e r -v i c e . The IATA supporters pointed out t h a t , i f market fo r c e s were allowed a great e r r o l e , many " s e r v i c e " routes would be abandoned due to t h e i r l a c k of p r o f i t a b i l i t y . Underlying these economic arguments, of course, were the ba s i c " e s s e n t i a l i n d u s t r y " motivations which, as w i l l be discussed, d i d not change during t h i s p e r i o d . A major s h i f t , however, d i d occur i n U.S. economic philosophy which l e d to the a s s e r t i o n t h a t i n t e r n a t i o n a l d e r e g u l a t i o n was i n the best i n t e r e s t of consumers and the i n d u s t r y . The s h i f t r e s u l t e d from s e v e r a l developments which c o i n c i d e d : the completion of new economic s t u d i e s , the coming to power of an a d m i n i s t r a t i o n running on a pla t f o r m of l e s s government i n t e r f e r e n c e and composed of adamantly pro-deregulation i n d i v i d u a l s , the c r i t i c i s m w i t h i n the United States of the e f f e c t s of the Bermuda I I agreement, the success of de r e g u l a t i o n and the example of Laker Airways which showed t h a t an a i r l i n e could operate p r o f i t a b l y a t much lower p r i c e s . The debate over the merits and costs of r e g u l a t i o n versus d e r e g u l a t i o n i n the a v i a t i o n i n d u s t r y dates back t o the 1930s; however, u n t i l the mid-'50s and '60s there had been no attempts t o assess s y s t e m a t i c a l l y the economic e f f e c t s of e i t h e r p o l i c y . Richard Caves i n the i n t r o d u c t i o n to h i s seminal work A i r Transport and i t s Regulators, published i n 1962, complained about the l a c k of s c i e n t i f i c study i n t h i s area: Debates have raged among economists and the general pub-l i c a l i k e about the usefulness of d i r e c t p u b l i c c o n t r o l of business. Yet no techniques have emerged to guide an i m p a r t i a l i n v e s t i g a t o r , and vague untested p l a t o n i c gen-e r a l i t i e s have r u l e d the f i e l d . No set of t h e o r e t i c a l 176 t o o l s or v e r i f i e d f a c t u a l p r o p o s i t i o n guides the sch o l a r who t r i e s to decide what would be the net impact on eco-nomic welfare of imposing d i r e c t c o n t r o l on an i n d u s t r y , compared t o p e r m i t t i n g the f r e e play of market for c e s or app l y i n g some other scheme of s o c i a l c o n t r o l (Caves 1962:4). Caves' work followed by a number of other s t u d i e s i n the 1960s t r i e d t o examine the impact of r e g u l a t i o n on the a v i a t i o n i n d u s t r y and assess the s o c i a l costs of r e g u l a t i o n i n terms of i n e f f i c i e n t resource a l l o c a t i o n s . In conjunction w i t h Caves' pion e e r i n g study, two other works, one studying a i r -l i n e p r i c i n g by George W. Douglas and James C. M i l l e r , and the other, by W i l l i a m A. Jordan, a n a l y z i n g the C a l i f o r n i a i n t r a s t a t e d e r e g u l a t i o n e x p e r i -ence, s e r i o u s l y undermined a s s e r t i o n s t h a t d e r e g u l a t i o n would lead to market chaos, predatory p r i c i n g , l o s s of s e r v i c e , and monopolies. These s t u d i e s had a s i g n i f i c a n t impact on the Ford A d m i n i s t r a t i o n i n t h e i r drawing up of the A v i a t i o n Act and provided concrete support f o r the Carter A d m i n i s t r a t i o n ' s a s s e r t i o n t h a t IATA r a t e - f i x i n g a c t i v i t y was de t r i m e n t a l to consumer welfare and was impeding the growth and development of the a v i a t i o n i n d u s t r y (Macavoy and Snow 1977) . The p u b l i c a t i o n of such s t u d i e s , which were p a r t of a growing body of l i t e r a t u r e c r i t i c i z i n g excessive r e g u l a t i o n i n a v a r i e t y of i n d u s t r i e s , con-t r i b u t e d t o growing pressure from both the academic community and the p u b l i c a t l a r g e on policy-makers to decrease government i n t e r v e n t i o n i n the market and increase the emphasis on f u r t h e r i n g consumer welfare. The Carter A d m i n i s t r a t i o n was quick to respond to new voter concerns. Carter ran on the e l e c t o r a l pledge t h a t he would reduce r e g u l a t i o n and end 177 government involvement i n the market place. As was evident from a memoran-dum sent to him by h i s p o l i c y a d v i s o r s , d e r e g u l a t i o n of the h i g h l y v i s i b l e a v i a t i o n i n d u s t r y was seen as a quick way to f u l f i l l campaign promises. The memorandum of December 22, 1976 s a i d : . . . support f o r a v i a t i o n d e r e g u l a t i o n l e g i s l a t i o n may produce a 'quick h i t , ' t o f u l f i l l campaign commitments to cut outdated and unnecessary programs, b e n e f i t consumers, challenge s p e c i a l i n t e r e s t i n f l u e n c e over the bureaucracy (Executive Summary: Options on A i r l i n e R e gulation Reform addressed t o P r e s i d e n t - e l e c t from Members of the T r a n s i -t i o n Advisory team qtd. i n Harbison 1982:23). Ca r t e r ' s appointment of A l f r e d Kahn described by Anthony Sampson as "the high p r i e s t of d e r e g u l a t i o n " and Mike Levine described as "a supercharged economic l e c t u r e r from Los Angeles," t o the CAB a l s o had an impact on the d i r e c t i o n U.S. p o l i c y took (Sampson 1985:70). Both these men, and p a r t i c u -l a r l y Kahn, who was s a i d to be the author of the Show Cause Order, were academic economists h e a v i l y i n f l u e n c e d by the pro-deregulation wave sweeping through u n i v e r s i t y economics departments. In the words of Jonsson, these men "acted on the f i r m b e l i e f t h a t greater competition and r e l i a n c e on market fo r c e s n a t i o n a l l y as w e l l as i n t e r n a t i o n a l l y could y i e l d s u b s t a n t i a l consumer b e n e f i t s " (Jonsson 1987:147). Kahn, explained the underlying l o g i c behind t h i s view: the i n t e r n a t i o n a l a v i a t i o n t r a d i n g process was a variable-sum game where j o i n t p r o f i t s from cooperation would be made. Thus, Kahn r e j e c t e d the previous c o n c e p t u a l i z a t i o n of the i n d u s t r y as "horse-trading," where the l o s s e s of one were the gains of another. In h i s words, "the equation was not what f o r e i g n e r s o b t a i n from us. We l o s e , and conversely," Kahn argued, "we 178 gain both what we 'give' and by what we receive" (qtd. in Harbison 1982:46). This view, of course, emphasized 'consumer' gains for i t was clear that certain airlines would suffer in the process. The Carter Administration f i r s t tested deregulation in the domestic environment. Harbison points out that although i t remained a popular assump-tion outside the United States that deregulation was essentially a domestic matter, i t was quite clear that U.S. policy-makers saw international policy as an extension of domestic policy. This view was reflected by Senator Cannon's comment in his announcement of plans to hold hearings on U.S. avia-tion policy in August 1977. He voiced concern that domestic and interna-tional policies were operating in contradiction to each other: at a time when we are trying to improve our domestic air transportation system by introducing more of the prin-ciples of free enterprise, we are agreeing to bilateral arrangements (Bermuda II) that increase the role of government regulation and restr i c t competition in inter-national aviation to a greater degree than before (qtd. in Harbison 1982:23). Lower prices, accelerated industrial growth, and increased company profits brought about by domestic deregulation increased the conviction of policy-makers that deregulation should be introduced internationally. The signing of the Bermuda II agreement and i t s after-effects also had a significant influence on the direction taken by U.S. policy-makers. It became clear very early that the agreement was not only unpopular but that i t did not even reflect the policy positions of the various government sectors which were instrumental in the formation of aviation policy. Discontent with 179 Bermuda I I increased when i t was found t h a t the B r i t i s h i n t e r p r e t e d the agreement more r e s t r i c t i v e l y than the United States had expected. And f i n a l l y , an impetus t o reverse the Bermuda I I trend was added when i t became c l e a r t h a t c o u n t r i e s were already viewing i t as a new model f o r b i l a t e r a l n e g o t i a t i o n s and were beginning t o press f o r more r e s t r i c t i o n s . The Japanese and the I t a l i a n s were the f i r s t t o c a l l f o r r e n e g o t i a t i o n along Bermuda I I l i n e s . U.S. c a r r i e r s , i n t h e i r c r i t i c i s m of the Bermuda I I agreement, c r i t i -c i z e d the government f o r not using i t s strong p o s i t i o n to the advantage of the United States. An o f f i c i a l complained: "We held a l l of the cards i f we had j u s t been w i l l i n g to stand our ground" (qtd. i n A v i a t i o n Week and Space  Technology J u l y 18, 1977:25). Instead, a i r l i n e o f f i c i a l s complained t h a t the United States had played i n t o the hands of the B r i t i s h and i n the process had encouraged other c o u n t r i e s to t r y t o pressure i t i n t o g i v i n g concessions. In the words of one a i r l i n e executive: What we gave the B r i t i s h was access to 90% of the U.S. wit h very l i t t l e i n exchange. . . . I have a major con-cern t h a t U.S. government o f f i c i a l s consider t h i s a pre-c e d e n t - s e t t i n g agreement—one from which a l l fu t u r e agreements w i l l be patterned, j u s t l i k e the o l d Bermuda. That r e a l l y concerns me (qtd. i n A v i a t i o n Week and Space  Technology J u l y 18, 1977:26). The CAB was very upset by the s i g n i n g of the Bermuda I I agreement: We objec t s t r o n g l y on p r i n c i p l e to the ki n d of governmen-t a l i n t e r f e r e n c e t h a t t h i s p a r t i c u l a r r e s t r i c t i v e p r o v i -s i o n of Bermuda I I has forced on us ( s i n g l e d e s i g n a t i o n ) . 