DEPARTMENT OF TRANSPORTATION
OFFICE OF THE SECRETARY
14 CFR Part 255
(Dockets Nos. OST-97-2881, OST-97-3014, OST-98-4775, and OST-99-5888)
RIN 2105-AC65
Computer Reservations System (CRS) Regulations
AGENCY: Office of the Secretary, Department of Transportation
ACTION: Final rule.
SUMMARY: The Department is amending its rules governing airline computer
reservations systems (“CRSs” or “systems”) to eliminate most of the rules now
and to terminate additional rules as of July 31, 2004. The Department is
readopting the rules prohibiting display bias and adopting rules that prohibit
systems from imposing certain types of contract clauses on participating
airlines that would unreasonably restrict their ability to choose how to
distribute their services. These rules will be effective during a six-month
transition period.
DATES: This rule is effective on January 31, 2004.
FOR FURTHER INFORMATION CONTACT: Thomas Ray, Office of the General Counsel, 400 Seventh St. S.W., Washington, D.C. 20590, (202) 366-4731.
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Table of Contents
A. Summary of Final Rule
B. Background
1. The CRS Business
2. The Travel Agency Distribution System and the Business Relationships between
Travel Agencies and the Systems
3. Regulatory Background
C. Development of the Record in this Rulemaking
D. Procedural Issues
E. The Need for Limited CRS Regulation
1. Introduction
2. Final Rule
3. Market Definition
4. The Systems’ Market Power over Airlines
5. The Potential for System Conduct Undermining Airline Competition
6. System Practices that Preserve Market Power
7. The Systems’ Ability to Engage in Display Bias
F. The Department’s Statutory Authority To Regulate CRS Practices
1. Whether Non-Airline Systems Are Ticket Agents Subject
to Section 411
2. Antitrust Principles Relevant to System Practices
3. First Amendment and International Law Issues
G. The Specific Rule Proposals
1. The Scope of the Rules
2. Exclusion of Internet-Based Systems
3. Definitions
4. Rules Barring Display Bias
5. Contract Clauses Restricting Airline Choices on System Usage
6. Equal Functionality
7. The Mandatory Participation Rule
8. Booking Fees
9. Booking Fee Bills
10. Other Participating Carrier Contract Rules
11. Marketing and Booking Data
12. Third-Party Hardware and Software
13. Travel Agency Contracts
14. The Tying of Commissions and Marketing Benefits with a
Subscriber’s Choice of a System
15. Regulation of the Internet’s Use in Airline Distribution
16. Tying of Internet Participation
17. International Issues
18. Retaliation against Discrimination by Foreign Airlines and Systems
19. Sunset Date for the Rules
20. Effective Date of the Rules
21. Divestiture
REGULATORY PROCESS MATTERS
Regulatory Assessment and Unfunded Mandates Reform Act Assessment
Regulatory Flexibility Analysis
Paperwork Reduction Act
Federalism Implications
Taking of Private Property
Civil Justice Reform
Protection of Children
Consultation and Coordination with Tribal Governments
Energy Effects
Environment
Glossary
ASTA American Society of Travel Agents
Board The Civil Aeronautics Board
Booking fees Fees paid by airlines and other travel suppliers when a travel
agent makes or changes a booking in a system
CRS Computer reservations system
Mandatory participation rule The rule requiring each airline that has a
significant ownership interest in a system to
participate in competing systems at as high
a level of functionality as it does in its
own system, if the terms are
commercially reasonable
Network airlines The airlines that operate hub-and-spoke route systems,
especially the five largest airlines
(American, Continental, Delta, Northwest,
and United)
Non-airline system A system that is neither owned nor controlled
by any airline or airline affiliate
OMB Office of Management and Budget
Participate To make the services of an airline or
other travel supplier
available for sale through a system
under a contract with that system
Parity clauses Clauses in participating airline contracts that
require a participating airline to buy at least as high a level of service from
the system as it does from any other system
Productivity pricing Pricing formula used in subscriber contracts that enables
the travel agency to obtain lower CRS fees
from a system if the travel
agency meets minimum booking quotas established
by the contract
Section 411 49 U.S.C. 41712, recodifying section 411 of the Federal Aviation Act
Subscriber A travel agency that obtains CRS services
under a contract with the system
System Computer reservations system
Webfares Discount fares offered by an airline
through its own website
and often through selected distribution channels
A. Summary of Final Rule
In this proceeding we have reexamined whether our existing rules on computer
reservations systems (“CRSs” or “systems”), 14 CFR Part 255, remain necessary
and, if so, whether we should readopt them, with or without modifications. If we
do not readopt the rules, they will expire on their sunset date, currently
January 31, 2004. Our notice of proposed rulemaking asked for comment on these
issues and proposed that most of the rules should be readopted. 67 FR 69366
(November 15, 2002). After reviewing the comments and the on-going changes in
the airline distribution and CRS businesses reflected in those comments, we have
concluded that most of the rules should be allowed to sunset on January 31,
2004. We believe, however, that we should adopt the rules prohibiting display
bias and certain rules barring unreasonably restrictive requirements in the
contracts between systems and their airline customers for a six-month transition
period to provide an opportunity for the affected parties to prepare for
complete deregulation of computer reservation systems. We intend to monitor
developments in the industry during this period and beyond. We, of course,
retain our authority to pursue future regulatory or enforcement actions against
airlines or systems that engage in anti-competitive practices.
The systems’ operations have been subject to rules for twenty years. Although
the systems now are commonly called global distribution systems, or GDSs, we
will continue to refer to them here as CRSs. The Civil Aeronautics Board (“the
Board”), the agency that had been responsible for the economic regulation of the
airline industry, originally adopted those rules in 1984. 49 FR 32540 (August
15, 1984), aff’d, United Air Lines v. CAB, 766 F.2d 1107 (7th Cir. 1985). After
reexamining whether those rules were necessary and effective, we readopted them
with some changes in 1992. 14 CFR Part 255, adopted at 57 FR 43780 (September
22, 1992).
When these rulemakings were held, one or more airlines or airline affiliates
owned or controlled each system, airlines depended heavily on travel agencies
for distribution, travel agents used a system to research airline service
options and to make bookings, and each travel agency predominantly relied on one
system to perform these tasks. Systems therefore did not need to compete for
airline participants (a “participant” is an airline that agrees to make its
services saleable through a system). The airlines that controlled the systems
had the incentive and ability to use them to prejudice the competitive position
of non-owner airlines and to provide information on airline services through the
systems to travel agents that gave an undue preference to the services operated
by the owner airlines. Competitive market forces did not discipline the prices
and terms for services offered by systems to participating airlines.
