US-Japan Memorandum of Consultations / January 30, 1998

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Memorandum of Consultations

Delegations representing the appropriate authorities of the United States of America and Japan, following several prior meetings in the United States and Japan, met in Washington, January 20-30, 1998, to discuss a full range of issues relating to their civil aviation relationship. Delegation lists are at Attachment A.

The delegations discussed the elements of an exchange aimed at ensuring implementation of the 1952 Agreement in a manner appropriate to the U.S.-Japan civil aviation relationship, pending conclusion of comprehensive revision talks.

Pursuant to those discussions, the delegations reached understandings regarding the elements to be included in a Memorandum of Understanding on those issues discussed, which are described in Attachment B, and agreed to meet again in Tokyo to complete negotiation of the final text of the Memorandum of Understanding.

Finally, the delegations noted the intentions of their respective aeronautical authorities to take necessary measures to implement the provisions of the agreement, as of the date of signing this Memorandum of Consultations, on the basis of comity and reciprocity, pending conclusion of the interim agreement:

For the Delegation of the United States of America

Alan Larson

Chairman

For the Delegation of Japan

Hiromichi Toya

Chairman 

Washington, D.C.

January 30, 1998

Tab A Combination Airlines - Incumbent

Designations, Routes, Frequencies, Capacity, and Traffic Composition; including formulae for traffic composition of incumbent airline passenger fifth freedom services:

For procedures for applying applicable formulae, see Tab K

Tab B Combination Airlines - Non-Incumbent

Designations; Frequencies, Routes

Reallocation of Frequencies:

Right to Switch Points:

Right to Substitute Airlines:

Guam/Saipan:

Tab C Annex I: Amendment to 1996 All-Cargo Agreement:

Incumbent All-Cargo Airlines

Designations, Routes, Frequencies,

Capacity, and Traffic Composition,

Relationship to prior agreements:

Non-incumbent All-Cargo Airlines

Tab D Charters:

Equalization, Expansion, Freight Forwarder Charters:

Tab E Cooperative Marketing Arrangements for Combination and All-Cargo Operations:

Tab F Operational Flexibility:

Tab G Change of Gauge: Combination Services:

Tab H Combination Services All-Cargo Services Pricing:

Tab I Future Negotiations:

Tab J Safety Net:

Tab K Procedures Concerning the Application of Articles 10, 11, and 12 of the 1952 Agreement With Respect to Capacity, Frequency. and Traffic Composition:

Tab L General Provisions:

OTHER DOCUMENTS:

Tab M Side letters on Capacity:

Tab N Side letters on Pricing

January 30, 1998

1. Rights of incumbents. Two airlines designated by the United States (hereinafter referred to as the "U.S. incumbent combination airlines") /l and two airlines designated by Japan (hereinafter referred to as the "Japanese incumbent combination airlines") /2 (hereinafter collectively referred to as the "incumbent combination airlines") pursuant to the 1952 Agreement may operate combination services between any point or points behind the territory of the Party designating the airlines, any point or points in the territory of the Party designating the airlines, any intermediate point or points, any point or points in the territory of the other Party, and any point or points beyond the other Party, without any limitation on frequency or capacity, and with respect to traffic composition without limitation except on passenger fifth freedom operations as set out in subsection 2, below.

2. Formulae.

Passenger services of incumbent combination airlines on route segments between the territory of the other Party and third countries, either intermediate to or beyond the territory of the other Party, (hereinafter "fifth freedom operations") shall be subject to the applicable formulae below:

1/ Subject to the right of the United States, provided for in the 1952 Agreement, to substitute airlines, the U.S. incumbent combination airlines shall be Northwest Airlines and United Airlines.

2/ Subject to the right of Japan, provided for in the 1952 Agreement, to substitute airlines, the Japanese incumbent combination airlines shall be Japan Airlines and All Nippon Airways.

a. Formulae Applicable to Fifth Freedom

(i) U.S. Airline Operations to and from IATA

The formulae in both provision (a)(i)(1) and provision (a)(i)(2) apply to U.S. incumbent combination airlines' fifth freedom operations to and from IATA Regions TCI (the Americas) and TC-3 (Asia) (hereinafter referred to as "Asia/Americas"):

Pax-miles (BC)< pax-miles (AB) + pax-miles (AC);

and

1/ For purposes of all formulae, for newly inaugurated services the six month period would commence after a reasonable start up period of no less than three months after inauguration of services.