180 We would s t r o n g l y have p r e f e r r e d to leave to the competi-t i v e market the d e c i s i o n of how many c a r r i e r s the market can s u p p o r t — a t Boston, Los Angeles, and other markets as w e l l (qtd. i n Dempsey 1978:422). A l f r e d Kahn, who i r o n i c a l l y was i n o f f i c e a t the time of the s i g n i n g of the agreement, was f u r i o u s , c a l l i n g i t a " v e h i c l e f o r a n t i - c o m p e t i t i v e i n t r u s i o n i n t o the i n t e r n a t i o n a l a v i a t i o n marketplace," and r e f e r r e d to i t as "that damned agreement" (qtd. i n A v i a t i o n Week and Space Technology January 23, 1978:31; The Economist December 3, 1977:57-58). Wit h i n Congress, o p p o s i t i o n was a l s o apparent. Senator Cannon described i t as: the g r e a t e s t step backward i n f o r t y years of attempting t o b r i n g market-oriented competition to i n t e r n a t i o n a l a v i a t i o n (qtd. i n Dempsey 1978:443). Even a d m i n i s t r a t i o n o f f i c i a l s ceased to support the agreement. Admin i s t r a -t i o n o f f i c i a l s t o l d A v i a t i o n Week and Space Technology t h a t once the f u l l d e t a i l s of Bermuda I I had been made c l e a r to the Pre s i d e n t and h i s a d v i s o r s , the White House "was l e s s than pleased" (qtd. i n A v i a t i o n Week and Space  Technology September 12, 1977:29). A veteran a v i a t i o n o f f i c i a l explained that the Carter A d m i n i s t r a t i o n had minimal background i n a v i a t i o n p o l i c y and had not, a t the time of n e g o t i a t i o n , r e a l i z e d the f u l l competitive impact of the agreement. P u b l i c c r i t i c i s m had made the A d m i n i s t r a t i o n aware of the f u l l r a m i f i c a t i o n s of t h e i r a c t i o n . A d m i n i s t r a t i o n o f f i c i a l s explained t h a t there was "a d e s i r e not to l e t Bermuda I I happen again" and t h a t the new p o l i c y "would i n s t r u c t n e g o t i a t o r s to weigh c a r e f u l l y the consumer b e n e f i t s and competitive impact of any 181 agreement. P o l i t i c a l c o n s i d e r a t i o n s , while remaining a l a r g e p a r t of any i n t e r n a t i o n a l a v i a t i o n n e g o t i a t i o n , should not o v e r r i d e consumer and competi-t i v e i n t e r e s t s " (qtd. i n A v i a t i o n Week and Space Technology September 12, 1977:29) . When the United States had negotiated the agreement w i t h the B r i t i s h , i t appears t h a t the U.S. policy-makers b e l i e v e d t h a t by making a n t i - c o m p e t i t i v e concessions on d e s i g n a t i o n , c a p a c i t y and p r i c i n g , they would be recompensed by the B r i t i s h adopting a more l i b e r a l p o l i c y towards charter f l i g h t s . The B r i t i s h , however, d i d not o b l i g e (The Economist December 3, 1977:57-58). To add t o U.S. di s c o n t e n t , seven months a f t e r the Bermuda I I agreement had been signed, the B r i t i s h s t a l l e d the inaug u r a t i o n of a new s e r v i c e by B r a n i f f on the D a l l a s / F o r t Worth-London route c l a i m i n g t h a t the p r i c e s were too low. The Economist described U.S. response to both these B r i t i s h a c t i o n s : The Americans are i n c r e a s i n g l y angry a t the r e s t r i c t i v e way the B r i t i s h have used Bermuda I I to block competition and they complain t h a t no agreements have been reached on loose r r u l e s f o r ch a r t e r f l i g h t s (qtd. i n The Economist March 4, 1978:81-82) . F i n a l l y , the i n i t i a l n e g o t i a t i o n demands of the Japanese and I t a l i a n s i n the post-Bermuda I I period (Gray 1978:18-20) r e i n f o r c e d the A d m i n i s t r a t i o n ' s f e a r s t h a t other c o u n t r i e s would ask f o r s i m i l a r concessions as those granted to the United Kingdom. In a l e t t e r t o Kahn, signed October 6, 1977 ( p r i o r to the beginning of n e g o t i a t i o n s w i t h Japan), Pre s i d e n t Carter urged Kahn to avoid making a n t i - c o m p e t i t i v e concessions: The work you are about t o undertake i n n e g o t i a t i n g b i l a t -e r a l agreements with Japan i s of great importance. 182 Two r e l a t e d problems face i n t e r n a t i o n a l a v i a t i o n today: empty seats and high f a r e s . Both problems can be re s o l v e d i f we work t o remove r e s t r i c t i o n s on low and i n -novative f a r e s i n both chartered and scheduled s e r v i c e . I am convinced t h a t increased competition can make con-venient, low-cost t r a n s p o r t a t i o n a v a i l a b l e t o many people who cannot a f f o r d i t , while a t the same time b r i n g i n g greater p r o s p e r i t y t o the i n t e r n a t i o n a l a v i a t i o n indus-t r y . Our goal i n i n t e r n a t i o n a l a v i a t i o n should be to move toward a t r u l y competitive system. Market fo r c e s should be the main determiner of the v a r i e t y , q u a l i t y and p r i c e of a i r s e r v i c e s . We should seek i n t e r n a t i o n a l a v i a t i o n agreements t h a t permit low-fare innovations i n scheduled s e r v i c e , expanded and l i b e r a l i z e d c h a r t e r oper-a t i o n s , non-stop i n t e r n a t i o n a l s e r v i c e , and competition among m u l t i p l e U.S. c a r r i e r s i n markets of s u f f i c i e n t s i z e . We should a l s o avoid government r e s t r i c t i o n s on a i r l i n e c a p a c i t y . While keeping i n mind the importance of a healthy U.S. f l a g c a r r i e r i n d u s t r y , we should be bold i n gr a n t i n g l i b e r a l and expanded access t o f o r e i g n c a r r i e r s i n the United States i n exchange f o r e q u a l l y v a l u a b l e b e n e f i t s we r e c e i v e from those c o u n t r i e s . Our p o l i c y should be to trade o p p o r t u n i t i e s rather than r e s -t r i c t i o n s . 183 To achieve these goals w i l l require close interagency cooperation and a firm negotiating posture. I am confi-dent of the a b i l i t y of you and your colleagues to achieve these objectives in our upcoming negotiations. I want you to keep me f u l l y informed of your progress (qtd. in Gray 1978:19-20). Chairman Kahn followed this advice and publicly declared that Bermuda II was an aberration which was "a substantial departure from the kind of system envisioned by Congress and generally incorporated in other bilateral agree-ments" (qtd. in Dempsey 1978:143). The above discussion would suggest that there was both confusion i n i -t i a l l y over the ramifications of the Bermuda II agreement, and that there was division among the policy-makers with regard to policy p r i o r i t i e s . The Bermuda II agreement was clearly the product of State Department desire to avoid unnecessary conflict with an a l l y . However, with the consolidation of power within the CAB under Kahn, the Bermuda II agreement was rejected and used as proof of the harmful consequences of a restrictionist policy on consumer welfare and industrial efficiency. The irony of the Bermuda II agreement was that i t produced one of the major forces leading to deregulation of the industry: Laker. The impact of Laker on U.S. policy was twofold. First, policy-makers found themselves facing a dilemma. On the one hand, in order to meet Laker prices, the Admin-istration wanted to approve three new scheduled fare proposals which would improve U.S. scheduled carriers' competitive position. On the other hand, the CAB warned the Administration that the new fares were predatory with respect to charters and threatened charter operation. As Harbison points 184 out, C a r t e r ' s d e c i s i o n t o approve the proposed f a r e s s i g n a l l e d "the t r a n s i -t i o n from r e l i a n c e on charter p r i c e competition to low scheduled p r i c i n g " (Harbison 1982:32). Charter p o p u l a r i t y was already d e c l i n i n g p r i o r to 1977, but the i n t r o d u c t i o n of these new competitive f a r e s c l e a r l y a c c e l e r a t e d the process. On the North A t l a n t i c , the key market where U.S. c h a r t e r operations p r e v a i l e d i n 1977, one i n four passengers t r a v e l l e d on a c h a r t e r a i r l i n e , w hile by 1981 t h i s f i g u r e had dropped to one i n s i x t e e n (Adkin 1982:43). The second consequence of the Laker phenomenon was t h a t i t provided evidence t h a t a i r c a r r i e r s o f f e r i n g lower f a r e s could operate p r o f i t a b l y . This evidence, combined with the domestic d e r e g u l a t i o n experience and the v a r i o u s economic s t u d i e s , gave the Carter A d m i n i s t r a t i o n s u f f i c i e n t ground f o r i t s philosophy: "competition i s a more e f f i c i e n t p r i c e r e g u l a t o r than government" (qtd. i n Dempsey 1978:398). According to the second p o s s i b l e explanation f o r weakening support f o r a c a r t e l , s t a t e s w i l l cease t o support such a regime under one of two condi-t i o n s : e i t h e r they l o s e i n t e r e s t i n the various economic, p o l i t i c a l and s e c u r i t y b e n e f i t s accruing t o a s t a t e from ownership of a f l a g c a r r i e r or they no longer see a c a r t e l system as optimal f o r the growth of t h e i r i n t e r -n a t i o n a l i n d u s t r y . The A f r i c a n , Middle Eastern and L a t i n American s t a t e s c l e a r l y continued to be i n t e r e s t e d i n the former, and t h e i r strong support of IATA suggests t h a t they continued t o see i t s a c t i v i t y as necessary f o r the development of t h e i r f l a g c a r r i e r s . They were quick to emphasize w i t h i n both the IATA and ICAO forums t h a t competition would have a negative impact on the s u r v i v a l of t h e i r r e s p e c t i v e a i r c a r r i e r s and t h e i r economies i n general. These s t a t e s s t r e s s e d the need f o r even stronger IATA a c t i o n and t h e i r i n s i s t e n c e on d i s c u s s i o n of economic matters i n ICAO can be seen as symptomatic of t h e i r b e l i e f t h a t IATA was being e x c e s s i v e l y f l e x i b l e rather than too r e s t r i c t i v e i n i t s c a r t e l a c t i v i t y . S i m i l a r l y , the m o b i l i z a t i o n of r e g i o n a l o r g a n i z a t i o n s and the attempt to c o n s o l i d a t e a u n i f i e d p o s i t i o n a g a i n s t U.S. p o l i c y i n i t i a t i v e s r e f l e c t e d t h e i r strong commitment to c a r t e l a c t i v i t y . Needless t o say, u n d e r l y i n g the o p p o s i t i o n to U.S. a n t i - c a r t e l a c t i v i t y was these s t a t e s ' r e a l i z a t i o n t h a t t h e i r c a r r i e r s were i n e f f i c i e n t and would not be able to meet the p r i c e s of U.S. and European c a r r i e r s . As has been seen, c e r t a i n European States and A s i a n - P a c i f i c States and even two less-developed c o u n t r i e s , the Netherlands A n t i l l e s and Jamaica, were w i l l i n g t o s i g n l i b e r a l b i l a t e r a l s w i t h the United States and agree to greater p r i c e f l e x i b i l i t y which would f u r t h e r weaken IATA p r i c e - f i x i n g func-t i o n s . The question a r i s e s : were these s t a t e s d i f f e r e n t from the others? Were they not worried about the s u r v i v a l of t h e i r i n d u s t r y ? In f a c t , t h e i r d e s i r e f o r a more competitive environment was p r e c i s e l y a consequence of such a n x i e t y . The c o u n t r i e s w i t h which the United States signed l i b e r a l agree-ments were p r i m a r i l y c a r r i e r s of f i f t h and s i x t h freedoms ( f o r example, the Netherlands, I s r a e l , Korea, and Singapore). I t was i n t h e i r i n t e r e s t t o see fewer r e s t r i c t i o n s on t h i s type of t r a f f i c and the United States found i t f a i r l y easy t o b r i b e them with greater f i f t h freedom and beyond r i g h t s i n r e t u r n f o r p r i c e f l e x i b i l i t y . S i m i l a r l y , i n the case of weaker s t a t e s , the prospect of new gateways to "the most d e s i r a b l e market both from the stand-p o i n t of d e s t i n a t i o n f o r other c o u n t r i e s and a l s o from the standpoint of generating business to go to (other) c o u n t r i e s , " i n the words of Senator Cannon, was hard to refuse ( G e r t l e r 1979:108). The o f f e r of s u b s t a n t i a l "hard r i g h t s " ( i . e . , gateways and routes) f o r " s o f t r i g h t s " ( p r i c e s ) e x p l a i n s why s t a t e s agreed t o greater p r i c e f l e x i b i l i t y . However, they d i d not 186 support the a c t u a l c a r t e l - b r e a k i n g p o l i c y of the United States and many st a t e s which signed l