Our goal in CRS rulemakings has been to prevent practices that were likely to
harm consumers by substantially reducing airline competition or by giving travel
agents and their customers inaccurate or misleading information on airline
services. The rules block system practices that would cause consumers and their
travel agents to receive misleading information and would distort airline
competition. We adopted most of the rules under our authority to prevent unfair
methods of competition in the sale of airline transportation, an authority that
empowers us to prohibit practices that violate the antitrust laws or antitrust
principles, but, in adopting the rules prohibiting display bias, we additionally
relied on our authority to prevent unfair and deceptive practices in the
marketing of air transportation.
We should adopt rules regulating industry practices only if they are reasonably
necessary to prevent anti-competitive or deceptive practices that are likely to
occur, and would cause significant consumer harm if they did occur, and that
market forces are unlikely to remedy. Any rule must be effective and
enforceable. Rules intended to address a serious competitive concern may have
unintended consequences that may reduce efficiency and consumer choice. As we
explained in our notice of proposed rulemaking, we will not adopt rules that
address all potential problems, for such detailed regulations would necessarily
impose significant burdens on the systems and interfere with legitimate business
practices. 67 FR 69389. Our approach for determining whether rules are necessary
is essentially the same as that recommended by the Justice Department. The
Department of Justice states that regulation is appropriate “only when (1)
market participants have substantial and durable market power that will likely
harm consumers directly, or will be exercised in ways that exclude or limit
competition in contiguous markets, and (2) the regulation will likely be
effective and enforceable without imposing significant costs of its own.”
Justice Department Reply Comments at 18.
Our rules included a sunset date, currently January 31, 2004, to ensure that we
would review whether the rules remained necessary in light of on-going
developments in the CRS and airline distribution businesses. 57 FR 43829-43830;
68 FR 15350 (March 31, 2003). This proceeding carries out that reassessment. The
major changes that have occurred since our last major rulemaking underscore the
need for such a reassessment. All of the U.S. airlines that had controlled a
system have divested their CRS ownership interests. As a result, none of the
four systems now operating in the United States is owned or controlled by any
U.S. airline or airline affiliate. Furthermore, airlines are selling an
increasingly large share of their tickets through their Internet websites and a
diminishing share through travel agencies using a system. The airlines’ control
over access to their webfares, the discounted fares originally offered only
through individual airline websites, has enabled them to obtain lower fees from
two of the systems. And travel agencies are increasingly demanding -- and
winning -- contracts from the systems that give them more freedom to use
alternative booking channels and to switch systems periodically.
Our examination of these developments has persuaded us that we should allow most
of the existing rules to sunset upon their expiration. The major predicate for
the rules has always been the systems’ control by airlines. The U.S. airlines’
divestiture of their ownership interests has eliminated that basis for the
rules. While each system still has market power over most airlines, that power
is diminishing. Moreover, the record does not show a likelihood that the systems
would use that power to distort airline competition except potentially through
the sale of bias.
On the other hand, we have determined that we should readopt, for a six-month
transition period, the rules prohibiting display bias and rules prohibiting
certain types of contract clauses in the systems’ contracts with airlines. We
are readopting the rules against display bias because we believe that, were the
rules terminated immediately, systems might well be expected to bias their
displays in ways that could mislead travel agents and their customers and
prejudice airline competition. For that reason, we believe it is important to
provide a measure of notice to the industry prior to the rules’ termination and
a concomitant opportunity to prepare for the absence of regulation.
Similarly, we are adopting for the same short transition period two rules
governing the contracts between the systems and airlines: rules prohibiting
parity clauses (a parity clause would require an airline to participate in that
system at at least as high a level as it participates in any other system) and
clauses requiring airlines to provide access to all webfares as a condition to
any participation in a system. However, an airline is free to agree to such
clauses. We believe that, were these prohibitions terminated immediately, the
systems would have sufficient market power to impose contract terms on airlines
that would unreasonably restrict the airlines’ ability to bargain for better
terms for participation. The transition period during which these prohibitions
will be maintained will furnish the industry with reasonable notice of the
forthcoming change with an opportunity to prepare for it. Our final decision is
consistent with the recommendations made by the Justice Department.
The two rules on contract clauses and the rule prohibiting display bias
therefore will sunset on July 31, 2004. We will actively monitor developments
during the transition period and beyond and take appropriate investigative,
enforcement, or regulatory action if we see evidence that systems or airlines
are engaging in anti-competitive conduct in connection with airline distribution
through the systems and other channels.
We will not readopt the other rules now in force, and we reaffirm our tentative
decision not to adopt rules governing the use of the Internet in airline
distribution. The rules that we are not readopting will automatically expire on
January 31, 2004, their sunset date.
The elimination of most of the rules will ensure that government regulation does
not interfere with market forces and innovation in the CRS and airline
distribution businesses. The record indicates that market forces are beginning
to discipline business practices in the CRS industry. Ending the broad
regulation of CRS practices will enable each system and each airline to bargain
over the terms on which CRS services should be provided, just as airlines obtain
products and services from other suppliers under agreements negotiated by the
parties. The systems will have the same ability to bargain with their other
customers, the travel agencies. The resulting terms under which airlines and
travel agencies obtain system services will likely reflect the interests of both
sides better than if we maintained broad regulations restricting the parties’
behavior. While we cannot predict exactly what will happen, we believe that
ending most of the rules will produce the best results for consumers over time.
We base this judgment on our experience with airline deregulation. Airline
deregulation has provided lower fares and better service for consumers, in part
by enabling new firms to enter the airline business. Several of the new airlines
have followed new business plans that have provided great benefits for airline
travelers. Airline deregulation has produced these benefits even though the
deregulated airline industry has not operated in the manner expected by industry
experts on the eve of deregulation. The deregulation of the CRS business should
also benefit consumers, even though we cannot forecast how it will play out.
Our final rule also conforms to the limits imposed by Congress on our authority
to regulate the airline and airline distribution businesses. Congress has given
us the authority to prevent practices that violate the antitrust laws or
antitrust principles and practices that are deceptive, but no comprehensive
oversight authority over airline distribution. We are adopting only those rules
that are necessary to prevent practices in the CRS business that would
constitute unfair or deceptive practices, or unfair methods of competition.
