The International Air Transportation Competition Act of 1979 set increasing the level of competitiveness and improving the competitive advantage and profitability of U.S. airlines as its objectives. These objectives were to be achieved through the negotiation of more liberal bilateral agreements with other nations. Using a panel data set of 37 airlines from the Pacific region over an 11 year period, the authors decompose profitability into three components: input prices, productivity and output prices. They find that pro-competitive bilateral agreements have been reached only with nations which have airlines possessing competitive advantage, either through low input prices or high productivity, compared to U.S. firms. In those cases where U.S. carriers would tend to dominate the market, very restrictive bilaterals remain.