Pax-miles (AC) > 25% pax-miles (BC)

ii. Definitions for U.S. airline operations to and from Asia/Americas

For purposes of the above formulae for U.S. airline fifth freedom operations:

(a) BC represents the passenger traffic transported by a U.S. airline with an initial origin or ultimate destination in Japan (B) and an ultimate destination or initial origin in third countries intermediate to, or beyond, Japan (C);

(b) AB represents the passenger traffic with an initial origin or ultimate destination in the United States (A) and an ultimate destination or initial origin in Japan (B); and

(c) AC represents the passenger traffic transported on a flight to, from, or via Japan with an initial origin or ultimate destination in the United States (A) and an ultimate destination or initial origin in third countries intermediate to, or beyond, Japan (C).

(d) Connecting passengers to/from the airline's homeland, on a flight of the same airline or of another airline of the same country, shall constitute third or fourth freedom traffic, not fifth freedom traffic.

(e) A passenger traveling on an aircraft carrying the code of two or more aii4ines shall be counted as a passenger of the airline on whose code the passenger is ticketed.

iii. U.S. Airline Fifth Freedom Operations to and from IATA Region TC-2 (Europe/Africa)

The following formula applies to fifth freedom operations of U.S. incumbent combination airlines to and from IATA Region TC-2 (hereinafter referred to as "Europe/Africa"):

Pax-miles (BC) < pax-miles (AC)]

b. Formulae Applicable to Fifth Freedom Operations of Japanese Airlines

(i) Japanese Airline Operations to and from IATA Regions TC-1 (the Americas) and TC-3 (Asia)

The formulae in both provision (b)(i)(1) and provision (b)(i)(2) apply to Japanese incumbent combination airlines' fifth freedom operations to and from Asia/Americas:

Pax-miles (BC) < pax-miles (AB) + pax-miles (AC);

and

Pax-miles (AC) > 25% pax-miles (BC)

ii. Definitions for Japanese airline operations to/from Asia/Americas

For purposes of the above formulae for Japanese airline fifth freedom operations:

(a) BC represents the passenger traffic transported by a Japanese airline with an initial origin or ultimate destination in the United States (B) and an ultimate destination or initial origin in third countries intermediate to, or beyond, the United States (C);

(b) AB represents the passenger traffic with an initial origin or ultimate destination in Japan (A) and an ultimate destination or initial origin in the United States (B); and

(c) AC represents the passenger traffic transported on a flight to, from, or via the United States with an initial origin or ultimate destination in Japan (A) and an ultimate destination or initial origin in third countries intermediate to or beyond the United States (C).

(d) Connecting passengers to/from the airline's homeland, on a flight of the same airline or of another airline of the same country, shall constitute third or fourth freedom traffic, not fifth freedom traffic.

(e) A passenger traveling on an aircraft carrying the code of two or more airlines shall be counted as a passenger of the airline on whose code the passenger is ticketed.

iii. Japanese Airline Fifth Freedom Operations to Europe/Africa

The following formula applies to fifth freedom operations of Japanese incumbent combination airlines to and from Europe/Africa:

The amount of fifth freedom passenger traffic, measured in passenger miles, aggregated on a route by route basis, transported by the airline over a six month period on each specified route including a fifth freedom segment to/from Europe/Africa, does not exceed the amount of third and fourth freedom passenger traffic transported by that airline on that route over the same period, similarly measured. This relationship between the fifth freedom traffic and the third/fourth freedom traffic may be expressed as follows:

Pax-miles (BC)< pax-miles (AC)

1. Designations.

(a) Each Party may designate, pursuant to the 1952 Agreement, up to four airlines, including any airlines, other than incumbent airlines, designated under the 1952 Agreement and all agreements and understandings related thereto (hereinafter referred to as the "prior agreements") to operate combination services /4 to operate combination services as non-incumbent combination airlines (hereinafter referred to as the "non-incumbent combination airlines").

(b) Effective January 1, 2000, each Party may designate a fifth non-incumbent combination airline.

2. Non-restricted frequencies

Non-incumbent combination airlines of each Party, in the aggregate, may operate, in addition to frequencies authorized pursuant to the prior agreements, up to 28 weekly round-trip frequencies between any point or points in the territories of the Parties, regardless of any restrictions on designations or frequencies on those city-pair markets under the prior agreements.

4/ Subject to the right of the Parties to substitute airlines, pursuant to paragraph B(l)(e), below, these airlines shall include, for the United States, the current non-incumbent airlines-Delta Airlines, American Airlines, and Continental Airlines/Continental Micronesia Airlines/Air Micronesia and for Japan, Japan Air System and Japan Asia Airways.