We are aware that some participants in the airline distribution and CRS
businesses may seek to engage in anti-competitive conduct that would reduce
competition in the airline and airline distribution businesses and thereby harm
consumers. A system, for example, might develop vertical ties with an airline
that would cause the system to operate in a way that could prejudice airline
competition. Some systems may seek to pursue practices that would reduce
competition in the CRS business and preserve their market power over airlines.
Even without specific regulations, any such practices could be unfair methods of
competition and thus unlawful. We retain the authority to bring enforcement
cases against firms that violate the statutory prohibition against unfair
methods of competition, and we will take appropriate action if we have evidence
of unlawful conduct. As Congress stated when it deregulated the airline
industry, S. Rep. No. 95-631, 95th Cong., 2d Sess. (1978) at 52:
Vigorous enforcement of antitrust policy is the discipline by which competition
can remain free and markets can operate in a healthy fashion. Predatory
behavior, market concentration, and other economic evils should be avoided and
remedied by the Board when they exist.
See also H. R. Rep. No. 98-793, 98th Cong., 2d Sess. (1984) at 5: “Although the
airline industry has been deregulated, this does not mean that there are no
limits to competitive practices. As is the case with all industry, carriers must
not engage in practices which would destroy the framework under which fair
competition operates.”
We will also actively monitor the systems’ reactions to the substantial
deregulation of their business, and we, of course, retain the power to reexamine
our decision that all rules should terminate by July 31, 2004, if the systems’
conduct or other developments makes such a reexamination necessary.
Our final rule departs from the proposals made by our notice of proposed
rulemaking. Our notice proposed to eliminate two of the major rules, the rule
barring discriminatory booking fees and the rule requiring airlines with a
significant ownership interest in one system to participate in competing systems
at an equivalent level if the terms for doing so were commercially reasonable,
but to readopt most of the remaining rules. Our review of the rulemaking record
up to that point suggested that rules were still necessary, notwithstanding the
changes in the systems’ ownership and the growing role of the Internet. 67 FR
69375-69384. The notice, however, did request comment on whether we should
sunset more of the rules now, and we predicted that the rules would become
unnecessary in a few years. 67 FR 69368, 69376, 69388-69389.
The comments and the continuing developments in airline distribution and the CRS
business have convinced us that most of the rules are no longer appropriate. In
particular, one of the systems, Worldspan, was owned by three U.S. airlines when
we issued our notice of proposed rulemaking but was sold several months ago to
two private venture capital firms. The airline distribution business has
continued to evolve since we issued the notice. Airlines are selling more
tickets through the Internet. Moreover, as we predicted, the airlines’ control
over access to their webfares has led some of the systems to offer airlines
discounted booking fees in return for the ability to sell those fares. 67 FR
69381; Galileo Supp. Comments at 5-8. And the comments have shown that the
systems’ contracts with travel agencies are significantly less restrictive than
they were even a few years ago. See, e.g., ASTA Comments at 14-16.
That our final rule does not duplicate our proposal is consistent with the
purpose of rulemaking procedures. The notice of proposed rulemaking was designed
to obtain comments from interested persons on our tentative findings and our
economic and policy analysis and to enable them to submit current information.
We held a public hearing to give interested persons an additional opportunity to
present their views and respond to our questions. The comments submitted in this
proceeding, together with the on-going developments in the airline distribution
and CRS businesses, have persuaded us that our proposals should not be made
final. Those proposals, while reasonable in light of industry conditions two or
three years ago, to a large extent no longer reflect current conditions.
We will begin our explanation of our final rule by updating our description of
the CRS and travel agency businesses, and we address several procedural issues.
We then discuss our conclusions on the need for adopting some CRS rules,
including our findings that the systems continue to have market power over
airlines, and discuss the question of our legal authority to readopt the rules
and to apply them to systems that are not owned by airlines. We thereafter
present the rationale for our decisions on each of the rule proposals.
Our notice of proposed rulemaking included a request for comments on whether we
should clarify our policy on fare disclosures as regards the disclosure of
travel agency service fees. We have decided to address that question in a
separate rule.
We will refer to commenters by their common names (for example, “Alaska,” not
“Alaska Airlines”). References to comments and reply comments are to the
pleadings filed in response to the notice of proposed rulemaking, not the
pleadings filed in response to the advance notices of proposed rulemaking, which
were discussed in the notice of proposed rulemaking. We will refer to the
statutory provision that is the principal basis for our adoption of CRS rules,
49 U.S.C. 41712, by its traditional name, section 411, as we did in the notice
of proposed rulemaking. The glossary at the beginning of this document gives the
meaning of the abbreviations and technical terms used in this rule.
B. Background
Our notice of proposed rulemaking described in some detail the nature of the
airline distribution and CRS businesses, including the travel agency business.
67 FR 69369-69375. Here we will update our factual description on the basis of
the information provided by the comments and set forth the factual findings
underlying our final decision.
1. The CRS Business
Airlines use several distribution methods: direct sales through their
reservations agents, sales through “brick-and-mortar” travel agencies, sales
through individual airline websites, and sales through on-line travel agencies.
In the past, the “brick-and-mortar” travel agency channel produced the great
majority of airline revenues for almost all airlines. In 1999 travel agencies
sold almost three-quarters of airline tickets, almost all through off-line
travel agencies. 67 FR 69369, citing Bear, Stearns & Co., “Point, Click, Trip:
An Introduction to the On-Line Travel Agency” (April 2000) at 17. Since then the
Internet has become an increasingly important distribution channel. Galileo
states that the different channels’ shares of total airline tickets in 2002 were
as follows, Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at
24:
off-line sales by airlines 17 percent
on-line sales by airlines 10 percent
off-line sales by travel agencies 58 percent
on-line sales by travel agencies 15 percent.
Until recently the great majority of all travel agency airline ticket sales,
whether off-line or on-line, have been made through one of the systems.