i b e r a l b i l a t e r a l s a l s o c r i t i c i z e d the U.S. Show Cause Order. The t h i r d v a r i a b l e seeks t o e x p l a i n the weakening of a c a r t e l i n terms of change i n the hegemon's a c t i v i t y . The f a c t t h a t i t was the United States which alone t r i e d t o undermine the operation of the c a r t e l through the Show Cause Order and the b r i b i n g of other c o u n t r i e s to s i g n l i b e r a l b i l a t e r a l s i n d i c a t e s t h a t t h i s v a r i a b l e holds the key to e x p l a i n i n g the developments of t h i s p e r i o d . This view i s supported by the h i g h l y r e v e a l i n g a c t i o n of the IATA executive i n f i l i n g the recommendations f o r the o r g a n i z a t i o n ' s r e s t r u c -t u r e w i t h the CAB p r i o r t o t h e i r f i n a l approval a t Geneva. This suggests not only t h a t IATA members recognized t h a t any p o l i c y adopted would be inoperable without U.S. sa n c t i o n , but a l s o t h a t the move to r e s t r u c t u r e the o r g a n i z a t i o n was aimed a t r e g a i n i n g U.S. support and cooperation. The f l e x i b l e membership p r o v i s i o n would a l l o w U.S. a i r l i n e s t o p a r t i c i p a t e i n c a r t e l operations but not fo r c e them t o p a r t i c i p a t e i n t r a f f i c agreements. Furthermore, i f they decided t o j o i n i n t r a f f i c conference a c t i v i t y , the p r o v i s i o n a l l o w i n g inno-v a t i v e fares would lend some f l e x i b i l i t y to p r i c e - s e t t i n g agreements. The question must then be posed: why d i d U.S. support f o r c a r t e l a c t i v -i t y wane? I t has already been suggested t h a t a s h i f t i n the economic p h i l o s -ophy towards a greater emphasis on consumer welfare played an important r o l e . Economic s t u d i e s brought home the costs of r e g u l a t i o n i n terms of i n d u s t r i a l i n e f f i c i e n c y . But, was concern f o r the development of the g l o b a l a v i a t i o n i n d u s t r y and consumer welfare a t the heart of the U.S. p o l i c y change? P a t r i c k Shovelton a l l u d e d to the motivation behind the United States' newly professed r e l i a n c e on f r e e competition and i t s i n t e r e s t i n the 187 consumer, when he suggested t h a t i n p l a i n f a c t the United States b e l i e v e d i n m e r c a n t a l i s m — " t h a t i s to say i n promoting and developing our [U.S.] own commercial i n t e r e s t s " (qtd. i n Harbison 1982:47). A study made by Klem and L e i s t e r i n 1979 f o r the f i r s t time e x p l i c i t l y recognized the connection between the " a t t i t u d i n a l s h i f t " i n U.S. p o l i c y and n a t i o n a l b e n e f i t s to be derived from such a p o l i c y . They wrote t h a t the United S t a t e s , e x t r a p o l a t i n g from i t s domestic d e r e g u l a t i o n experience, r e a l i z e d t h a t " a g g r e s s i v e l y pur-suing increased competition would y i e l d s u b s t a n t i a l b e n e f i t s t o U.S. car-r i e r s " (qtd. i n Harbison 1982:50). Thus, U.S. p o l i c y change was i n a c t u a l f a c t a new s t r a t e g y , f o l l o w i n g the example of U.S. c h a r t e r p o l i c y i n the '60s and e a r l y '70s, to gain dominance i n the a v i a t i o n i n d u s t r y . The question then a r i s e s , was the attempt at regime change and concern over improving the U.S. i n d u s t r i a l p o s i t i o n i n the long-run the consequence of a d e c l i n i n g a b i l i t y to support the costs of c a r t e l a c t i v i t y ; or was i t a r e f l e c t i o n of changes i n s e c u r i t y - r e l a t e d motivations which had p a r t i a l l y explained U.S. cha r t e r promotion i n the previous period? I t appears t h a t i n i t s r e l a t i o n s w i t h i n d u s t r i a l i z e d s t a t e s , the United States d i d not f e e l t h a t i t needed t o make economic concessions i n order t o b o l s t e r t h e i r economies. Thus, s e c u r i t y - r e l a t e d motivations f o r c a r t e l support continued to be "de-linked" during t h i s p eriod. In the case of weaker s t a t e s , i t appears t h a t the United States continued to make an e f f o r t to g ive economic concessions which would help develop t h e i r a i r l i n e indus-t r i e s . For example, i n i t s b i l a t e r a l n e g o t i a t i o n s w i t h Jamaica, Netherlands A n t i l l e s , Costa R i c a , and Papua New Guinea, the United States provided huge concessions i n the form of va l u a b l e gateways or a c t u a l a n t i - c o m p e t i t i v e r e s t r i c t i o n s . U n l i k e supporting the c a r t e l , a s t r a t e g y which aided 188 i n d i s c r i m i n a t e l y a l l c o u n t r i e s w i t h l e s s e f f i c i e n t a i r c a r r i e r s than the United States, these u n i l a t e r a l concessions were c o u n t r y - s p e c i f i c and allowed the United States to p i c k and choose which s t a t e s i t ought to help and b e f r i e n d . Such a p o l i c y was a l s o l e s s c o s t l y to the United States i n terms of economic l o s s e s . One can conclude from both these examples t h a t , where the United States saw i t s s e c u r i t y i n t e r e s t s a t i s s u e , i t was w i l l i n g t o s a c r i f i c e i t s own economic welfare. The questions then a r i s e : why was the United States unsuccessful i n changing the regime? Why was i t unable t o e x t r a c t a l l the concessions i t wanted from other s t a t e s ? Was i t no longer powerful enough to shape the regime? I f the United States had i n f a c t l o s t power, one would be tempted to suggest that\ i t s procompetitive p o l i c y was not j u s t a r e s u l t of changed s e c u r i t y i n t e r e s t s , but a l s o a consequence of i t s no longer being able to support a c a r t e l . The r e s o r t to more d i s c r i m i n a t i n g and l e s s c o s t l y methods of a i d i n g T h i r d World c o u n t r i e s develop t h e i r a v i a t i o n i n d u s t r i e s would f u r t h e r support t h i s view. Jonsson argues t h a t U.S. power was not d e c l i n i n g and e x p l a i n s attempts at regime change i n the f o l l o w i n g way: In sum, i t was the underlying s t r e n g t h of the United \ States i n the a v i a t i o n i s s u e - a r e a , not American weakness or d e c l i n e , t h a t explained the attempted regime change. The United States t r i e d to e x p l o i t i t s t r a f f i c generating c a p a c i t y t o the f u l l by p r e s s i n g f o r f r e e competition and by l e t t i n g i t s powerful domestic a i r l i n e s enter the i n t e r n a t i o n a l market (Jonsson 1987:49). 189 To a c e r t a i n degree, Jonsson i s c o r r e c t i n h i s a n a l y s i s . The United States c l e a r l y remained the dominant ac t o r i n terms of t r a f f i c generation and t r a f f i c a t t r a c t i o n , and continued to produce over 80% of the a i r l i n e manufac-t u r e i n d u s t r y . In terms of general economic and m i l i t a r y power, i t c l e a r l y dominated i t s b i l a t e r a l p a r t n e r s . Moreover, the f a c t t h a t the United States was able to introduce some l i b e r a l i z a t i o n i n t o the market and d i s r u p t IATA operations l e a d i n g t o the complete r e s t r u c t u r i n g of the o r g a n i z a t i o n would a l s o suggest t h a t i t continued t o be very powerful. Nevertheless, a number of f a c t o r s i n d i c a t e t h a t i n terms of r e l a t i v e power the United States had l o s t some leverage v i s - a - v i s other s t a t e s and was concerned w i t h r e e s t a b l i s h -i n g i t s dominance i n the i n d u s t r y . F i r s t , i f the United States was so powerful, why was i t unable to e x t r a c t concessions from such c o u n t r i e s such as Japan, the United Kingdom, France and I t a l y ? Furthermore, why d i d i t have to pay f o r p r i c e f l e x i b i l i t y by o f f e r i n g new gateways and extended r i g h t s which were c l e a r l y disadvanta-geous to the development of i t s own i n d u s t r y ? Second, there i s s i g n i f i c a n t evidence t h a t the United States perceived i t s power i n the i n d u s t r y to be d e c l i n i n g . Chairman Kahn i m p l i e d i n an i n t e r v i e w , t h a t government o f f i c i a l s saw U.S. a v i a t i o n power to be under siege. Kahn explained: I was p r i v i l e g e d to have a d i s c u s s i o n of i n t e r n a t i o n a l b i l a t e r a l a v i a t i o n p o l i c y w i t h one of our government o f f i c i a l s , who began the conversation by observing to me t h a t the next s e v e r a l years were going to be very t r y i n g f o r us, s i n c e our a i r l i n e s enjoyed a very l a r g e share of world markets, and one f o r e i g n government a f t e r another could be depended upon to i n s i s t on n e g o t i a t i o n s l o o k i n g 190 to expand the landing rights of i t s carriers in our country, the best we could hope to do, he said, would be to dig in our heels, "give" up as l i t t l e as possible, and in this way hold our losses to a minimum (qtd. in Har-bison 1982:51). A more extreme version of this view was the CAB's actual admission that U.S. power had declined. In the introduction to the Show Cause Order, the CAB stated: U.S. carriers no longer dominate international aviation and the bargaining power of our a l l i e s is now much more equal to our own (qtd. in Aviation Week and Space Tech- nology January 9, 1979;27) Industry data supported the view that U.S. dominance was on the decline. For example, in 1972 U.S. citizens had composed 61% of the international market while in 1979 they represented 50.4% (Rosenfield 1982:482). U.S. citizen travel had grown at a rate of 3.3% a year in the 1970s while foreign citizen travel had grown at a rate of 9.4% per year. Furthermore, U.S. carriers' share of the international market had fallen from 56.5% in 1971 to 50.0% in 1978. On the North Atlantic, the United States' most valuable market, U.S. carriers' share of t r a f f i c f e l l from 48% in 1971 to 45.4% in 1977 (Adkin 1982:35-36). (See Table 7.) Both Jonsson's comment and evidence indicating an actual decline in U.S. power may be reconciled. U.S. dominance in the industry had decreased; however, i t continued to be the strongest actor in the international system. Ultimately, i t probably had the power resources to pressure states to accede 191 t o i t s i n t e r e s t s . However, t h e c o s t s o f u s i n g such r e s o u r c e s , a l i e n a t i n g i t s a l l i e s , were so h i g h t h a t t h e U.S. was u n w i l l i n g t o use them. R e l u c t a n c e t o use power, de f a c t o , t r a n s l a t e s i n t o a l o s s o f l e v e r a g e power. F o r example, i n o r d e r t o g a i n c o n c e s s i o n s from t h e U n i t e d Kingdom and Japan w h i l e a v o i d i n g d i r e c t c o n f l i c t , t h e U n i t e d S t a t e s r e s o r t e d t o i n d i r e c t p r e s s u r e s as opposed t o more c o n f r o n t a t i o n a l forms o f l e v e r a g e . T h i s t a c t i c d i d n o t p r o v e t o be p a r t i c u l a r l y s u c c e s s f u l i n f o r w a r d i n g U.S. economic o b j e c t i v e s . Thus, c o n c e r n f o r U.S. and Japanese f r i e n d s h i p m o d i f i e d t h e t y p e o f l e v e r a g e t h a t t h e U n i t e d S t a t e s was w i l l i n g t o employ w h i c h r e s u l t e d i n t h w a r t i n g t h e p u r -s u i t o f i t s economic i n t e r e s t s . The f a c t t h a t U.S. a l l i e s were now a b l e t o m o d i f y U.S. b e h a v i o u r by t h r e a t e n i n g t o w i t h d r a w t h e i r " f r i e n d s h i p " s i m p l y i l l u s t r a t e s a g a i n i n t h e i r r e l a t i v e power. I n c o n c l u s i o n , i t would appear t h a t U.S. b e h a v i o u r can be e x p l a i n e d : , f i r s t , by a d e l i n k a g e i n o l d s e c u r i t y i n t e r e s t s w h i c h had c o n d i t i o n e d i t s p r e v i o u s s u p p o r t o f t h e c a r t e l . T h i s d e l i n k a g e was symptomatic o f t h e g a i n i n t h e economic power o f U.S. a l l i e s w h i c h t r a n s l a t e d i n t o U.S. power l o s s . I n t h e second p l a c e , U.S. i n t e r e s t s i n p r o m o t i n g t h e economic w e l f a r e o f i t s i n d u s t r y g a i n e d u r g e n c y i n t h e c o n t e x t o f i t s r e l a t i v e economic d e c l i n e . And t h i r d l y , U.S. b e h a v i o u r was t h e n m o d i f i e d by d i f f e r e n t s e c u r i t y i n t e r -e s t s : a n x i e t y about n o t a l i e n a t i n g i t s a l l i e s , w h i c h , i n t u r n was a r e f l e c -t i o n o f a c e r t a i n l o s s i n l e v e r a g e power. I t found i t s e l f i n t h e p a r a d o x i c a l s i t u a t i o n where i t had t h e p o t e n t i a l r e s o u r c e s t o shape t h e a v i a t i o n e n v i r o n -ment a c c o r d i n g t o i t s own economic i n t e r e s t s , b u t i t now was s u b j e c t t o t h e l e v e r a g e o f i t s a l l i e s who were p r e p a r e d t o t h r e a t e n a w i t h d r a w a l o f t h e i r s u p p o r t from i t s g l o b a l a c t i v i t i e s . 