3. Restricted Frequencies

(a) Non-incumbent combination airlines of each Party, in the aggregate, may operate, in addition to the frequencies authorized pursuant to the prior agreements, up to 42 weekly round-trip frequencies between any point or points in the territories of the Parties, regardless of any restrictions on designations or frequencies on those city-pair markets under the prior agreements, except in the following city-pair markets:

* For purposes of identifying restricted city-pair markets, Newark, New Jersey, shall be treated as a separate point from New York, New York, and Oakland, California shall be treated as a separate point from San Francisco, California.

(b) With respect to city-pair markets listed in paragraph (a), above, if (i) no airline of the other Party is serving a city-pair market, or (ii) if the level of service provided by the airlines of both Parties in the market falls to six or fewer frequencies per week, in the aggregate, for a one year period, aeronautical authorities of either Party may request consultations to determine whether there are public interest reasons for permitting such a city-pair to be served with restricted frequencies.

d. Reallocation of frequencies.

1. Each Party shall have the right to:

(a) reallocate to any non-incumbent combination airlines of the Party any frequencies provided for in the prior agreements, except those provided for routes between Guam/Saipan and Japan, which are provided for in paragraphs (g), that are allocated to that Party's incumbent combination airlines, including All Nippon Airways, as of January 1, 1998. Following such reallocation, these frequencies may be used for operations between any point or points in the territories of the Parties, regardless of any restrictions on designations or frequencies on those city-pair markets under the prior agreements, except in the city-pair markets restricted pursuant to paragraph I(B)(3)(a), above. These frequencies shall be in addition to the frequencies provided for in paragraphs (2) and (3)(a), above;

(b) on 60 days notice, reallocate any frequencies provided for in Section I(B) for non-incumbent combination airlines among any of its non-incumbent combination airlines and to change the points selected for each frequency, subject to any point limitations applicable to such frequency in accordance with paragraph (3)(a) or paragraph (g)(Guam/Saipan-Japan routes), above, regardless of any restrictions on designations or frequencies on those city-pair markets under the prior agreements.

e. Right to Switch Points

1. Except with respect to Guam/Saipan-Japan routes, which are addressed in paragraph (g)(Guam/Saipan-Japan Routes), below, each Party shall have the right to select up to three non-incumbent combination airlines which shall, upon six months notice to the aeronautical authorities of the other Party, be permitted to change, on a one time, one city-pair basis, the point selected in its territory for frequencies provided for in the prior agreements and allocated as of January 1, 1998, to that airline. Each airline selected may change the point in its territory to any other point in its territory, regardless of any restrictions on designations or frequencies on those city-pair markets under the prior agreements. This right is subject to the limitation that if the city-pair market from which the switch will be made is not on the list of restricted city-pairs described in paragraph I(3)(a), then the frequency may not be switched to a city-pair market on that list.

2. In lieu of one of the switches permitted under subparagraph 1, above, the United States shall have the right to designate its non-incumbent combination airline authorized as of January 1, 1998, under Section 11 of the 1985 Interim Agreement (hereinafter referred to as the "1985 MOU") to serve Saipan-Tokyo as a coterminal with Guam-Tokyo, to operate up to seven weekly frequencies on any city-pair, except the restricted city-pairs identified in paragraph 1(3)(a), above, in addition to frequencies provided for elsewhere in this agreement or the prior agreements. If an airline switches from Saipan Tokyo to another city-pair, pursuant to this paragraph, then: (i) that airline may not be designated, under paragraph 1(3)(g) (Guam/Saipan-Japan Routes) of this agreement, to operate the Saipan-Tokyo route; and (ii) the rights of designation under Section II of the 1985 MOU shall be reduced to one designation for Saipan-Tokyo. A Party may reverse the switch and designate the same airline to serve Saipan-Tokyo with unlimited frequencies, as prior to the switch. However, an airline exercising the right to switch under this paragraph may not receive the second designation permitted under Section II of the 1985 MOU to serve Saipan-Tokyo. No other Guam-Saipan-Japan designations shall be affected by this provision.

f. Right to Substitute Airlines

Each Party shall have the right, on sixty days notice, to designate substitute airlines for any of the non-incumbent combination airlines, subject to the limitation that the total number of airlines designated at any one time shall not exceed the number of authorized designations, as described in paragraph B(l)(a), above.

g. Guam/Saipan-Japan Routes

PAPER FOLLOWS

Guam/Saipan-Japan routes may be operated under three independent provisions of the proposed new agreement.