Four systems operate in the United States: Sabre, Galileo, Worldspan, and
Amadeus. Each of them was originally developed by one or more U.S. airlines
(Amadeus entered the U.S. market by acquiring a U.S. system). Two of the systems
-- Sabre and Galileo -- were no longer owned or controlled by any U.S. airlines
when we issued the notice of proposed rulemaking. At that time, three U.S.
airlines -- American, Delta, and Northwest -- owned Worldspan. Amadeus was then
owned by three European airlines -- Air France, Iberia, and Lufthansa -- as well
as by public shareholders (and has the same ownership today). Worldspan’s
airline owners sold that system to two private venture capital firms on June 30,
2003, after the issuance of our notice of proposed rulemaking. As part of that
sale, the airline owners agreed to certain parity clauses and marketing
commitments. Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at
20; Amadeus Comments at 32-33; August 1, 2003, Letter from Charles Simpson, Jr.;
Sabre Supp. Reply at 4. Amadeus is now the only system with any airline
ownership.
The systems that have no airline owners have marketing ties with their former
owners. United markets Galileo, American markets Sabre, and Delta and Northwest
have agreed to market Worldspan for several years following the closing of the
system’s sale. Amadeus Comments at 25, n. 24; Galileo Supp. Comments at 1-4.
Southwest also markets Sabre, although Southwest never had an ownership interest
in the system.
Each system’s share of CRS airline bookings in the United States in 2002 was as
follows, Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 18:
Sabre 44.7 percent
Worldspan 26.5 percent
Galileo 19.7 percent
Amadeus 9.2 percent
Since 1999 the shares of Galileo and Amadeus have been declining, while
Worldspan’s share has risen sharply, from 19.3 percent to 26.5 percent. The
growth in Worldspan’s share in large part reflects its status as the booking
engine for two of the three largest on-line travel agencies, Expedia and Orbitz.
Each system provides information and booking capabilities on the airlines that
“participate” in it, that is, agree to make their services saleable through the
system. The system obtains its availability information from the airlines’
internal reservations systems, and it makes bookings in those systems, which are
used by the airlines’ own reservations agents and other staff members. The
systems also provide information and booking capabilities for rental cars,
hotels, and other travel services. Airline transportation is the most important
travel service sold through the systems, and airlines obtain a larger share of
their revenues from CRS bookings (sales made through the systems) than do other
travel suppliers. 67 FR 69370.
An airline (or other travel supplier) participating in a system must pay fees
for each booking transaction (the fees paid by participating airlines are
usually called “booking fees”). Airlines can participate at different levels. At
higher levels the information provided travel agencies will be more timely and
so more reliable, and travel agents can carry out tasks like reserving specific
seats for their customers. An airline that chooses a higher level of
participation must pay a higher booking fee. 67 FR 69370. Booking fees paid by
airlines provide well over half of the systems’ total revenues. 67 FR 69380.
The average airline booking fee per segment is $4.25. Because the average ticket
includes more than one segment, the average booking fee per ticket is $11.
United Reply Comments at 28; “Upheaval in Travel Distribution: Impact on
Consumers and Travel Agents,” National Commission to Ensure Consumer Information
and Choice in the Airline Industry” (November 13, 2002), at 16. United alleges
that its average booking fee per segment equals 3.3 percent of its average
revenue per segment. United Reply Comments at 29. Sabre has stated that the
effective booking fee per segment for its highest level of participation was
$4.38 in 2002, about 2.4 percent of the average airline ticket price for tickets
sold through Sabre. Sabre charges $2.12 per segment for airlines participating
at its low level, Basic Booking Service. Sabre Comments at 14; Sabre Comments,
Wilson Declaration at 6.
Sabre and Galileo have created programs that give participating airlines lower
booking fees in return for a commitment to provide the system with all of their
webfares. Under Sabre’s Direct Connect Availability program (“DCA program”), an
airline can obtain a 10 percent reduction in its booking fees, guaranteed for
three years, in exchange for a commitment to provide the system with all of the
airline’s published fares, including its webfares. American, Continental, Delta,
Northwest, United, US Airways, and a number of smaller airlines now participate
in this program. Sabre Supplemental Reply at 1.
Galileo first established its Momentum program, which gave airlines a 20 percent
reduction in booking fees for tickets sold through participating travel
agencies, if the airlines agreed to give Galileo access to all of their
publicly-available fares. Travel agencies could participate in the program if
they agreed to a reduction in their incentive payments from Galileo. United and
US Airways were the first airlines that joined this program. One of the travel
agencies that joined the program was Rosenbluth International, the fourth
largest U.S. corporate travel agency. Due to complaints from America West and
other airlines, Galileo dropped the initial requirement that any airline
participating in the Momentum program must upgrade its participation level to
the highest level. More recently Galileo introduced Preferred Fares Select,
which will enable airlines to obtain lower booking fees on all of their bookings
if they agree to make all of their publicly-available fares saleable through
Galileo. Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at
52-56; Galileo Reply Comments at 33-34; Galileo Supplemental Comments at 5-8;
Sabre Comments, Fahy Declaration at 10-11.
The record does not indicate that Amadeus or Worldspan has introduced comparable
programs.
Travel agencies often obtain CRS services at no cost or receive bonus payments
in exchange for agreeing to use a system. ASTA states that in 2002 fewer than
half of all travel agencies paid monthly fees for system services and that 60
percent of them received a signing bonus of some kind from the system that they
were using. ASTA Comments at 17. The systems pay on average $1 to $1.50 per
booking to travel agencies for using a system. Sabre Comments at 7.
As we stated in the notice of proposed rulemaking, travel agents have depended
heavily on the systems to determine what airline services are available and to
make bookings. There we cited statistics showing that travel agencies in 1999
sold almost three-quarters of all airline tickets and made 93 percent of their
domestic airline bookings and 81 percent of their international airline bookings
through a system. 67 FR 69369-69370. The record shows that since then the share
of airline revenues produced by travel agents using a system has been declining.
The Justice Department states that the share of revenues produced by
“brick-and-mortar” travel agencies for the five airlines that own Orbitz has
fallen from 76 percent in May 2000 to 67 percent in March 2002, primarily due to
the growth in Internet sales. Justice Department Reply Comments at 14-15.
In the past, almost all U.S. airlines participated in every system. Southwest,
which has participated only in Sabre and at a low level, was the major
exception. JetBlue, which began operations in 2000, also participates only in
Sabre and at the same level as Southwest. Sabre Comments at 38. Airlines that
can avoid participation in every system focus their marketing efforts instead on
direct sales to consumers, made through either the airline’s website or its
reservations agents. Airlines that have been participating in all of the
systems, such as Alaska, have been shifting many of their bookings away from the
travel agency channel, which required them to pay the systems’ booking fees.