192 NOTES 1 Chairman Kahn's b r i e f tenure as CAB chairman ran from June 1977 t o October 1978 when he was elevated to the p o s i t i o n of top i n f l a t i o n f i g h t e r of the Carter A d m i n i s t r a t i o n . 2 The Laker " S k y t r a i n " was a "no f r i l l s " s e r v i c e charging the lowest f a r e s a v a i l a b l e from New York to London. Laker was i s s u e d a l i c e n s e by the B r i t i s h C i v i l A v i a t i o n A u t h o r i t y (CAA) to operate the London-New York route i n 1972, and the f o l l o w i n g year a p p l i e d to the CAB f o r a scheduled f o r e i g n a i r c a r r i e r permit. The CAB granted the permit subject to p r e s i d e n t i a l approval. Meanwhile, i n response t o l a r g e decreases i n t r a f f i c on B r i t i s h c a r r i e r s i n 1974, the B r i t i s h Board of Trade issued a p o l i c y guidance statement pro-posing t h a t only one c a r r i e r be designated to serve long-haul i n t e r n a t i o n a l routes. Consequently, the CAA withdrew i t s c o n d i t i o n a l approval of Laker d e s i g n a t i o n . Laker challenged the CAA d e c i s i o n i n B r i t i s h courts c l a i m i n g t h a t the Trade Board's a c t i o n was ultra vires. Laker won i t s case i n the Court of Appeals and i t s l i c e n c e was r e v a l i d a t e d . Under the renegotiated b i l a t e r a l between the United Kingdom and the United States, Bermuda I I , Laker was permitted t o operate the London-New York route. On September 27, 1977, S k y t r a i n s e r v i c e began and q u i c k l y gained p o p u l a r i t y operating at load f a c t o r s averaging 80% of c a p a c i t y (Dempsey 1978:406). N IATA scheduled c a r r i e r s responded q u i c k l y to the new competition by i n t r o d u c i n g three new competitive f a r e s . These were: budget far e s which were t o be purchased a t l e a s t 21 days p r i o r to the week of departure, w i t h a i r l i n e s d e s i g n a t i n g the day of departure and r e t u r n 10 days p r i o r to 193 departures, and would have a proposed p r i c e 8% above Laker f a r e s ; standby far e s which were to be a v a i l a b l e on the day of departure and were to be s o l d no more than three hours before departure with p r i c e s 8% above Laker f a r e s ; and Super-Apex f a r e s t a k i n g the form of advance purchase excursion f a r e s , w i t h the p r i c e being lowered by 17%. A f t e r some dispute w i t h the CAB which viewed these new fare s as being d i r e c t e d a g a i n s t c h a r t e r s e r v i c e s r a t h e r than aga i n s t Laker, the State Department approved the proposed f a r e s (Harbison 1982:30-37). 194 6. THE RESTRUCTURED REGIME AND NEW CHALLENGES: 1981-DESCRIPTION Buffeted from both without and w i t h i n , the r e s t r u c t u r e d o r g a n i z a t i o n s a i l e d away . . . wi t h i t s s a i l s t a t t e r e d , some masts down, some leaks below the water l i n e and some squabbling among the crew. But i t was s t i l l a f l o a t , and the banner of m u l t i l a t e r a l i s m was s t i l l f l y i n g . And although the more stormy weather l i e s ahead, the f e e l i n g . . . was t h a t greater s a f e t y l i e s i n remaining aboard r a t h e r than jumping s h i p ( A i r Transport World January 1980:58). The events of the tumultuous period from 1977 t o 1981 have l e f t an i n d e l i b l e mark on the i n t e r n a t i o n a l regime r e g u l a t i n g the commercial aspects of c i v i l a v i a t i o n . Although IATA continues t o play a r o l e i n t a r i f f c o o r d i n -a t i o n , i t s s i g n i f i c a n c e has diminished. This i s p a r t i c u l a r l y t r u e i n U.S. and European markets. F o l l o w i n g 1981, the U.S. d r i v e towards i n t e r n a t i o n a l d e r e g u l a t i o n was t o a c e r t a i n extent contained as seen i n i t s abandoning of the Show Cause Order, and i n i t s adopting a more pragmatic p o l i c y i n i t s n e g o t i a t i o n of l i b e r a l b i l a t e r a l s . U.S. a i r l i n e s were not p r o h i b i t e d from p a r t i c i p a t i n g i n IATA t r a f f i c conferences and on a number of occasions d i d so; however, f o l l o w i n g 1981, much p r i c i n g , as i n the previous p e r i o d , occur-red o u t s i d e the IATA r e g u l a t o r y framework. The diminished t a r i f f f i x i n g importance of IATA i n Europe r e s u l t e d from three f a c t o r s : a stronger b e l i e f i n l i b e r a l i z a t i o n ; the t h r e a t of the a p p l i c a t i o n of Treaty of Rome a n t i - t r u s t p r i n c i p l e s a g a i n s t t a r i f f c o o r d i n a t i n g a c t i v i t y ; and the growth of 195 r e g i o n a l i s m as r e f l e c t e d i n t a r i f f c o o r d i n a t i o n i n i t i a t i v e s i n the A s s o c i a -t i o n of European A i r l i n e s (AEA). In both North America and Europe, IATA's r o l e as a trade a s s o c i a t i o n has grown i n importance. IATA t r a f f i c coordina-t i o n continues t o be q u i t e important i n the P a c i f i c , although i t i s encoun-t e r i n g challenges to i t s a u t h o r i t y . In A u s t r a l i a and New Zealand as i n Europe, there have been moves towards a p p l y i n g a n t i - t r u s t laws a g a i n s t IATA a c t i v i t y . Regionalism has a l s o gained i n importance and the Orie n t A i r l i n e s A s s o c i a t i o n (OAA) plays a key r o l e i n c o o r d i n a t i n g r e g i o n a l t a r i f f s . The s h i f t towards greater t a r i f f c o o r d i n a t i o n by r e g i o n a l o r g a n i z a t i o n s (e.g., the A f r i c a n A i r l i n e s A s s o c i a t i o n [AFRAA], the Arab A i r C a r r i e r s ' O r g a n i z a t i o n [AACO], and the As o c i a c i o n I n t e r n a c i o n a l de Transporte Aero de America [AITAL]) i s a l s o apparent i n A f r i c a , the Middle East and L a t i n America, r e s -p e c t i v e l y . Nevertheless, IATA's t a r i f f f i x i n g f u n c t i o n continues t o be very important i n these regions, where c o u n t r i e s remain opposed to l i b e r a l i z a t i o n . A Pragmatic U.S. policy The U.S. r e t r e a t from the aggressive p u r s u i t of a procompetitive p o l i c y followed the e l e c t i o n of Pr e s i d e n t Reagan i n 1981. In h i s f i r s t w r i t t e n statement addressing i s s u e s r e l a t e d to c i v i l a v i a t i o n , Reagan s t a t e d t h a t i t was e s s e n t i a l t h a t the United States take every reasonable step t o reassure the i n t e r n a t i o n a l a v i a t i o n community of our w i l l i n g n e s s to address matters of common concern i n a cooperative manner (qtd. i n A v i a t i o n Week and Space Tech-nodogy August 31, 1981:30). 196 A c c o r d i n g l y , he encouraged the CAB t o extend the Show Cause Order deadline beyond September 15, 1981 saying t h a t such an a c t i o n was both "appropriate and i n the best i n t e r e s t of our f o r e i g n p o l i c y " (qtd. i n A v i a t i o n Week and  Space Technology August 31, 1981:30). The CAB order was delayed u n t i l Jan-uary 15, 1982 and was followed by a f u r t h e r stay granted on January 7, 1982. On May 6, 1982 the U.S. Tra n s p o r t a t i o n Department issued an order c l o s i n g the proceedings. The United States gave IATA t r a f f i c machinery a n t i - t r u s t immun-i t y f o r the next f i v e years (Haanappel 1984:162-164). Before making a p u b l i c statement on i n t e r n a t i o n a l a v i a t i o n p o l i c y , key Reagan A d m i n i s t r a t i o n o f f i c i a l s from the White House and the Departments of Tra n s p o r t a t i o n and State met with executives of f i v e major U.S. a i r l i n e s ( B r a n i f f I n t e r n a t i o n a l , F l y i n g Tiger L i n e , Northwest A i r l i n e s , Pan American World Airways, and Trans World A i r l i n e s ) to di s c u s s a v i a t i o n i s s u e s . The a i r l i n e s pointed t o t h e i r weakened i n t e r n a t i o n a l presence: U.S. market share dropped from 45.4% i n 1977 to 42.3% i n 1980 i n the A t l a n t i c and from 45% to 43.9% i n the P a c i f i c during the same per i o d . In a d d i t i o n , U.S. p r o f i t s i n i n t e r n a t i o n a l operations f e l l from $292 m i l l i o n i n 1978 to $92 m i l l i o n i n 1979 and t o $152 m i l l i o n i n 1980). The a i r l i n e s blamed the Carter Adminis-t r a t i o n f o r t h i s ( A v i a t i o n Week and Space Technology May 11, 1981:32). C. E. Meyer J r . , president of Trans World and spokesman f o r the f i v e a i r -l i n e s , s t r e s s e d t h a t the problem was not the r e s u l t of the i n a b i l i t y of U.S. c a r r i e r s t o succeed i n a competitive environment, but due to Car t e r ' s i n a b i l -i t y to understand the i n t e r n a t i o n a l marketplace. Meyer s a i d , "Give us the fre e market environment and we w i l l make i t because U.S. c a r r i e r s are e f f i c -i e n t , but," he added, "the government must recognize r e a l i t i e s and t r y t o have a competitive market i n the framework t h a t e x i s t s . " He continued: 197 In f a c t , o u t side the U.S. there i s no "free market" i n i n t e r n a t i o n a l a i r t r a n s p o r t a t i o n . The i n t e r n a t i o n a l market i s c h a r a c t e r i z e d by f o r e i g n government s u b s i d i e s and other " m e r c a n t a l i s t ' p r a c t i c e s by f o r e i g n governments designed t o b o l s t e r the performance of each nation's own c a r r i e r a t the expense of U.S. f l a g c a r r i e r s (qtd. i n A v i a t i o n Week and Space Technology May 11, 1981:31-32). The a i r l i n e s prepared a memorandum recommending f i v e d i r e c t i v e s f o r a new a v i a t i o n p o l i c y . These were: 1) ensure th a t the U.S. bargains f o r and obtains f