1. Operations based on Guam/Saipan-Japan Routes provision.

a. With respect to Guam/Saipan-Japan routes for which two designations were authorized under the prior agreements, for each such route for which an incumbent airline of a Party was designated to operate, as of January 1, 1998, the Party may designate one non-incumbent combination airline out of those designated under section B(1) to operate the route.

b. The non-incumbent airlines designated under this provision may operate any number of frequencies on the route or may change the point in Japan for the route and operate any number of frequencies on the new route, subject to limitations that: (1) selection of a new point in Japan is subject to the limitations on designations for Guam/Saipan-Japan routes under the prior agreements; (2) any new points in Japan selected are not being served to or from Guam/Saipan by any airline of the other Party as of January 1, 1998. In the event such airline terminates services in the Guam/Saipan-Japan market, such market shall become eligible for service; (3) following any such switch in points, the number of designations authorized under the prior agreements for the Guam/Saipan-Japan city-pair from which the service was switched shall be decreased by one; and (4) no more than a total of four new points in Japan may be served under this provision. However, this limitation does not affect the right of an airline to switch its service back to the original Guam/Saipan-Japan city-pair. A Party may, on 60 days notice, substitute a non-incumbent combination airline for another non-incumbent combination airline designated to serve any Guam/Saipan-Japan routes under these provisions.

2. Operations by non-incumbent airlines based on new frequencies. New frequencies may be operated on Guam/Saipan-Japan routes by any designated airline, without regard to the restriction on designations referenced in paragraph 1, above. Therefore, if any Guam/Saipan-Japan routes are included in the list of restricted city pairs, any number of non-incumbent combination airlines allocated new unrestricted frequencies may operate on any restricted Guam/Saipan-Japan routes, but only to the extent of the allocated unrestricted frequencies. An airline that has rights under the provisions referenced in paragraph 1, above, may also be allocated new unrestricted frequencies to operate on different Guam/Saipan-Japan routes.

3. Operations based n airline incumbency. Incumbent airlines may operate any Guam/Saipan-Japan routes without restriction on points or frequencies.

TAB C

Annex 1: Amendment to the 1996 All-Cargo Agreement

This Annex shall constitute an amendment to the 1996 All-Cargo Agreement (hereinafter referred to as the "1996 All-Cargo MOU") and shall be construed as an expansion of the rights provided for therein.

1. Rights of incumbents. Three airlines designated by the United States (hereinafter referred to as the "U.S. incumbent all-cargo airlines") /5 and two airlines designated by Japan (hereinafter referred to as the "Japanese incumbent all-cargo airlines") /6 (hereinafter collectively referred to as the "incumbent all-cargo airlines") pursuant to the 1952 Agreement may operate all-cargo services between any point or points behind the territory of the Party designating the airlines, any point or points in the territory of the Party designating the airlines, any intermediate point or points, any point or points in the territory of the other Party, and any point or points beyond the other Party, without any limitation on frequency, capacity, or traffic composition. /7

2. The provisions of the prior agreements, other than the 1952 Agreement, shall not be construed to constrain the rights of incumbent all-cargo airlines to operate services to the full extent provided for in paragraph 1, above.

5/ Subject to the right of the United States, provided for in the 1952 Agreement, to substitute airlines, the U.S. incumbent all-cargo airlines shall be FedEx, Northwest Airlines and United Airlines.

6/ Subject to the right of Japan, provided for in the 1952 Agreement, to substitute airlines, the Japanese incumbent all-cargo airlines shall be Japan Airlines and Nippon Cargo Airlines.

7/ No formula will apply to incumbent all-cargo services.

Improvements with regard to non-incumbent all-cargo operations will be implemented as amendments to the 1996 MOU which became effective on August 21, 1996. The basic elements pertaining to nonincumbent cargo improvements are as follows:

1. Improvements in Rights of Nonincumbent Airlines

The U.S. 1989 MOU nonincumbent all-cargo airline may operate all frequencies provided for in the prior agreements from any point or points in the United States to two points in Japan and beyond each of those two points to two points, with full traffic rights between all points on the route. The beyond points selected for each point in Japan may be the same or different points. No more than six frequencies per week may be operated on the route including Tokyo. No more than twelve frequencies per week may be operated on the route including Osaka.

The U.S. nonincumbent all-cargo airline authorized to serve Japan pursuant to the 1996 MOU may operate all frequencies provided for in the prior agreements from any point or points in the United States to two points in Japan and beyond each of those two points to one point, with full traffic rights between all points on the route. The beyond points selected may be the same or different points.

The United States Government shall select for each airline, and may change upon 60 days notice, the points chosen in Japan and the beyond points. The points selected in Japan and the beyond points may be the same points for each airline.

2. Designations

Effective January 1, 2002, each Party shall have the right to designate one airline, in addition to designations authorized in prior agreements, to operate as a nonincumbent all-cargo airline. Airlines designated under this provision may operate up to five weekly round-trip frequencies, from any point or points in the territory of the Party designating the airline, to any point in the territory of the other Party, and beyond to one point without local traffic rights on the beyond sector, provided that Tokyo and Osaka and any U.S. point served by a Japanese all-cargo airline as of January 1, 1998, shall not be served. The Party designating the airline shall have the right to choose the point in the territory of the other Party and the beyond point. Points selected may be changed on 60 days notice to the other Party.