See, e.g., Alaska Comments at 5. The large network airlines nonetheless still
obtain at least 60 percent of their revenues from bookings made by travel agents
using a system, as discussed below. American, for example, states that over 70
percent of its bookings are made through the systems. American Reply Comments at
19. The share of total industry bookings made through the systems has been
declining in part due to the growth of airlines like Southwest that do not
depend on travel agencies for the major share of their revenues. American Reply
Comments at 19.
The systems have played a major role in airline distribution because travel
agents -- the airlines’ primary distribution channel -- have relied so much on
the systems for investigating airline service options and booking tickets,
because the systems are so efficient. They electronically provide comprehensive
information and booking capabilities on airlines and other travel suppliers.
Each system presents displays that integrate almost all services offered in a
market. Each system shows the schedules and fares offered by airlines in each
market that are available for sale through travel agents using that system and
whether seats are available on specific flights at specific fares (some fares
are often not available through the systems, notably corporate discount fares
and webfares). The system thus allows the travel agent to compare the schedules
and fares offered by different airlines and determine which would best meet a
customer’s needs. The agent using a system can reserve a seat and issue a paper
ticket or print an E-ticket.
On-line agencies also use systems -- Travelocity uses Sabre, while Expedia and
Orbitz use Worldspan, for example. 67 FR 69370. Orbitz and Expedia have been
developing direct connection technologies which enable bookings to be made
directly with an airline’s internal reservations system, bypassing Worldspan.
Sabre Comments, Fahy Declaration at 8-9.
Since the Board first adopted CRS rules, no firm has entered the CRS business.
Until recently, entry into the CRS business would have been prohibitively costly
and time-consuming. 67 FR 69381. This may no longer be true. Sabre Comments,
Fahy Declaration at 8. New direct-connection technologies can enable firms to
provide airline information and booking services that replicate at least some of
the services provided by the systems. Galileo Comments at 42, n. 38. Orbitz,
which now operates as an on-line travel agency, plans to make its services
available to travel agencies through software being developed by Aqua. Orbitz
continues to rely on Worldspan for some functions involved in the search and
booking process. 67 FR 69373, 69374. Another commenter in this proceeding,
AgentWare, is also offering travel agencies fare and schedule information and
links to booking sites. Galileo Comments at 66-67.
The development of sources of airline information and booking capabilities on
the Internet has created additional resources that travel agents can use. Travel
agents are increasingly checking the fares and services offered on websites
because some airline discount fares have not been sold through the systems.
Travel agents, however, continue to make most of their airline bookings through
a system. Using alternative booking channels is less efficient for travel
agents, as discussed below. Nevertheless, the development of alternative sources
of information and booking capabilities on the Internet, and the airlines’
control over access to their webfares, have begun to make the systems responsive
to market force discipline.
Corporate travel departments as well as travel agencies use the systems. A
corporate travel department can book travel for its company’s employees by
accessing a system through the Internet or by Intranet (an internal corporate
communications network based on Internet technology). 67 FR 69370.
Systems operate throughout the world. U.S. systems like Sabre and Worldspan
market their services to travel agencies in foreign countries, and Amadeus is a
major system in the Eastern Hemisphere. The systems had the following shares of
worldwide CRS airline bookings in 2002, Galileo Comments, Guerin-Calvert,
Jernigan, & Hurdle Declaration at 18:
Sabre 30.8 percent
Worldspan 15.1 percent
Galileo 26.4 percent
Amadeus 27.7 percent
The European Union, Canada, and other governments have regulations governing CRS
operations. The United States has entered into a number of international air
services agreements that require each party to ensure that the systems operating
in its country and their owners do not subject airlines and systems from the
other country to discriminatory treatment. 67 FR 69371-69372.
2. The Travel Agency Distribution System and the Business Relationships between
Travel Agencies and the Systems
The systems’ practices have affected airline competition because of the
importance of travel agents in airline distribution. The travel agency system
has provided airlines with an efficient means of distribution. Travel agencies
have acted as agents for virtually all airlines and generally hold themselves
out to the public as sources of impartial advice on airline services and other
travel services. 67 FR 69371.
In 2001, there were 18,425 travel agencies. The travel agency business is
dominated by the largest travel agencies. In 2001, the 117 travel agencies with
revenues of more than $50 million (as measured by sales of air transportation)
accounted for 57.2 percent of all travel agency sales. The 1,015 travel agencies
with revenues of $5 million to $50 million accounted for another 20.1 percent of
all travel agency sales. “Upheaval in Travel Distribution: Impact on Consumers
and Travel Agents,” National Commission to Ensure Consumer Information and
Choice in the Airline Industry” (November 13, 2002), at 113. See also Sabre
Comments, Salop & Woodbury Declaration at Table 3 (Sabre’s top five subscribers
produced 25.7 percent of its total bookings, excluding Travelocity, and the top
100 produced 49.6 percent of its total bookings, excluding Travelocity).
As noted above, in 2002 the airlines obtained 58 percent of their bookings from
“brick-and-mortar” travel agencies and 15 percent from on-line travel agencies.
Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 24. The
three largest on-line travel agencies had the following shares of all on-line
travel agency bookings in 2002: Travelocity, 28.5 percent; Expedia, 28.7
percent; and Orbitz, 21.3 percent. Sabre Comments, Salop & Woodbury Declaration
at Table 2. Travelocity is a Sabre subsidiary, while Orbitz is owned by the five
largest U.S. airlines -- American, Continental, Delta, Northwest, and United.
Travelocity has been using Sabre as its source of airline information and
booking capabilities, while Expedia and Orbitz have been using Worldspan for
these functions. Orbitz and Expedia have been developing direct connections with
airlines that bypass Worldspan. Airlines that agree to be “charter associates”
in Orbitz, which includes a commitment to make all publicly-available fares
available for sale through Orbitz, receive a rebate on their booking fees. 67 FR
69374.
The larger airlines still obtain most of their revenues from bookings made by
travel agents. However, despite the continuing importance of travel agencies in
airline distribution, the travel agency business has faced severe business
problems in recent years, due to developments such as the airlines’ elimination
of base commissions (but not incentive commissions), the growing use of the
Internet by many travelers, particularly leisure travelers, and the overall
decline in airline traffic. See “Upheaval in Travel Distribution: Impact on
Consumers and Travel Agents,” National Commission to Ensure Consumer Information
and Choice in the Airline Industry” (November 13, 2002). From 1994 to 2002, the
number of travel agencies fell by 31 percent and the number of travel agency
locations by 21 percent. “Upheaval in Travel Distribution” at 21. The number of
travel agencies declined by 12 percent in the year ended September 2002 and by
another 7 percent through April 2003. ASTA Reply Comments at 15-16.
