Nippon Cargo Airlines decided to go first class when it won approval from the Japanese government to compete against Japan Air Lines for international freight traffic. The new cargo line bought two spanking new 747s from Boeing Co. at $100 million each -- highly unusual since there are plenty of used jumbo jets on the market suitable for cargo -- and set an April 1 starting date.
But NCA didn't count on Flying Tigers, a Los Angeles-based company that is the largest air freight line in the world, and on a growing level of frustration within the Reagan administration and on Capitol Hill over Japan's $36.8 billion trade surplus with the United States.
Using that frustration in an intensive lobbying effort that involved former president Gerald Ford, a member of its board of directors, Flying Tigers succeeded in stalling a State Department push to win U.S. approval this week of a deal that would give NCA six flights a week between the United States and Japan. In return, additional American passenger carriers would get Japanese approval for flights to Japan.
Some senior officials in the Reagan administration, moreover, are trying to link an airline agreement between the two countries to overall U.S.-Japan trade relations for the first time, especially holding an NCA agreement hostage to opening Japan's market to U.S. telecommunications products. Japan and the State Department oppose that linkage.
Commerce Undersecretary Lionel H. Olmer gave the first hint that a freeze had been put on U.S. negotiations with Japan on NCA's application for cargo routes when he told the trade subcommittee of the Senate Finance Committee Friday that "there will be no administration position until all the trade consequences are fully understood."
Olmer added that the issue of giving NCA the route -- usually decided in negotiations carried out for the United States by midlevel specialists from the State and Transportation departments -- has moved up to "a very high level of the U.S. government . . . on a high-priority basis."
State Department officials acknowledged that the crash negotiations they hoped to start this week have been stalled, but said they could be resumed in the "near future." And they expressed annoyance at other government departments entering the dispute at this late date.
Although little noted in this country until recently, the question of NCA entering the lucrative U.S.-Japan air freight market has become a major issue among the Japanese, who believe they were forced into an unfair air treaty with the United States in 1952 in the closing days of the American occupation.
Among other irritants, Japan has complained about the large number of U.S. airlines that fly the route while they had only JAL, which until now had the government monopoly on international passenger and cargo air service.
In past negotiations, the Japanese delayed for more than three years United Air Lines' entry into the market to protest what they consider the unequal nature of the aviation agreement.
To protest the 17-month delay in obtaining permission to fly the U.S.-Japan cargo route, NCA took the unusual step, for the Japanese, of going public at a press conference to accuse the United States of being protectionist by opposing NCA's bid. It suggested that the Japanese government should retaliate against American carriers -- probably Flying Tigers -- if it can't start flying to the United States by April 1.
"The only possible reason [for any delay] is to guard [the] U.S. all-cargo carrier Flying Tigers from new competition," said NCA Executive Vice President Hisayoshi Terai at the Feb. 21 press conference in Tokyo.
"We may appeal to the government to stop service of the U.S. carrier," he continued later in the press conference. "We are very embarrassed by Flying Tigers. [It is] up to the government to stop [the] carrier. I personally think it is necessary to put pressure on [the] U.S. carrier."
But NCA doesn't come into the fray with its skirts clean, according to American trade officials. It waged a five-year fight with JAL, which is 36 percent owned by the government, before it was able to break that carrier's monopoly to carry passengers and cargo internationally as a Japanese line.
In the process, Terai acknowledged at his press conference, the government entered the battle to "avoid unnecessary dumping," which he defined as "when one does things to increase share . . . tries to monopolize routes, then raises prices.
"Unnecessary dumping [is] not healthy, Japanese government says," Terai added.
Moreover, NCA's ownership is the very picture of Japan Inc. The six steamship lines that already control sea traffic between the United States and Japan own 51 percent of the new air freight carrier. The rest is divided among the 19 freight forwarders who handle most cargo shipments in and out of Japan; seven major trading companies; All Nippon Airways, Japan's domestic passenger line; 23 banks, and two insurance companies.