3. Opportunities Made Available by NCA's Change to Incumbent Status

The Parties agree that as a consequence of NCA attaining incumbent status under this agreement, all rights available to NCA under the 1996 MOU, the 1989 MOU and the 1985 MOU, as set forth in those agreements, become available to a nonincumbent airline of Japan, not yet designated. In addition to the rights available to NCA in prior agreements, the nonincumbent airline designated to operate using NCA's previously granted rights shall have the right to operate beyond its authorized points to two points with full traffic rights. The beyond points selected for each point in the United States may be the same or different points. Points selected may be changed on 60 days notice to the other Party.

(Opportunities for code sharing are set forth in section XX of this agreement.)

The provisions in this Section (Charter Services) supersede the limitations on passenger and cargo charter operations between Japan and the United States contained in the prior agreements.

Airlines of each Party, in the aggregate, may operate up to 400 one-way charter flights per year between any point or points in the United States and any point or points in Japan, subject to the limitation that no more than 300 charter flights may be operated to or from Tokyo or Osaka, in the aggregate, by the airlines of each Party. Charter operations shall be subject to country of origin rules, except as provided in Section C, below.

1. Effective January 1, 2000, superseding Section A, above, airlines of each Party, in the aggregate, may operate up to 600 one-way charter flights per year between any point or points in the United States and any point or points in Japan, subject to the limitation that no more than 300 charter flights may be operated to or from Tokyo by the airlines of each Party. Charter operations shall be subject to country of origin rules, except as provided in subsection C, below.

2. Effective January 1, 2002, superseding subsection B(1), above, airlines of each Party, in the aggregate, may operate up to 800 one-way charter flights per year between any point or points in the United States and any point or points in Japan, subject to the limitation that no more than 300 charter flights may be operated to or from Tokyo by the airlines of each Party. Charter operations shall be subject to country of origin rules, except as provided in subsection C, below.

1. Airlines of the United States, in the aggregate, may operate each year up to 150 air freight forwarder charter units, originating in Japan and destined for the United States, subject to the limitations set forth in Section A, above. The following equivalencies will apply for purposes of counting units:

2. Effective January 1, 2000, superseding subparagraph 1, above, airlines of the United States, in the aggregate, may operate each year up to 225 air freight forwarder charter flights, without restriction as to aircraft type, originating in Japan and destined for the United States, subject to the limitations set forth in Section B (Expansion of Charter Opportunities), above.

Subject to country of origin rules and the requirements normally applied to such arrangements, charter carriers shall be permitted to engage in leasing arrangements.

TAB E

1. Operation of Cooperative Marketing Arrangements -Requirements for Operating Airline. In operating the authorized services on routes that include points in the territories of the Parties and also may include behind, intermediate, and beyond points, any designated airline of one Party may enter into cooperative marketing arrangements such as blocked-space, codesharing or leasing arrangements with:

9/ Nothing in this Section shall be construed to limit the exercise of a designated airline's fifth freedom traffic rights on flights that it operates that also carry codeshare traffic.

provided that all airlines in such arrangements (i) hold the appropriate authority, except as specifically provided in Section 4, below, and (ii) meet the requirements normally applied to such arrangements. Codesharing between the combination services of combination airlines and all-cargo services of all-cargo airlines shall not be permitted.

2. Operation of Cooperative Marketing Arrangements - Requirements for Non-Operating Airline. On services on routes that include points in the territories of the Parties and also may include behind, intermediate, and beyond points, using aircraft operated by an airline or airlines described below, any designated airline of one Party may enter into cooperative marketing arrangements such as blocked-space, codesharing or leasing arrangements, with:

provided that all airlines in such arrangements (i) hold the appropriate authority, except as specifically provided in Section 4, below, and (ii) meet the requirements normally applied to such arrangements. For beyond and intermediate point services of the non-operating airline of the first Party, the codeshare services may be offered only on a blind-sector basis. Codesharing between the combination services of combination airlines and all-cargo services of all-cargo airlines shall not be permitted.