The nature of the travel agencies’ operations is important to this proceeding,
because we must consider the impact of our decisions on the travel agencies’
business and because the rules have covered some features of the relationships
between the systems and travel agencies. However, providing support for travel
agencies that would offset other economic developments is not within our
statutory authority and therefore not a proper goal of this proceeding. This
proceeding must be, and is, limited to preventing system practices and related
airline practices that would harm consumers by significantly reducing airline
competition.
A critical factor in our decision-making is that travel agencies, unlike most
airlines, can choose which system to use. Most travel agencies need to use only
one system, and for most travel agencies no system has features and information
that are indispensable, as discussed below. Because most travel agencies are
free to decide to use one system rather than its competitors, the systems
compete vigorously for travel agency customers. As noted above, systems usually
pay travel agencies for choosing one system rather than another. See, e.g., 67
FR 69371; Sabre Comments at 7.
In past rulemaking proceedings, and in our notice of proposed rulemaking in this
proceeding, we cited evidence that the systems’ contracts with travel agencies
often contained provisions that unreasonably restricted the travel agencies’
ability to use more than one system or to use alternative electronic sources of
airline information and booking channels. 67 FR 69405; 57 FR 43822. For example,
each system formerly kept travel agencies from buying their own equipment and
made them use equipment provided by the system for accessing its services. 57 FR
43796. The record further suggested that the systems’ contracts with travel
agencies typically included “productivity pricing” programs that imposed
financial penalties on an agency that began using another system or other
booking channel for making a substantial number of bookings, or that gave the
agency incentive payments if it made most of its bookings through that system.
67 FR 69408. These types of restrictive contract provisions concerned us because
they tended to preserve the systems’ market power and denied airlines an
opportunity to encourage travel agencies to use alternative electronic means for
obtaining information on airline services and making bookings, such as direct
links between a travel agency and an airline’s own internal reservations system.
Our notice observed, however, that the systems were giving at least some travel
agencies more flexible terms. 67 FR 69405.
The proposals made by our notice fairly reflected industry conditions when the
comments on our advance notices of proposed rulemaking were filed. Large Agency
Coalition Comments at 7. However, the comments submitted in response to our
notice of proposed rulemaking show that travel agencies since then have been
successfully demanding more flexible contracts and winning the ability to use
alternative booking channels. ASTA’s October 2002 travel agency survey made the
following finding (quoted in Sabre Comments at 151):
[CRS] vendors are introducing a new crop of more flexible contracts with less
rigid productivity requirements and more pricing options. [C]ontract terms have
gotten more favorable towards agencies with shorter overall length, lower
required segments and a higher percentage of agencies receiving booking
incentives.
See also Large Agency Coalition Comments at 7-14.
For example, subscriber contracts typically have a term that is substantially
shorter than the maximum permitted by our rules. Our rules prohibit contracts
with a term of more than five years and require a system to offer a three-year
contract to any travel agency offered a five-year contract. 57 FR 43825. For
some time after we adopted that rule, few travel agencies had contracts with a
term of less than five years. 67 FR 69405. Now, however, many travel agencies
have contracts that are no more than three years in length. The percentage of
travel agencies with five-year contracts has declined from 85 percent in 1998 to
47 percent in 2002, while the percentage with three-year contracts has risen
from 9 percent in 1998 to 39 percent in 2002. Almost 60 percent of Worldspan
subscribers had five-year contracts in 2002, while only 35 percent of Sabre’s
subscribers had such contracts. Sabre Comments at 17-18; Sabre Comments, Fahy
Declaration at 14-15.
Travel agencies, moreover, have a substantial ability to switch systems when
their existing contract expires. Half of the responding agencies in the ASTA
survey stated they intended to obtain competitive bids at the end of their
current contract, while another third stated that they might seek competitive
bids and only one sixth stated they definitely intended to continue using the
same system. Sabre Comments at 153. Nonetheless, switching systems can impose
significant costs on travel agencies, at least for smaller travel agencies.
Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 81.
When we last readopted the rules, we added a provision giving travel agencies
the right to use their own equipment to access a system and to use third-party
software. Before then, each system typically demanded that its subscribers use
equipment provided by the system and barred subscribers from accessing other
systems and databases from that equipment. 57 FR 43796-43797. Travel agencies
are increasingly using their own equipment. Only 70 percent of travel agencies
leased equipment from a system in 2002, while 85 percent did so in 2000. ASTA
Comments at 14. Sabre alleges that it seeks to exit the equipment-leasing
business, that 73 percent of the equipment used by Sabre subscribers will be
provided by third parties by the end of 2003, and that 62.5 percent of their
equipment was being provided by third parties as of November 2002. Sabre
Comments at 131. Amadeus states that only one fourth of its subscribers rely
entirely on equipment provided by Amadeus. Amadeus Comments at 45. Subscribers
to other systems are more likely to use equipment provided by the system. ASTA
represents that systems do not resist subscriber efforts to use their own
equipment instead of equipment provided by the system. ASTA Comments at 15.
Sabre represents that it does not enforce the provisions in its older subscriber
contracts that barred the travel agencies from using Sabre equipment to access
other systems. Its subscribers are free to use multiple systems. Sabre Comments
at 17, n. 17, and 71. Amadeus has made a similar representation. Amadeus
Comments at 45.
Sabre further represents that the larger travel agencies often have complete
flexibility in using the systems. Sixteen of Sabre’s 20 largest
“brick-and-mortar” travel agency customers use multiple systems, and many use
their own software to direct bookings to a specific system, often in order to
maximize their incentive payments. Those 16 agencies produce 35 percent of
Sabre’s total volume from “brick-and-mortar” travel agencies. Sabre Comments at
71. However, as discussed below in our market definition analysis, each location
of a travel agency that subscribes to more than one system tends to
predominantly rely on one system rather than make substantial use of every
system whose services are being purchased by the parent firm.