a i r value f o r a l l r i g h t s traded to f o r e i g n governments; 2) pursue route awards f o r U.S. and f o r e i g n f l a g c a r r i e r s only i f they make "good eco-nomic sense" and c o n t r i b u t e to the strengthening of the U.S. p o s i t i o n ; 3) be accommodating t o l e g i t i m a t e i n t e r e s t s of " f r i e n d l y " f o r e i g n governments ( i . e . , those not engaging i n d i s c r i m i n a t o r y p r a c t i c e s ) ; 4) e l i m i n a t e d i s c r i m -i n a t i o n a g a i n s t U.S. c a r r i e r s and ensure access t o f o r e i g n markets; and 5) a l l o w a i r l i n e s maximum p r i c i n g f l e x i b i l i t y without s t r e s s i n g non-economic low fa r e s (qtd. i n A v i a t i o n Week and Space Technology May 11, 1981:31). The Reagan A d m i n i s t r a t i o n responded by undertaking a p o l i c y review. Policy-makers concluded t h a t i t would not be necessary t o make a formal d e c l a r a t i o n on i n t e r n a t i o n a l p o l i c y s i n c e e x i s t i n g p o l i c y embodied i n the I n t e r n a t i o n a l A i r T r a n s p o r t a t i o n Act of 1979 met wi t h t h e i r approval. Robert D. Hormats, A s s i s t a n t Secretary f o r Economics and Business A f f a i r s s t a t e d : "there are no major q u a r r e l s w i t h t h a t l e g i s l a t i o n i n t h i s A d m i n i s t r a t i o n " (qtd. i n A v i a t i o n Week and Space Technology November 9, 1981:83). However, i t soon became c l e a r t h a t i n f a c t there had been a major s h i f t i n U.S. 198 p o l i c y . Matthew V. Scocozza, A s s i s t a n t Secretary f o r P o l i c y and Int e r n a -t i o n a l A f f a i r s a t the Tr a n s p o r t a t i o n Department, described i n very general terms the nature of the change: We have taken a pragmatic approach, tempered w i t h r e a l -ism, over the l a s t three years (qtd. i n A v i a t i o n Week and  Space Technology A p r i l 9, 1984:28). In c o n t r a s t t o the Carter A d m i n i s t r a t i o n p o l i c y t h a t had st r e s s e d con-sumer i n t e r e s t and the advancing of competition a t a l l c o s t s , along w i t h the long-run o b j e c t i v e of strengthening the U.S. i n d u s t r y , i t became c l e a r t h a t the Reagan A d m i n i s t r a t i o n was emphasizing the t h i r d tenet of the 1979 Compe-t i t i o n Act. C l e a r l y , i t s main concern was supporting the immediate h e a l t h of the U.S. a i r l i n e i n d u s t r y as a whole. A Department of T r a n s p o r t a t i o n o f f i -c i a l e xplained t h a t the new U.S. p o l i c y wanted t o achieve " e f f i c i e n t , reason-a b l y p r i c e d , u n r e s t r i c t e d and a c c e s s i b l e i n t e r n a t i o n a l a i r s e r v i c e " while a t the same time ensuring "at l e a s t e q u a l i t y w i t h f o r e i g n c a r r i e r s i n improving p r o f i t a b i l i t y i n f o r e i g n a i r t r a n s p o r t a t i o n " (qtd. i n A i r Transport World October 1984:29). Consequently, the United States followed an o f t e n c o n t r a -d i c t o r y p o l i c y : i t t r i e d t o expand r i g h t s and increase p r i c e f l e x i b i l i t y w i t h some c o u n t r i e s , while a t the same time attempting to renege on conces-sions given t o other c o u n t r i e s by the previous a d m i n i s t r a t i o n . A r e p o r t e r , w r i t i n g f o r A i r Transport World, commented t h a t t h i s pragmatic approach was le a d i n g t o a great d e a l of confusion among U.S. bargaining partners who observed t h a t : [the] U.S. seems t o be going i n both d i r e c t i o n s simultan-eously, p a r t i c u l a r l y when one country r e c e i v e s s i g n i f i -cant U.S. r i g h t s and another i s given crumbs ( A i r Trans- po r t World October 1984:29). 199 U.S. policy-makers, i n e x p l a i n i n g t h e i r new p o l i c y , s t r e s s e d t h a t they were seeking a balancing of b e n e f i t s . Scocozza c o n t r a s t e d the Carter a t t i -tude t o the Reagan p o l i c y : " I t used to be easy t o get t h i n g s . Three years ago they would j u s t scream and shout, and we bleeding hearts over here would give them what they wanted. While now," he added, "we won't give an i n c h where we don't see our n e g o t i a t i n g partners being forthcoming" (qtd. i n A v i a - t i o n Week and Space Technology A p r i l 9, 1984:28). An important aspect of t h i s "give and take" stance was a n e g o t i a t i n g s t r a t e g y based on a case by case approach. In other words, o f f i c i a l s s t r e s s e d the need to consider each b i l a t e r a l n e g o t i a t i o n w i t h i n the context of s p e c i f i c gains t o be made i n t h a t p a r t i c u l a r market, as opposed t o g r a n t i n g a blanket endorsement f o r some general p o l i c y . A U.S. o f f i c i a l expressed t h i s " l e s s t h e o l o g i c a l and more p r a c t i c a l " approach saying, " I f you t r y t o make a g e n e r a l i z a t i o n i n the i n t e r n a t i o n a l marketplace, you're going t o be wrong more than r i g h t " (qtd. i n A v i a t i o n Week and Space Technology November 8, 1982:28). F r a n k l i n W i l l i s , Deputy A s s i s t a n t Secretary of State f o r T r a n s p o r t a t i o n and Telecommunica-t i o n s , i n an i n t e r v i e w w i t h A i r Transport World e x p l i c i t l y described t h i s "case by case" approach and explained why c e r t a i n p o l i c i e s were being adopted i n s p e c i f i c c o u n t r i e s : A pro-competitive model agreement doesn't apply u n q u a l i -f i e d l y everywhere. I t does i n b i g or medium-size coun-t r i e s , such as the United Kingdom, I t a l y and Japan known as mature markets i n economic parlance. In a l l of those, y o u ' l l see a c o n s i s t e n t push to deregulate, a g a i n s t some very u n w i l l i n g partners. But where we don't need u n l i m i -ted beyond r i g h t s i n less-developed or i n less-dense 200 markets such as C h i l e , Singapore or Korea, the U.S. w i l l be more conservative (qtd. i n A i r Transport World October 1984:29). When one turns to some of the a c t u a l n e g o t i a t i o n s during the period f o l l o w i n g 1981, t h i s pragmatic p o l i c y i s c l e a r l y r e f l e c t e d . One i n t e r e s t i n g example of the "balancing of b e n e f i t s " i s seen i n the d i f f e r e n t approaches taken by the United States t o i t s b i l a t e r a l n e g o t i a t i o n s w i t h S w i t z e r l a n d and the Scandinavian c o u n t r i e s i n 1984. Both s t a t e s c a r r y a very l a r g e share of the t r a f f i c between t h e i r c o u n t r i e s and the United States ( S w i s s a i r c a r r i e s more than 90% of U.S.-Swiss t r a f f i c over the A t l a n t i c , w h i l e SAS c a r r i e s 85% of Scandinavian t r a f f i c . ) Both c o u n t r i e s were i n t e r e s t e d i n g a i n i n g new p o i n t s of entry ( A t l a n t a and Houston) t o the United S t a t e s . The U.S. was w i l l i n g t o make such concessions t o the former but not the l a t t e r . In the case of S w i t z e r l a n d , the United States gave such concessions because i t was able t o get a d d i t i o n a l p r i c e f l e x i b i l i t y . Policy-makers a l s o suggested t h a t the imbalance i n t r a f f i c shares was a consequence of Swiss e f f i c i e n c y saying t h a t i t "does b e t t e r because i t markets harder," the i m p l i c a t i o n being t h a t the U.S. government appreciated t h i s type of competitiveness ( A i r Transport  World September 1984:29-30). In c o n t r a s t , the United States was u n w i l l i n g to give SAS a d d i t i o n a l gateways because i t was h i n d e r i n g U.S. attempts t o lower p r i c e s ( A i r Transport World 1984:29-30). ' Perhaps the g r e a t e s t achievement of the United States i n the promotion of i t s pro-competitive p o l i c y during t h i s p e r i o d was the s i g n i n g of a Memo-randum of Understanding with the ECAC a l l o w i n g f o r greater p r i c e f l e x i b i l i t y w i t h Europe over North A t l a n t i c routes. The v i c t o r y was i n no way complete f o r i t r e q u i r e d a compromise on the p a r t of the United States. As James H. 201 Burnley, General C o u n c i l t o the Tr a n s p o r t a t i o n Department, commenting on the agreement, t o l d the I n t e r n a t i o n a l A v i a t i o n Club: Our p r e f e r r e d approach, of course, i s completely deregu-l a t e d p r i c i n g . In many cases, however, we have compro-mised w i t h governments by agreeing to c e r t a i n ranges w i t h i n which proposed f a r e s may not be disapproved (qtd. i n A v i a t i o n Week and Space Technology October 3, 1983: 41). The Memorandum of Understanding, signed i n May 1982 and i n i t i a l l e d by nine European c o u n t r i e s ( B r i t a i n , I r e l a n d , West Germany, I t a l y , Spain, Greece, Belgium, Holland, Yugoslavia, and Portugal) e s t a b l i s h e d a "band" system or "zones of reasonableness." The system i n c l u d e d intergovernmental involvement i n the rate-making process through the s e t t i n g of reference f a r e s and p r i c i n g zones. I t gave a i r l i n e s the freedom t o s e t p r i c e s w i t h i n the "zones of reasonableness." I t allowed u n i l a t e r a l government t a r i f f d i s a p -p r o v a l o u t s i d e the zones. And i t d i d not p r o h i b i t m u l t i l a t e r a l c a r r i e r t a r i f f c o o r d i n a t i o n (Haanappel 1984:157). In f a c t , i n September 1983 the U.S. State Department sent a l e t t e r t o European governments e x p l a i n i n g t h a t IATA procedures would be re q u i r e d f o r a l l North A t l a n t i c a i r l i n e meetings whether between IATA members or IATA and non-IATA members or any other groups. I t f u r t h e r s t r e s s e d t h a t b i l a t e r a l r a t e meetings between a i r l i n e s would not be permitted. Consequently, a dual system was e s t a b l i s h e d . On the one hand, many f a r e s f e l l o u t s i d e the zones and req u i r e d government approval on a b i l a t e r a l b a s i s ; on the other, f a r e s were e s t a b l i s h e d through IATA r a t e -making conferences. The i r o n y of the system, which among other th i n g s t r i e d t o decrease government involvement, was t h a t the s e t t i n g of m u l t i l a t e r a l 202 zones, fares and cost required a great deal of government activity (Air  Transport World October 1983:37). A second Memorandum of Understanding was signed by 16 European countries in early 1983. The new signatories were: Italy, France, Switzerland, Fin-land, Denmark, Norway, and Sweden (Aviation Week and Space Technology October 22, 1984:33). A third Memorandum came into force in November 1983 and was extended for two more years in 1985. In early 1987 a new two-year Memorandum of Understanding was signed which allowed fare zones to be lower and expanded the ability of airlines to offer deep discounts (Aviation Week and Space  Technology February 23, 1987:32; Haanappel 1984:164). U.S. negotiations and attempts to liberalize U.S.-Japanese markets were fruitless for a long time. Japanese officials were adamantly opposed to a procompetitive policy. Early in 1981 a JAL representative articulated the Japanese position: As there are ample air carriers in the U.S. the survival of the strongest theory can be acceptable there but i t is unacceptable in Japan (qtd. in Aviation Week and Space  Technology November 1981:106). Nevertheless, that same year the United States was able to gain certain liberalizing concessions from the Japanese. In what Department officials said was a "major achievement," Japan allowed United Airlines entry into the U.S.