4. Codeshare Only Authority for Non-incumbent Combination and Non-incumbent All-Cargo Airlines to Hold Out Services Under Codeshare Arrangements on Routes For Which They Lack Operating Authority: Subject to the requirements in subsection (2), above, and the limitations in subsection (5) (Limitations on Same Country Airline Codesharing), below, non-incumbent combination airlines and non-incumbent all-cargo airlines may be granted authority to place their code on services operated by airlines of either Party or by airlines of third countries, under codeshare arrangements, between any point or points behind the territories of the Parties, any point or points in the territories of the Parties, and any point or points intermediate to and beyond the territories of the Parties, whether or not they hold authority to operate services on the routes, provided that for beyond and intermediate point services of non-incumbent combination and all-cargo airlines the codeshare service may be offered only on a blind sector basis.

5. Limitations on Same Country Airline Codesharing. Codesharing between airlines of the same Party shall be subject to the following limitations:

TAB F

With respect to all services described above, subject to the route or city-pair list restrictions under this agreement or the prior agreements, airlines designated by the Parties may, and at their option:

without directional or geographic limitation and without loss of any right to carry traffic otherwise permissible under this Agreement; provided that the service serves a point in the territory of the Party designating the airline.

1. For combination services, on any segment or segments of the authorized routes, any designated airline may perform international air transportation without any limitation as to change, at any point on the route, in type or number of aircraft operated; provided that:

2. Transportation performed on aircraft of other airlines under codesharing arrangements shall not be counted for purposes of this Section (Change of Gauge).

1. On any segment or segments of the authorized routes, any designated airline may perform international air transportation without any limitation as to change, in both the inbound and outbound directions, at any point on the route, in type or number of aircraft operated; provided that:

a. In the outbound direction, transportation beyond such point is a continuation of the transportation from the territory of the Party that has designated the airline and, in the inbound direction, the transportation to the territory of the Party that has designated the airline is a continuation of the transportation from beyond such point.

b. For each flight outbound from the homeland, when a change of gauge takes place in the territory of the other Party, the onward transportation to a point or points in third countries, may be performed by any number of aircraft as long as the aggregate capacity, measured in cubic footage, of those aircraft does not exceed the capacity of three 747-100 Freighters.

2. Transportation performed on aircraft of other airlines under codesharing arrangements shall not be counted for purposes of this section (Change of Gauge).

3. This section (Change of Gauge) shall not be construed to limit in any manner the applicability of the provisions regarding Operational Flexibility in this agreement.

Pricing and Distribution

1. There shall be a fair and equal opportunity for the airlines of both Parties to contract with wholesalers, travel agents, and other similar bodies, if any, for the sales of their air transportation services in accordance with laws and regulations of the Party where such a contract is concluded. Airlines of both Parties also shall be free to market their air transportation services directly to consumers, inter alia, by establishing their own sales channels to this end in accordance with laws and regulations of the Party where they market the services.

2. Experts of both Parties will meet by May 1, 1998, to consider steps to liberalize pricing, including zone pricing.

3. Until such time as a new agreement is reached on pricing, aeronautical authorities of each Party will flexibly approve air fares proposed by airlines. This would require, for example, at a minimum, approval of a proposed fare or rate of airlines of either Party that matches any competitive fare or rate which is permitted under the current regime.

TAB I

1. The Parties shall commence negotiations no later than January 1, 200 1, with the objective of fully liberalizing the aviation relationship.

2. If the Parties fail to reach agreement in the above-referenced negotiations by January 1, 2002, then additional opportunities shall become available, as described in Part VI (Safety Net), below.

Safety net frequencies become available beginning January 1, 2002, or when non-incumbent carriers of either side are operating 56 frequencies authorized by this agreement, whichever is later.

1. New Frequencies

In addition, 7 unrestricted frequencies become available once ANA implements 70 or more trans-Pacific frequencies in addition to currently operated frequencies by that airline under prior agreements.

2. Conversion of Restricted Frequencies

Notes:

1. "Hybrid" frequencies may be used to serve any city-pair markets other than Tokyo-New York, Tokyo-Chicago and Tokyo-Honolulu.

2. "Restricted" frequencies may be used to serve any city-pair markets except for the city-pair markets on the restricted cities list.

TAB K

Procedures Concerning the Application of

Articles 10, 11, and 12 of the 1952 Agreement with

Respect to Capacity, Frequency, and Traffic Composition

The following procedures concerning the application of Articles 10, 11, and 12 of the 1952 Agreement shall apply to all approvals and reviews of changes in capacity or frequency of services, including inaugurations of new services, for all services operated under this agreement or any of the prior agreements, and take precedence over the procedures prescribed in any of the prior agreements or agreed minutes implementing the 1952 Agreement.

A. General Procedures

The procedures in this section (General Procedures) apply to all operations of all airlines, with the sole exception of those operations expressly provided for in Section B, below, (Procedures Applicable to Passenger Services on Fifth Freedom Operations to and from Europe/Africa):

1. Airlines of each Party shall follow the procedures normally applied on a non-discriminatory basis under the laws and regulations of the other Party relating to approvals or reviews of changes in capacity or frequency of services, including inaugurations of new services.