Using alternate booking channels and sources of information has become easier
for travel agents in recent years. New software, for example, allows travel
agents to conduct fare searches simultaneously through a system and airline
websites. Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at
29. The systems allegedly do not seek to block their subscribers from using
alternative booking channels and sources of information, and they help develop
tools enabling travel agents to use alternative sources of information. Galileo
Comments at 64, 66-67. In 2002, 98 percent of all travel agencies had Internet
access, according to an ASTA survey. Galileo Comments, Guerin-Calvert, Jernigan,
& Hurdle Declaration at 81.
However, despite the widespread use of the Internet by travel agents, they make
relatively few bookings through the Internet. According to the ASTA survey,
travel agents made only 10 percent of their bookings through websites, and most
of those bookings were for tours booked through tour operator sites. ASTA
Comments at 12. The inefficiency of using the Internet for airline bookings is
probably the most important deterrent to a greater use of the Internet. See
“Upheaval in Travel Distribution: Impact on Consumers and Travel Agents,”
National Commission to Ensure Consumer Information and Choice in the Airline
Industry” (November 13, 2002), at 47-50.
Our notice further identified the systems’ pricing practices as a factor that
seemingly kept travel agencies from using alternative systems and booking
channels. Each system’s productivity pricing program generally gave travel
agencies incentive payments if a subscriber used the system for a large majority
of its bookings (or imposed financial penalties if it did not). We believed that
such productivity pricing programs effectively deterred travel agencies from
making significant use of alternative booking channels, such as airline
websites. While we noted that the percentage of subscriber contracts with
productivity pricing had been declining, most subscriber contracts still
included productivity pricing. 67 FR 69408-69409.
The comments show that the systems’ productivity pricing provisions have become
significantly less widespread and less restrictive in the last few years. In
1998 91 percent of subscriber contracts had productivity pricing, but only 56
percent did in 2002. The average number of bookings required before a travel
agency can obtain incentive payments has fallen from 252 in 1998 to 194 in 2002.
ASTA Comments at 15; Sabre Comments at 69, 162. The Large Agency Coalition
represents that the systems’ incentive payment programs typically allow the
travel agency to make up to thirty percent of its bookings outside the system
before it suffers a financial penalty. Transcript at 231. Despite these changes,
however, Sabre states that it has contracts with some small travel agencies that
require the subscriber to use no system other than Sabre. Sabre argues that this
requirement is reasonable under the circumstances because Sabre is providing
support for the agency’s operations that would otherwise not be economical.
Sabre Comments, Salop & Woodbury Declaration at 20. Nonetheless, despite the
greater flexibility allowed travel agencies by recent productivity pricing
arrangements, the record suggests that the systems’ current contractual
arrangements may still deter travel agencies from making many bookings through
the Internet. Orbitz Comments at 23, n. 10; ASTA Comments at 26, n. 44, and
34-35; Travel Management Alliance Comments.
The increasing flexibility of the contracts obtained by travel agencies is the
result of changes in the travel agency business. ASTA states that travel
agencies must have a greater ability to respond to changing technology,
especially the growth of the Internet. The increasing uncertainties of the
travel agency business itself, moreover, are likely to encourage many travel
agencies to avoid long-term commitments if possible. ASTA Comments at 14. The
large travel agencies created in recent years have more bargaining leverage with
the systems.
In the past, we have endeavored to prevent system practices that would deter
travel agencies from using multiple systems. We reasoned that the systems’
market power over airlines would be reduced if travel agencies had the ability
to use alternative sources of airline information and booking capabilities. 57
FR 43797. Travel agency parties had encouraged those efforts. 67 FR 69391; 57 FR
43796.
The travel agency commenters in this proceeding assert, however, that rules
designed to encourage travel agencies to use multiple systems will be futile.
They contend that almost all travel agencies predominantly or entirely use one
system. ASTA thus alleges, ASTA Comments at 3-4:
Use of a single CRS is a function of the market reality that multiple CRS’s are
highly inefficient for travel agencies, who therefore do not employ them. No
amount of realistically foreseeable inducement from competing CRS’s or
regulatory pressure from DOT is going to overcome the inefficiencies for most
agencies of operating multiple CRS’s in today’s environment.
See also Transcript at 213.
Using more than one system is generally inefficient for travel agencies,
because, among other things, it requires training staff members to work with
different systems and will cause the booking records of different customers to
be in different places. Cardinal Travel Service Comments; Galileo Comments at
64-65; Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 79;
ASTA Comments at 23-24; Large Agency Coalition Comments at 20. At travel
agencies that have multiple offices, each office tends to use one system even
though the firm subscribes to several systems. Carlson Wagonlit Comments at 11.
Travel agencies, moreover, assertedly have no need to use multiple systems.
Large Agency Coalition Comments at 20; Transcript at 236-237. While some travel
agencies use multiple systems, they appear to make relatively little use of the
secondary system. Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle
Declaration at 79-80. The Large Agency Coalition is a group of 22 large,
corporate-oriented travel agencies, all but one of which was included in a
recent listing of 84 top corporate travel agencies. Although many of the 22 use
two or three systems, they typically do so because (i) the dominant airline in a
city other than the agency’s headquarters city insisted that the agency use the
system affiliated with the airline, (ii) a newly-won corporate client wished to
keep its existing system at an on-site location rather than switch to the
agency’s primary system, or (iii) the agency acquired another agency which had a
contract obligating it to continue using another system. Large Agency Coalition
Comments at 1-3. See also Transcript at 212.
3. Regulatory Background
The Board’s rules, adopted in 1984, included an expiration date to ensure that
we would reexamine the rules after they had been in force for several years. We
therefore reexamined those rules through our rulemaking completed in 1992. 57 FR
43780 (September 22, 1992). We readopted the rules, because we found that CRS
rules remained necessary then to protect airline competition and to help ensure
that consumers did not receive inaccurate or misleading information on airline
services. We based our decision on the systems’ control by airlines and airline
affiliates, which could still use their control of the systems to prejudice
airline competition if there were no rules. Airlines then relied on travel
agencies for distribution and had no practical ability to induce travel agencies
to use systems charging lower fees, and travel agencies did not choose systems
on the basis of their treatment of airlines. See 67 FR 69367, 69372.
The rules adopted by us regulate the operations of systems owned or marketed by
an airline or airline affiliate insofar as the system was providing services to
travel agencies.