-Japanese market. It also allowed more competitive pricing but retained the right to restrict capacity. In return, the Japanese received new U.S. gateways and beyond rights (Aviation Week and Space Technology June 14, 1982: 32; Aviation Week and Space Technology November 8, 1982:28). 203 The new "conservative" p o l i c y i n less-developed markets or less-dense markets described by W i l l i s was quickly apparent i n U.S. negotiations with Thailand and Singapore i n 1984. Thailand asked the United States f o r the r i g h t to carry f i f t h freedom t r a f f i c through Tokyo to Sea t t l e and Dallas. The United States was prepared to give such concessions on the condition that Thailand promise not to exercise c e r t a i n r i g h t s obtained i n i t s l i b e r a l b i l a t e r a l signed when the Carter Administration was i n o f f i c e . A U.S. o f f i -c i a l explained the p o l i c y Our approach, which the Thais c a l l ' r e s t r i c t i v e ' i s based on our assessment of our own opportunities i n the Thai market (qtd. i n A i r Transport World October 1984:31). S i m i l a r l y , Singapore asked f o r more U.S. gateways. The United States agreed on the condition that SIA d i d not f l y through Tokyo. In t h i s case, the United States wanted to reduce t h i r d country competition i n a market where i t found i t s e l f a t a competitive disadvantage (Air Transport World October 10, 1984:31). In recent years, following the success of the ECAC-U.S. Memorandum of Understanding, the United States has taken the i n i t i a l step towards promoting the concept of a m u l t i l a t e r a l t a r i f f agreement i n the Far East and South America (AWST May 30, 1983:233). Two f i n a l b i l a t e r a l s , one signed i n the early stages of the Reagan Administration and one i n 1986, throw further l i g h t on new trends i n U.S. po l i c y . In 1981 B r a z i l denounced the U.S.-Brazil b i l a t e r a l due to the attempt by American A i r l i n e s to introduce a new low fare. In response, President Reagan wrote to the CAB urging i t to reconsider giving i t s permis-sion to t h i s : 204 Review of t h i s order has brought t o my a t t e n t i o n recent events t h a t have damaged the r e l a t i o n s of the U.S. and B r a z i l i a n a v i a t i o n a u t h o r i t i e s . I am concerned t h a t the U.S. r e l a t i o n s w i t h B r a z i l may d e t e r i o r a t e f u r t h e r (qtd. i n A v i a t i o n Week and Space Technology December 21, 1981:2). An a d m i n i s t r a t i o n o f f i c i a l added t h a t emphasizing low f a r e s was u n r e a l i s t i c . " I t doesn't make sense any longer" ( A v i a t i o n Week and Space Technology December 21, 1981:23). The CAB took the advice of the P r e s i d e n t and the d i s -pute was s e t t l e d . The second i n t e r e s t i n g n e g o t i a t i o n occurred between the United States and the S o v i e t Union i n 1986. Departing from i t s usual p o l i c y (one would surmise f o r p o l i t i c a l reasons), the United States agreed t o a b i l a t e r a l which allowed frequency t o be f i x e d and i n c o r p o r a t e d a revenue sharing scheme ( A v i a t i o n Week and Space Technology May 5, 1986:32). Changes in Europe The move towards d e r e g u l a t i o n i n Europe followed i n the wake of U.S. d e r e g u l a t i o n . I t gained momentum a f t e r 1981 and developed w i t h i n the m u l t i -l a t e r a l forums of the European Economic Community (EEC), the European C i v i l A v i a t i o n Conference (ECAC), and through the u n i l a t e r a l a c t i o n of a few s t a t e s , i n p a r t i c u l a r , the United Kingdom. The process of l i b e r a l i z a t i o n has been slow and, on numerous occasions, has come to a s t a n d s t i l l due to the f a c t t h a t , not only are c o u n t r i e s wary of the consequences of a U.S. s t y l e d e r e g u l a t i o n , but a l s o a number of c o u n t r i e s are d i r e c t l y opposed to such 205 i n i t i a t i v e s . The major proponents of l i b e r a l i z a t i o n , B r i t a i n , the Nether-lands, and I r e l a n d , and t o a l e s s e r extent, S w i t z e r l a n d and F i n l a n d f e e l t h a t s t a t e s u b s i d i e s should be e l i m i n a t e d as should p o o l i n g agreements; while market access, c a p a c i t y and f a r e c o n t r o l should be l i b e r a l i z e d . The main opponents of these p o l i c i e s ( i . e . , France, I t a l y , Greece, and A u s t r i a ) support s u b s i d i z a t i o n , market access, c a p a c i t y and f a r e c o n t r o l . They argue t h a t a i r s e r v i c e i s a n a t i o n a l p u b l i c u t i l i t y which needs government protec-t i o n . They warn t h a t the unleashing of competitive f o r c e s w i l l lead t o sub-s i d i z a t i o n wars and w i l l i n the long run be de t r i m e n t a l t o p u b l i c i n t e r e s t . S p e c i f i c a l l y , they p o i n t to the increase i n mergers i n the United States f o l l o w i n g d e r e g u l a t i o n and warn t h a t t h i s phenomenon i s l i k e l y t o occur i n Europe l e a d i n g to monopolization of the i n d u s t r y by a few strong c a r r i e r s . Some concede to a l l o w i n g l i m i t e d l i b e r a l i z a t i o n . The d i v i s i o n between the two groups i s r e f l e c t e d i n the m u l t i l a t e r a l d e l i b e r a t i o n s of the EEC and ECAC as power s h i f t s from one group to the other. Several a c t o r s have been i n v o l v e d i n the very slow movement towards l i b e r a l i z a t i o n i n the European Economic Community: the EEC Commission, the European Parliament, the European Court of J u s t i c e , and the Cou n c i l of M i n i s t e r s . In the f a l l of 1981 the EEC approved a r e p o r t c r i t i c a l of passenger f a r e s i n the Common Market. The r e p o r t i n d i c a t e d the inadequacies of the p r i c e - f i x i n g system s t a t i n g t h a t the procedure f o r s e t t i n g scheduled f a r e s was time consuming. I t added t h a t p r o f i t s were too high on c e r t a i n routes, and as evidence of t h i s f a c t , pointed out th a t many routes were being c r o s s -s u b s i d i z e d by other operations. (The r e p o r t suggested t h a t t h i s p r a c t i c e was i n e f f i c i e n t and should be se v e r e l y r e s t r i c t e d . ) I t f u r t h e r added t h a t a 206 comparison of ch a r t e r and scheduled f a r e s showing v a r i a t i o n s i n p r i c e l e v e l s of 5 to 25% f u r t h e r suggested t h a t scheduled p r i c e s were e x c e s s i v e l y high. The r e p o r t concluded t h a t European governments were being given l i t t l e i n f o r -mation on a i r l i n e c o s t s and revenue and were t h e r e f o r e not i n a p o s i t i o n to determine i f f a r e s being charged were reasonable ( A v i a t i o n Week and Space  Technology August 3, 1981:28). This study, along w i t h other s t u d i e s undertaken around the same time by the ECAC and consumer groups, served to make both European governments and the p u b l i c more aware of c a r t e l c o s t s . This new awareness was r e f l e c t e d i n a d i r e c t i v e of the European Parliament which gave the EEC two months t o develop a t r a n s p o r t p o l i c y a l l o w i n g f o r some l i b e r a l i z a t i o n . Otherwise, the P a r l i a -ment warned, i t would take the EEC t o the European Court of J u s t i c e charging t h a t i t had v i o l a t e d the Treaty of Rome by encouraging a n t i - c o m p e t i t i v e prac-t i c e s . (As w i l l be discussed, the Treaty of Rome f o r b i d s a n t i - c o m p e t i t i v e p r a c t i c e s . However, i t does not i n c l u d e a s p e c i f i c r e g u l a t i o n on a i r t r a n s -p o r t . This f a c t has given r i s e to a great deal of debate over whether the terms of the t r e a t y are a p p l i c a b l e to f a r e c o l l u s i o n i n the a v i a t i o n i n d u s t r y . ) Since the EEC was not forthcoming w i f h a p o l i c y , the Parliament f i l e d a complaint w i t h the European Court of J u s t i c e . Responding t o t h i s a c t i o n , the EEC Commission recommended a p o l i c y t h a t would provide a compromise between the demands of the Treaty of Rome without r e s o r t i n g to f u l l d e r e g u l a t i o n as adopted i n the United S t a t e s . F r e d e r i k Sorensen, head of the EEC A i r Trans-port D i v i s i o n , explained: The a i r l i n e s a p p l i c a t i o n of the competition r u l e s would lead t o r e v o l u t i o n . The task i s t o e s t a b l i s h f a i r and 207 equal o p p o r t u n i t i e s f o r the a i r l i n e s , but . . . the degree of competition needs t o be c o n t r o l l e d (qtd. i n A v i a t i o n Week and Space Technology January 30, 1984:28). The Commission proposal or Memorandum 2 suggested t h a t : (1) governments be forbidden t o s u b s i d i z e a i r l i n e s (permission to provide a i d i n order t o promote r e g i o n a l development could be obtained from the c o u n c i l but members would have t o prove t h a t the a i r l i n e i n question would be s e l f - s u f f i c i e n t i n the f u t u r e ) ; (2) governments be p r o h i b i t e d from g i v i n g route grants subject to an a i r l i n e ' s agreeing to p a r t i c i p a t e i n revenue p o o l i n g or other coopera-t i v e agreements; (3) governments could a l l o w pools or cooperative agreements but l e s s than 1% of an a i r l i n e ' s revenue should be allowed t o pass between c a r r i e r s ; (4) c a p a c i t y l i m i t s on s p e c i f i c routes be allowed i f both s t a t e s agreed; and (5) "zones of reasonableness" be agreed on by c o u n t r i e s and used as a means t o in c r e a s e p r i c e f l e x i b i l i t y w i t h i n the re g i o n ( A v i a t i o n Week and  Space Technology January 30, 1984:28). A European o f f i c i a l explained the philosophy behind t h i s approach: We do not b e l i e v e we can use r e g u l a t i o n s t o f o r c e a i r -l i n e s t o be more e f f i c i e n t and reduce c o s t s . We b e l i e v e the way to in c r e a s e e f f i c i e n c y i s to al l o w some competi-t i o n as a spur t o e f f i c i e n c y . The a i r l i n e s must become more co s t conscious (qtd. i n A v i a t i o n Week and Space  Technology January 30, 1984:29). The European Parliament responded w i t h a more cons e r v a t i v e p o l i c y urging a "go slow" approach t o European d e r e g u l a t i o n . The proposal, l i k e Memorandum 2 urged governments to "promote a more consumer o r i e n t a t e d European a i r t r a n s p o r t system" ( A v i a t i o n Week and Space Technology June 17, 1985). I t 208 also proposed the establishment of "zones of reasonableness." However, i t did not call for any significant liberalization of capacity or market entry restrictions or for the abolition of revenue pooling (Aviation Week and Space  Technology November 4, 1985:29). The Parliament proposal was supported by the Association of European Airlines and IATA at the October IATA Annual General Meeting. Support for these recommendations was not easily acquired within the AEA. The organiza-tion composed of 13 European airlines has representatives from both the more liberal and more conservative states. Six of its members: Aer Lingus, British Airways, Iberia, KLM Royal Dutch Airlines, and UTA would have pre-ferred a more liberal approach, although they agreed to support the policy unlike British Caledonian which dissociated itself from the activities of the organization. Members who supported the conservative policy were Air France, Alitalia, Olympic Scandinavian Airline System, TAP Air Portugal, Sabena and Lufthansa (Aviation Week and Space Technology November 4, 1985:29). IATA support of the policy led the secretary general of European charter airlines, R. Paul Holubowicz, to accuse the European Parliament of having "sold out to the big business cartel lobby of IATA" (qtd. in Aviation Week and Space Tech- nology September 23, 1985:39). The European Commission criticized the conservative European Parliament proposal and urged the Council of Ministers to follow the recommendations of Memorandum 2. They warned the Council that i f i t did not act on proposals for deregulation, the Commission would pursue legal action against airline and government practices which i t believed to be contrary to free and fair competition (Aviation Week and Space Technology September 23, 1985:29). 