2. All changes in capacity or frequency of services, including inaugurations of new services, of an airline of either Party with respect to any routes or frequencies provided for in this agreement or any of the prior agreements, shall be permitted to take effect on the date duly requested by the airline.

3. The operations of designated airlines of either Party performed in accordance with the provisions of this agreement and within the limits of the formulae in Section I(A)(2), above, if applicable, shall be deemed to be in compliance with Articles 10, 11, and 12 of the 1952 Agreement.

4. If the aeronautical authorities of either Party have concerns related to the traffic composition, frequency, or capacity of operations of an airline of the other Party, they shall promptly notify the aeronautical authorities of the other Party of their concerns and the bases therefor and may request consultations under Article 14 of the 1952 Agreement to discuss any reservations expressed by the aeronautical authorities of the Party in the light of experience gained as a result of the operations of such services.

5. In consultations concerning fifth freedom operations of incumbent combination airlines, the aeronautical authorities shall first consider whether the operations at issue are not within the limits of the applicable formula in subsection I(A)(2), above, where applicable. If the aeronautical authorities reach agreement that the operations are not within the limits of the applicable formula, then they shall next consider whether the services are consistent with the relevant provisions of the 1952 Agreement.

6. Subject to the requirements of paragraph 6, below, consultations shall be held promptly following a request therefor, at a time mutually agreed by aeronautical authorities of both Parties. At such consultations, the aeronautical authorities of both Parties shall seek an agreement as to whether the services are inconsistent with Articles 10, 11, and 12 of the 1952 Agreement, and if so, whether, and to what extent, the services should be modified to comply with the requirements of Articles 10, 11, and 12. Both aeronautical authorities shall exert their utmost efforts to reach an agreement within such reasonable time as the case might require.

7. Consultations described in subsection 4, above, may be held only after a six month period of actual operations, or such longer period as may be mutually agreed by the aeronautical authorities of both Parties. With respect to inaugurations of services on new route segments, the three (Editor's Note: "six" was written above three) month period of actual operations shall begin after an initial three month start-up period.

8. In the event the aeronautical authorities of both Parties are unable, in the course of consultations, to reach an agreement as to whether an airline's operations meet applicable capacity or frequency requirements, the operations in question shall be permitted to continue until an agreement is reached as a result of such consultations, or if the aeronautical authorities of both Parties do not reach an agreement as a result of such consultations, or if the aeronautical authorities of both Parties do not reach an agreement as of such consultations, until resolution of the questions pursuant to Article 15, 16, or 18 of the 1952 Agreement.

9. Absent agreement of the Parties or resolution of the question pursuant to Articles 15, 16, or 18 of the 1952 Agreement, neither Party shall unilaterally limit a designated airline's operation of agreed routes and frequencies.

10. These procedures shall apply to proposed changes, including inaugurations, of services, notwithstanding the pendency of consultations or the other procedures under this Section on any prior proposals, including proposals to commence or increase services on the same route.

11. The continued operation of services pursuant to the procedures for reviewing operations as set forth in this Section may not in any case be considered by one Party to be a breach of the Agreement, absent agreement of the Parties.

B. Procedures Applicable to Passenger Services on Fifth Freedom Operations to and from Europe/Africa

The procedures in this section (Procedures Applicable to Passenger Services on Fifth Freedom Operations to and from Europe/Africa) apply to all fifth freedom operations to and from Europe/Africa of all combination airlines with respect to passenger services.

1.Airlines of each Party shall follow the procedures normally applied on a nondiscriminatory basis under the laws and regulations of the other Party relating to the filings by airlines of either Party reflecting changes in the capacity or frequency of services including inaugurations of new services, on agreed routes.

2. All changes in capacity or frequency of services, including inaugurations of new, fifth freedom operations to and from Europe/Africa may be reviewed by the aeronautical authorities of the other Party to consider whether the planned operations are in compliance with Articles 10, 11, or 12. The operations in question may not commence if the reviewing aeronautical authorities object to them, or have withheld any necessary approvals. 3. If the aeronautical authorities of either Party have concerns with respect to such operations, they shall promptly notify the aeronautical authorities of the other Party of their concerns and the bases therefor, and may request consultations under Article 14 of the 1952 Agreement to discuss any reservations expressed by the aeronautical authorities of the Party in the light of projections or data reflecting the probable results of such operations.