"NCA doesn't have to compete for freight any more," said Cyril D. Murphy of Flying Tigers, the 40-year-old cargo airline founded by American air combat veterans of the war in the Pacific. "It comes in with the relations already there. It just backs its planes up to the door. Our problem is how to compete against them."
"That's something new in aviation. We don't confront this anywhere else in the world," added Murphy, Flying Tigers' vice president for international and governmental affairs.
U.S. Trade Representative William E. Brock raised many of those same concerns when he conveyed President Reagan's request last December for an International Trade Commission investigation of cargo competition between the United States and Japan.
"These ownership linkages raise concerns that we may encounter problems similar to those which now exist with the Japanese in other areas, such as ocean shipping," Brock wrote ITC Chairwoman Paula A. Stern. The ITC report is due in July, and the quasi-judicial independent agency will hold a public hearing on April 9.
Brock wrote Stern that structural arrangements similar to those that exist in NCA "have worked to the detriment of U.S. transportation companies" in areas such as ocean shipping.
He said Japan doesn't allow American ships to carry tobacco from the United States bought by the Japan Tobacco and Salt Public Monopoly Corp. "Also, Japanese commercial interests have rejected even consideration of the idea that their automobile can be shipped to the United States on American bottoms," Brock continued.
Sen. John C. Danforth (R-Mo.) also questioned the potentially anticompetitive positions of Japan's air and ship transporters in NCA at a hearing Friday of the Senate Finance Committee's trade panel.
The Justice Department's antitrust division just completed a study, still clasified, that found granting NCA's application would increase competition on the Pacific air cargo route, administration officials said. It is unclear, however, whether the study addressed the question of the monopolistic makeup of NCA's ownership structure.
The U.S.-Japan airline talks have gone through five sessions, including one that ended last week in Tokyo at which the chief American negotiator, Deputy Assistant Secretary of State Franklin Willis, came out with a possible deal.
There was no commitment on either side, but Willis, now back Flying Tigers is no paper tiger when it comes to Washington infighting. here, said he is recommending it to the government. Although the arrangement has not been made public, industry and administration sources said it would give more U.S. passenger airlines -- most likely American Airlines, Delta Airlines and Aloha Airlines -- a piece of the U.S.-Japan route and add flights for United Airlines. In return, NCA reportedly would get six cargo flights a week. In addition, there may be some added benefits for JAL. Willis said that type of arrangement would be advantageous for American carriers, allowing them to use their hubs scattered around the country to collect passengers for the trans-Pacific flight.
And NCA, which needs the April 1 start-up to avoid having its costly planes sitting idly on the ground in Tokyo, would gain limited rights that can be controlled if the ITC study and the experience of the new arrangement shows the new cargo carrier to be an anticompetitive octopus.
"This is what Flying Tigers always feared would happen, that the United States and Japan would make a traditional passenger-for-cargo swap," said the U.S. cargo line's Murphy.
Flying Tigers, no paper tiger when it comes to Washington infighting, used former president Ford to lobby Transportation Secretary Elizabeth Dole. The cargo line contacted Commerce Secretary Malcolm Baldrige, who called Secretary of State George P. Shultz to make sure Willis would not close a deal on last week's trip to Tokyo, and mobilized support on Capitol Hill.
Complicating those efforts, however, are the different views of the passengers lines involved. Pan American World Airways and Northwest Airlines, the major U.S. passenger carriers on the route who share some of the freight business with Flying Tigers, have remained quiet bystanders -- possibly fearing retaliation from Japan if they fight NCA. But the airlines that will gain new routes to Japan were reported ready to support the deal Willis constructed.
Flying Tigers now flies as many as 36 jumbo jets loaded with cargo across the Pacific in a peak week and holds about one-fourth of the cargo market between the United States and Japan.
The airline has indicated that it expects to pay for its opposition to NCA if the new carrier doesn't win its approval in time to start flying April 1.
"We expect that, come April 1, if [NCA] doesn't get what it wants, we are going to feel some pain, we're going to pay a price," Murphy said.