209 Meanwhile, during t h i s p e r i o d , the European Court of J u s t i c e was a l s o being c a l l e d on t o take a p o s i t i o n on a i r l i n e r e g u l a t i o n . As mentioned e a r l i e r , i t was not c l e a r whether the a n t i - t r u s t l e g i s l a t i o n found i n A r t i c l e 85-94 of the Treaty E s t a b l i s h i n g the European Economic Community (Treaty of Rome) a p p l i e d to a i r t r a n s p o r t . In 1974 the Court of J u s t i c e i n the Case of the Commission of European Communities versus the French Republic had judged t h a t a l l forms of t r a n s p o r t are subje c t to the "general r u l e s of the t r e a t y . " Nevertheless, t h i s judgement continued to be surrounded by controversy (Haanappel 1984:86-87). Then, i n the summer of 1985, the European Court of J u s t i c e was asked once again to examine the j u r i s d i c t i o n of the Treaty of Rome a n t i - t r u s t laws. S p e c i f i c a l l y , i t was asked t o pass judgement on whether EEC member a i r l i n e s have the r i g h t to re g u l a t e the p r i c e of a i r l i n e t i c k e t s w i t h i n i t s borders and whether they have the r i g h t t o l i m i t the regu-l a t i o n of c a p a c i t y and e n t r y 1 ( A v i a t i o n Week and Space Technology J u l y 5, 1985:28). In t h i s i n s t a n c e , however, the European Court of J u s t i c e d e c l i n e d t o make a d e c i s i v e judgement. I t s t a t e d t h a t such a d e c i s i o n was p o l i t i c a l and could only be made by n a t i o n a l governments. The Court supported the general concept of l i b e r a l i z i n g the a i r l i n e environment saying t h a t the Treaty of Rome competition r u l e s should apply to a i r t r a n s p o r t . However, i t st r e s s e d t h a t s i n c e the EEC had never adopted s p e c i f i c r e g u l a t i o n s on compe-t i t i o n w i t h i n the t r a n s p o r t i n d u s t r y , n e i t h e r the n a t i o n a l courts nor the Court of J u s t i c e could f o r c e nations to abandon f a r e r e g u l a t i o n . The d e c i -s i o n d i d not r e q u i r e s t a t e s and the EEC commission to take a c t i o n against f a r e agreements which r e s t r i c t trade; however, i t opened the way f o r them t o do so ( A v i a t i o n Week and Space Technology May 5, 1986:34). 210 For the time being, l i b e r a l i z a t i o n has been s t a l l e d i n the EEC. The EEC Commissioner f o r Competition, Mr. Sutherland, annoyed a t the apparent u n w i l l -ingness of the Co u n c i l of M i n i s t e r s t o abandon r e s t r i c t i v e p o l i c i e s and break the IATA c a r t e l warned s e v e r a l a i r l i n e s ( i . e . , Lufthansa, A l i t a l i a , and Olympic) t h a t he would s t a r t l e g a l a c t i o n against them f o r a n t i - c o m p e t i t i v e p r a c t i c e s . The EEC Commission has a l s o warned the C o u n c i l of M i n i s t e r s t h a t i f they d i d not agree on a plan f o r the l i b e r a l i z a t i o n of the a i r l i n e indus-t r y by the summer of 1987, the Commission would withdraw d r a f t EEC r e g u l a -t i o n s e x c l u d i n g a i r l i n e s from f u l l competition r u l e s of the Treaty of Rome (The Economist March 21, 1987:7). P a r a l l e l i n g developments i n the smaller forum of the EEC, i n i t i a t i v e s have been taken w i t h i n the ECAC (composed of D i r e c t o r Generals of C i v i l A v i a -t i o n from 22 European c o u n t r i e s ) t o l i b e r a l i z e the a v i a t i o n i n d u s t r y i n Europe. As i n the EEC, the momentum toward d e r e g u l a t i o n w i t h i n the ECAC increased f o l l o w i n g the i s s u e of a r e p o r t of a study on the e f f e c t s of c a r t e l a c t i v i t y i n Europe. In 1982 f o r the f i r s t time the ECAC documented the extent t o which a i r l i n e and government agreements were h i n d e r i n g competi-t i o n . I t reported t h a t 90% of European routes had c a p a c i t y l i m i t s . In a d d i -t i o n , 75% to 80% of a l l ton-kilometres performed on intra-European f l i g h t s were subj e c t to p o o l i n g agreements ( i . e . cost or revenue sharing) ( A v i a t i o n  Week and Space Technology November 8, 1982:51). The study recommended t h a t c o u n t r i e s begin to deregulate the i n d u s t r y by e s t a b l i s h i n g "zones of reason-ableness" which would a l l o w a i r l i n e s a c e r t a i n degree of p r i c e f l e x i b i l i t y , as w e l l as by l i m i t i n g government i n t e r f e r e n c e i n s e r v i c e patterns and c a p a c i t y l e v e l s . The re p o r t recognized t h a t such a c t i o n would meet with 211 r e s i s t a n c e s i n c e a n t i - c o m p e t i t i v e measures were adopted i n order to p r o t e c t the many i n e f f i c i e n t European a i r l i n e s from competition. The re p o r t a l s o commented t h a t i t i s "inconceivable t h a t any European government would accept the e l i m i n a t i o n of i t s f l a g c a r r i e r " f o r reasons of p r e s t i g e , p u b l i c p o l i c y , f o r e i g n exchange, p o l i t i c a l and other reasons (qtd. i n A v i a t i o n Week and  Space Technology September 6, 1982:54-55). I t concluded t h a t change should be e v o l u t i o n a r y as opposed to r e v o l u t i o n a r y : ECAC s t a t e s wish to avoid d i s r u p t i v e e f f e c t s which could undermine the s t a b i l i t y inherent i n the present framework of b i l a t e r a l and m u l t i l a t e r a l arrangements between Euro-pean s t a t e s by exposing i t t o r a d i c a l r a t h e r than r e v o l u -t i o n a r y change (qtd. i n A v i a t i o n Week and Space Tech- nology September 6, 1982:54-55). Three years l a t e r , a t the same time t h a t the two EEC proposals were being debated, the ECAC issued i t s own p o l i c y . I t c a l l e d f o r commitment t o : (1) the l i b e r a l g r a n t i n g of t r a f f i c r i g h t s , m u l t i p l e d e s i g n a t i o n and i n c r e a s -i n g f o r e i g n c a r r i e r access to routes not served by n a t i o n a l c a r r i e r s ; (2) reducing c a p a c i t y r e s t r i c t i o n s and g i v i n g a i r l i n e s more decision-making f l e x -i b i l i t y ; (3) ensuring f a i r and equal opportunity i n a i r l i n e s e r v i c e ( t h i s d i d not mean ensuring equal b e n e f i t s and the re p o r t dissuaded s t a t e s from engag-in g i n revenue pools or t r a f f i c s haring schemes); (4) more freedom f o r r e g i o n a l a i r l i n e operations; (5) the adoption of "zones of reasonableness" f o r p r i c i n g ; and (6) e l i m i n a t i n g r e g u l a t i o n s which l i m i t e d the a b i l i t y of nonscheduled a i r l i n e s to compete (qtd. i n A v i a t i o n Week and Space Technology June 17, 1985:29). 212 The adoption of such a policy was not legally binding on national governments, although i t was the first step in encouraging further ECAC agreements on liberalization. Consequently, a number of ECAC working groups began to draft a new multilateral agreement comparable to the Memorandum of Understanding on the North Atlantic which could govern European transport. As of May 4, 1987 two agreements had been drafted. The first dealt with tariffs and proposed the establishment of zones of reasonableness for dis-count and deep discount fares. It allowed airlines to propose tariffs to governments unilaterally without i n i t i a l approval by other airlines. The proposal also incorporated a system for rapid arbitration in the event of tariff disputes. The second agreement dealt with capacity sharing and pro-posed an end to the 50/50 split policy promulgated by certain European countries. The new agreement allowed airlines to offer up to a 55% share of the total capacity between two countries over two years. The drafts were to be available for signing later in the year (Aviation Week and Space Tech- nology May 4, 1987). Although the activity within various multilateral forums such as the EEC and ECAC has led to a move towards deregulation, the most effective initia-tives have been taken through the unilateral action of a few procompetitive states (i.e., Britain especially and second, Holland). The British move towards promoting liberalization in Europe followed the election of the Thatcher government in 1979. The House of Lords undertook a policy investi-gation into European scheduled fares and reported in the summer of 1980 that European fares were too high due to the regulated, protective regime formed around them. The report urged that European governments should be persuaded that the "benefits of more competition would not be more than offset by the 213 d i s r u p t i o n of the e x i s t i n g r e g u l a t o r y system" (qtd. i n A v i a t i o n Week and  Space Technology June 30, 1980:29). Four years l a t e r , the B r i t i s h , f o l l o w i n g the example of e a r l i e r U.S. l i b e r a l b i l a t e r a l s , signed an agreement w i t h Holland i n June 1984 which allowed a i r l i n e s t o f l y between any points i n the United Kingdom and Holland, and gave a i r l i n e s autonomy i n c a p a c i t y and f r e -quency d e c i s i o n s and provided a system of country of o r i g i n t a r i f f r e g u l a -t i o n . The t h r e a t of t r a f f i c d i v e r s i o n r e s u l t i n g from t h i s agreement l e d West Germany, Belgium, Luxembourg and even France to s i g n s i m i l a r l i b e r a l i z i n g agreements w i t h B r i t a i n (The Economist September 28, 1985; A v i a t i o n Week and  Space Technology December 2, 1985:36). Developments i n the P a c i f i c The P a c i f i c Basin i s the f a s t e s t growing market i n the a v i a t i o n indus-t r y . ICAO has p r e d i c t e d t h a t t r a f f i c w i l l grow a t an average annual r a t e of 10% through 1992 and a i r l i n e s o r i g i n a t i n g from the region w i l l g a in over 33% of world t r a f f i c . Although U.S. i n i t i a t i v e s i n the area have helped to introduce competitive f o r c e s , the prospects f o r r a p i d f u t u r e d e r e g u l a t i o n are mixed. The strongest moves have been taken i n recent years by A u s t r a l i a and New Zealand. The A u s t r a l i a n Trade P r a c t i c e s Commission has withdrawn a n t i -t r u