4. In consultations concerning fifth freedom operations of incumbent combination airlines to points in Europe/Africa, the aeronautical authorities shall first consider whether the operations at issue are within the limits of the applicable formula in subsection I(A)(4), above. If the aeronautical authorities reach agreement that the operations are within the limits of the applicable formula, then they shall next consider whether the services are consistent with the relevant provisions of the 1952 Agreement.

5. Consultations shall be held promptly following a request therefor, at a time mutually agreed by the aeronautical authorities of both Parties. At such consultations the aeronautical authorities of both Parties shall seek an agreement as to whether the services should be permitted to be inaugurated or operated. Both aeronautical authorities shall exert their utmost efforts to reach an agreement within such reasonable time as the case might require.

6. In the event the aeronautical authorities of the Parties are unable, in the course of consultations, to reach an agreement as to whether an airline's operations meet applicable requirements, the operations in question shall not be permitted until agreement is reached as a result of such consultations, or, if the aeronautical authorities of both Parties do not reach an agreement as a result of such consultations, until resolution of the questions pursuant to Articles 15, 16, or 18 of the 1952 Agreement.

C. Terms Applicable to All Operations

1. Neither of the Parties shall be permitted unilaterally to require the filing of traffic reports or data relative to fifth freedom operations to and from Asia/Americas of an incumbent combination airline of the other Party for the purpose of determining compliance with provisions relating to traffic composition, frequency, or capacity in this agreement or the prior agreements.

2. Nothing in this agreement shall be construed to limit the rights of either Party to enforce its domestic competition laws and other laws and regulations on such issues as safety, security and environment against any airline operating services under this agreement or any of the prior agreements following an appropriate proceeding, so long as such laws and regulations do not discriminate on the basis of nationality or any other improper or inappropriate basis.

TAB L

Relationship to Other Provisions and Agreements.

1. The provisions of the prior agreements, other than the 1952 Agreement, shall not be construed to constrain the rights of incumbent airlines to operate services to the full extent provided for in Sections I(A) and II(A), above.

2. Nothing in this Agreement shall be construed to impair any existing rights of a Party, under the prior agreements, to reallocate frequencies, select new points for service, or substitute airlines.

The US delegation considers that consistent with the purpose of the related articles of the 1952 Agreement beyond services may be operated by the incumbent airlines of both sides without limitation on frequencies. The U.S. delegation would appreciate confirmation from the Japanese delegation on this point.

We respond to your letter of January 30, 1998. For purposes of the new agreement, the Japanese delegation confirms, the U.S. view as stated in the letter, considering the circumstances of the markets concerned.

Assistant Secretary Alan P. Larson

Bureau of Economic and Business Affairs

Room 6828 U.S. Department of State

2201 C Street, N.W.

Washington, D.C. 20520

Dear Ambassador Larson:

The Ministry of Transport of Japan recognizes the importance of liberalizing the pricing regime. We are studying price liberalization in our domestic market and have initiated a consultative process to consider steps in this direction. In the discussions that will begin no later than May 1, 1998, the Ministry of Transport expects that experts consider steps with due attention paid to this ongoing domestic process.

Until such a time as a new bilateral agreement is reached, the Ministry of Transport of Japan, consistent with this agreement, intends to exercise to the maximum extent possible the flexibility accorded by Japanese law in order to approve reasonable filings of airfares proposed by airlines. We intend to approve filings by airlines to introduce lower rates of fares provided that they are consistent with domestic laws and regulations. In particular, we will not interfere with offerings by airlines that match those permitted to be offered in the marketplace.

Sincerely,

Hiromichi Toya

Vice Minister

Ministry of Transport

Dear Vice Minister Hiromichi Toya:

We have just concluded a U.S.-Japan Civil Aviation agreement that states in part:

"2. "Experts of both Parties will meet by May 1, 1998, to consider steps to liberalize pricing, including zone pricing.

3. Until such time as a new agreement is reached on pricing, aeronautical authorities of each Party will flexibly approve filings of air fares proposed by airlines. This would require, for example, at a minimum, approval of a proposed fare or rate of airlines of either Party that matches any competitive fare or rate which is permitted under the current regime."

We look forward to the consultations that will begin no later than May 1, 1998, and expect to propose substantial price liberalization measures.

For the U.S., the provisions of paragraph 3 mean that the U.S. Department of Transportation will flexibly approve prices proposed by U.S. and Japanese airlines that are not unreasonably discriminatory nor unreasonably high due to abuse of a dominant position. In particular, it will approve fares and rates of U.S. and Japanese airlines that match lower or more competitive fares and rates in the marketplace for transportation between our countries, or between one of our countries and a third country.

I would appreciate information on how Japan interprets and intends to implement these provisions of our agreement.

Sincerely,

Alan P. Larson