s t immunity from a wide range of IATA a c t i v i t y . As of mid 1985, the a c t i o n was under appeal. S i m i l a r l e g i s l a t i o n i s being considered i n New Zealand (Dempsey 1987:iv.; A v i a t i o n Week and Space Technology October 28, 1985:31). At a conference on the P a c i f i c market a t the Lloyd's of London Press I n t e r n a t i o n a l C i v i l A v i a t i o n Conference, P a c i f i c c o u n t r i e s voiced t h e i r support f o r more competition and l e s s r e g u l a t i o n of p r i c i n g but were not on the whole i n favour of complete d e r e g u l a t i o n ( A i r Transport World December 214 1986:34-38). The major forum f o r t a r i f f c o o r d i n a t i o n i n the region i s the O r i e n t A i r l i n e s A s s o c i a t i o n (OAA). IATA a l s o plays an important r o l e i n the development of t a r i f f s although i t i s r a r e t h a t p r i c e s are d i r e c t l y estab-l i s h e d a t t r a f f i c conferences. Rather, the many non-IATA a i r l i n e s i n con-j u n c t i o n w i t h the IATA a i r l i n e s and w i t h the a c t i v e involvement of govern-ments e s t a b l i s h f a r e s f o l l o w i n g g u i d e l i n e s provided by IATA. I l l e g a l d i s -counting i s very widely p r a c t i c e d , perhaps more than i n any other r e g i o n . Developments i n A f r i c a , the Middle East and Latin America IATA continues to p l a y an important r o l e i n A f r i c a , the Middle East and L a t i n America although the r e g i o n a l o r g a n i z a t i o n s AFRAA, AACO, and AITAL are becoming i n v o l v e d i n t a r i f f c o o r d i n a t i o n . Since i t s r e s t r u c t u r i n g , IATA has supported t h i s r e g i o n a l i n i t i a t i v e by t r y i n g to e s t a b l i s h a c l o s e r rapport w i t h the v a r i o u s o r g a n i z a t i o n s . For the most p a r t , c o u n t r i e s i n these regions continue t o oppose d e r e g u l a t i o n . O f f i c i a l s f e e l t h a t t h e i r s m a l l e r , younger a i r l i n e s must be protected from the l a r g e , e f f i c i e n t , e s t a b l i s h e d European and U.S. c a r r i e r s . The p r e s i d e n t of AFRAA, Mohamed Faheem Kayan, expressed t h i s view: A v i a t i o n i s so s e n s i t i v e t h a t i t cannot be l e f t t o f r e e and u n c o n t r o l l e d competition. I t has r e s u l t e d i n bank-r u p t c i e s and unemployment i n the U.S. The e f f e c t could be even worse i n the developing c o u n t r i e s (qtd. i n A v i a - t i o n Week and Space Technology November 4, 1985:32). These c o u n t r i e s are p a r t i c u l a r l y concerned t h a t the economic preponderance of the major a v i a t i o n powers w i l l impose d e r e g u l a t i o n upon t h e i r own c o u n t r i e s through a v a r i e t y of methods. F i r s t , European and U.S. a i r l i n e s w i l l be able 215 t o "dump" c a p a c i t y i n l e s s developed c o u n t r i e s . For example, Frank Okyne, Chairman of Ghana Airways, has pointed out t h a t about 70% of A f r i c a n t r a f f i c o r i g i n a t e s i n Europe. Consequently, he argues, i t would be very easy f o r the European a i r l i n e s t o c r o s s - s u b s i d i z e t h e i r A f r i c a n operations and o f f e r low p r i c e s which would break the A f r i c a n a i r l i n e s . S. M. Kh e i r , General Manager of Sudan Airways, pointed out t h a t although s t r i c t l y speaking governments have the a u t h o r i t y t o c o n t r o l s e r v i c e s to t h e i r c o u n t r i e s , there i s always a way f o r a i r l i n e s to circumvent r e g u l a t i o n s . A second way i n which l i b e r a l i z -a t i o n i s l i k e l y t o enter u n w i l l i n g developing c o u n t r i e s i s through pressure exerted by the European and U.S. governments. One country which has s u f f e r e d as a consequence of such pressure i s C h i l e . P a t r i c i o Sepulveda, P r e s i d e n t of AITAL, has claimed t h a t the Chile a n a v i a t i o n i n d u s t r y has taken great l o s s e s s i n c e the government's adoption of an open sky p o l i c y i n 1978. Sepulveda has s a i d : Even though the law s a i d we [Lan-Chile A i r l i n e s ] should have r e c i p r o c a l r i g h t s , i n p r a c t i c e the government never demanded them (qtd. i n A v i a t i o n Week and Space Technology November 4, 1985:32). Summary Since 1981 the p r i n c i p l e s of the c a r t e l system have continued to be upheld by s t a t e s i n the Middle East, A f r i c a , and L a t i n America. The move towards t a r i f f n e g o t i a t i o n w i t h i n r e g i o n a l forums represents a change i n the decision-making procedure of the regime. I t does not c o n s t i t u t e a change i n the p r i n c i p l e of m u l t i l a t e r a l t a r i f f - s e t t i n g . In the United States there has been a move away from l i b e r a l i z a t i o n . Whether U.S. t r a f f i c may be s a i d to be 216 o p e r a t i n g w i t h i n the c a r t e l system i s open t o question. On the one hand, i t would appear t h a t i n c e r t a i n markets (e.g., the North A t l a n t i c ) the United States continues to oppose 40-60 market-sharing parameters and m u l t i l a t e r a l p r i c e - s e t t i n g . (Although, the United States-ECAC memorandum may be seen as a p a r t i a l concession t o the l a t t e r p r i n c i p l e s i n c e i t allows a c e r t a i n degree of m u l t i l a t e r a l t a r i f f - s e t t i n g . ) In other markets (e.g., the Soviet and Thai markets) U.S. p o l i c y seems to be moving back towards r i g i d market-sharing, although m u l t i l a t e r a l t a r i f f - s e t t i n g i s not p r a c t i c e d i n these markets. In Europe there has been a move away from supporting c a r t e l p r i n c i p l e s ( p a r t i c -u l a r l y by B r i t a i n and Holland which have signed a l i b e r a l b i l a t e r a l w i t h each o t h e r ) . C e r t a i n European s t a t e s have threatened to wage an a n t i - t r u s t b a t t l e a g a i n s t IATA and many support the adoption of an intra-European agreement on zones of reasonableness. In the case of the Europeans, who i n the past agreed on s t r i c t m u l t i l a t e r a l t a r i f f s e t t i n g on intra-European routes, t h i s a c t i o n would represent a move away from the c a r t e l system. (Within c e r t a i n bands a i r l i n e s set p r i c e s u n i l a t e r a l l y according t o market f o r c e s . ) S i m i -l a r l y , t a l k of movement away from a 50-50 t r a f f i c s p l i t i n d i c a t e s a s l i g h t weakening of support f o r c a r t e l p r i n c i p l e s . Nevertheless, at the time of the w r i t i n g of the t h e s i s , European t r a f f i c o u t s i de shared U.S. markets, operates f o r the most pa r t w i t h i n the c a r t e l system. In the A s i a n / P a c i f i c r e gion, some t r a f f i c operates o u t s i d e the c a r t e l system ( i . e . , t a r i f f s are not d i r e c t l y s e t through IATA); nevertheless, i t appears t h a t many of these c o u n t r i e s adhere e i t h e r t o r e g i o n a l m u l t i l a t e r a l t a r i f f agreements or f o l l o w IATA g u i d e l i n e s . De facto t h i s can be seen as support f o r c a r t e l p r i n -c i p l e s . F i n a l l y , new moves t o apply a n t i - t r u s t l e g i s l a t i o n a g a i n s t IATA by New Zealand and A u s t r a l i a s i g n a l weakening support f o r the c a r t e l system. In 217 c o n c l u s i o n , i t i s c l e a r t h a t the p r i n c i p l e s of the c a r t e l system no longer have the same support as i n the heyday of the c a r t e l . Nevertheless, they continue to dominate i n many markets. ( 218 ANALYSIS Recent years have seen the c o n s o l i d a t i o n of support f o r the r e s t r u c t u r e d c a r t e l . F o l l o w i n g 1981, the U.S. tempered i t s aggressive p u r s u i t of deregu-l a t i o n . Not only d i d i t abandon the Show Cause Order, but i t a l s o i m p l i c i t l y permitted i t s c a r r i e r s t o p a r t i c i p a t e i n North A t l a n t i c t r a f f i c conferences by becoming party t o the ECAC-U.S. Memorandum of Understanding. I t a l s o changed i t s p o l i c y towards l i b e r a l b i l a t e r a l s and adopted a more pragmatic approach. C u r i o u s l y , t h i s p e r i o d has seen new challenges to the IATA c a r t e l o r i g i n a t i n g from Europe, New Zealand and A u s t r a l i a , although f o r the time being these i n i t i a t i v e s have been s t a l l e d . Both w i t h i n North America and Europe, IATA 1s c o n t r o l over t a r i f f - f i x i n g has weakened as other forums ( i . e . , r e g i o n a l o r g a n i z a t i o n s and b i l a t e r a l government n e g o t i a t i o n s ) have become new l o c i i of n e g o t i a t i o n s . In these regions, IATA's r o l e as a trade a s s o c i a t i o n has gained i n importance. In A f r i c a , the Middle East and L a t i n America ( i . e . , regions where a i r l i n e s are the l e a s t competitive and r e q u i r e some form of government support) IATA p r i c e - f i x i n g i s s t i l l very important. These s t a t e s f e a r , however, t h a t d e r e g u l a t i o n from North America and Europe w i l l make inroads i n t o t h e i r c o n t r o l l e d systems. Thus the three new developments i n the a v i a t i o n regime si n c e 1981 have been a move t o i n t e r n a t i o n a l d e r e g u l a t i o n i n Europe, a move away from i n t e r -n a t i o n a l d e r e g u l a t i o n i n the United States, and a growing tre n d toward r e g i o n a l i s m i n developing c o u n t r i e s . The a n a l y s i s w i l l focus on e x p l a i n i n g these three dynamics. The f i r s t question to be asked i s to what extent were changes i n eco-nomic theory or in f o r m a t i o n r e s p o n s i b l e f o r the behaviour of c e r t a i n s t a t e s i n Europe, the United States, and i n the developing world? I t i s i n t e r e s t i n g 219 to note t h a t , as seen i n the United States i n the previous p e r i o d , i n Europe the move towards d e r e g u l a t i o n was preceded by a number of economic s t u d i e s c a l c u l a t i n g the costs of r e g u l a t i o n . The s i g n i f i c a n c e of these s t u d i e s should not be underestimated. For the f i r s t time, the extent of p o o l i n g and other r e s t r i c t i v e arrangements were made p u b l i c . S i m i l a r l y , p r i c e s and costs of European operations were c a l c u l a t e d so t h a t European e f f i c i e n c y l e v e l s c o u l d be compared w i t h some p r e c i s i o n t o those i n North America. The conclu-sions of these s t u d i e s were f o r the most pa r t c r i t i c a l of the anti-competi-t i v e arrangements. They s t r e s s e d t h a t l i b e r a l i z a t i o n would lea d to both higher e f f i c i e n c y , lower p r i c e s and i n d u s t r i a l growth, and urged p o l i c y -makers to a c t a c c o r d i n g l y . The acceptance of the i d e a t h a t market fo r c e s should p l a y a greater r o l e i n the commercial r e g u l a t i o n of c i v i l a v i a t i o n c h a r a c t e r i z e d t o a c e r t a i n extent the general European atmosphere. Although the Europeans were quick to s t r e s s t h a t they were pursuing c o n t r o l l e d l i b e r a l i z a t i o n as opposed t o dereg-u l a t i o n American-style. I t would appear t h a t the economic s t u d i e s had some impact on the change i