The current rules (i) bar each system from using carrier identity as a factor
for editing and ranking services, (ii) prohibit systems from charging airlines
discriminatory booking fees, (iii) require each system to make available to any
participating airline the booking and marketing data generated by the system
from bookings for domestic travel made through the system, and (iv) prohibit
certain types of restrictive contract provisions that unreasonably limit the
travel agencies’ ability to switch systems or use more than one system. The
rules also require each system to provide non-owner airlines with information
and booking capabilities as accurate and reliable as those provided the owner
airline, and they give each travel agency the right to use its own equipment in
conjunction with a system and to access other systems and databases from the
same terminals used to access its primary system, unless the agency uses
equipment provided by that system. The rules additionally require each airline
with a significant CRS ownership interest to participate in other systems at as
high a level of functionality as it does in its own system, if the terms for
participation are commercially reasonable (this is the mandatory participation
rule).
Five years after our last overall reexamination of the rules, we revised the
rules in two respects. First, we prohibited systems from enforcing “parity
clauses” against airlines that did not own or market a competing system. 62 FR
59784 (November 5, 1997). The parity clauses required each airline to buy at
least as high a level of service from the system as it did from any other
system. The parity clauses made it unnecessary for systems to compete for
airline participation at higher levels of service. Secondly, we strengthened the
prohibition against display bias by requiring each system (i) to offer at least
one display that does not give on-line connections a preference over interline
connections and (ii) to either list one-stop and other direct flights before
connecting services or use elapsed time as a significant factor in selecting
flight options from the database. 62 FR 63837 (December 3, 1997). We
strengthened the rule in large part because of evidence that United had caused
Galileo to create displays that prejudiced United’s competitors. 62 FR
63840-63841.
C. Development of the Record in This Rulemaking
To ensure that the record in this proceeding would be as complete as possible
and that all interested persons would have the opportunity to present their
views and to respond to points made by other commenters, we have used procedures
in addition to those required by the Administrative Procedure Act for informal
rulemakings. We began this proceeding by issuing an advance notice of proposed
rulemaking, 62 FR 47606 (September 10, 1997). We issued a supplemental advance
notice of proposed rulemaking that asked interested persons to update the record
and to comment on the implications of two developments, the Internet’s growing
role in airline distribution and the systems’ shrinking airline ownership. 65 FR
45551 (July 24, 2000).
After reviewing the comments submitted in response to those notices, we issued
our notice of proposed rulemaking on November 15, 2002. That notice, as stated
above, proposed to readopt most of the existing rules but also asked for
comments on whether the rules had become unnecessary. We additionally proposed
to eliminate the mandatory participation rule and the prohibition against
discriminatory booking fees. We tentatively concluded that we should not extend
the rules to cover the distribution of airline tickets through the Internet. We
asked for comment on whether we should change our policy statement requiring
travel agents to disclose the full amount of airline fares to consumers so that
travel agents would be obligated to state separately the amount of any travel
agency service fee, as long as the fee did not exceed certain levels. We took
into account the changes in the systems’ airline ownership, although only
Galileo and Sabre then had no airline owners. We tentatively believed that the
systems might engage in practices that would undermine airline competition due
to the marketing relationships and other ties that continued to exist between
the systems and their former airline owners.
To make certain that interested persons had ample opportunity to present their
evidence and positions on the issues, we established a lengthy comment period
and asked for reply comments. 67 FR 69366. We later extended the comment period
and reply comment period by two months and one month, respectively. 67 FR 72869
(December 9, 2002). To provide an additional opportunity for public
participation, we also held a public hearing on May 22, where interested persons
could present their views to a Department official, Michael W. Reynolds, the
Deputy Assistant Secretary for Aviation and International Affairs, and answer
his questions. 68 FR 25844 (May 14, 2003); 68 FR 27948 (May 22, 2003).
We received about 95 comments and 35 reply comments. The commenters included
members of Congress, other Federal agencies, the systems, many U.S. and foreign
airlines, many travel agencies and travel agents, firms that process the
marketing and booking data sold by the systems, and several public interest
groups. Because of the complexity of the issues and the varying effects of the
rule proposals, the commenters do not share common views.
The Justice Department argues that we should readopt the rules prohibiting
display bias and should not adopt any other rules except possibly transitional
rules barring the systems from demanding most-favored-nation clauses in their
contracts with participating airlines. Sabre, Worldspan, United, Expedia, and
Travelocity contend that we should terminate all of the CRS rules. Amadeus,
Galileo, Alaska, America West, Midwest, and US Airways generally assert that
most of the rules should be readopted. Orbitz, American, Continental, Delta, and
Northwest argue that we should maintain some rules only for a transition period
to ensure that the CRS industry’s deregulation will succeed. The travel agency
commenters largely support the continuation of rules governing the systems’
contracts with their travel agency customers but object to any significant
restrictions on the systems’ incentive pricing programs. The public interest
groups generally oppose continued regulation, but some argue that we should take
action to prevent Orbitz’ operations from reducing competition.
As stated above, we have determined not to make final our tentative proposals to
readopt most of the rules. The comments on our notice of proposed rulemaking
have shown that market forces in the CRS business are more effective than was
shown by the comments submitted before we issued that notice: the airlines’
control over access to their webfares has enabled them to obtain better terms
for participation in some systems, the systems’ subscriber contracts are giving
travel agencies increasing flexibility to use alternative booking channels, and
the airlines’ share of revenues from travel agents has continued to decline.
Furthermore, as a result of the Worldspan sale, no system is now controlled by
U.S. airlines.
Before turning to the detailed discussion of the substantive issues, we will
address the procedural questions raised by commenters.
D. Procedural Issues
For this proceeding we have followed the notice-and-comment procedures
established by the Administrative Procedure Act for informal rulemakings, as we
have done in all past CRS rulemakings. 67 FR 69369. We also held a public
hearing and invited interested persons to submit reply comments as well as
comments. These informal rulemaking procedures have given commenters a fair
opportunity to present their evidence and policy and legal arguments and have
enabled us to resolve the issues rationally and efficiently.
Some parties filed comments or reply comments after the due date for those
documents. We have accepted all such documents, and we have considered them to
the extent practicable.
Sabre’s comments included several exhibits for which Sabre requested
confidential treatment. Sabre thereafter concluded that some of these exhibits
did not require confidential treatment, because their information was equivalent
to that provided by other commenters without any request for confidential
treatment. We were unable to work out an arrangement with Sabre on the remaining
documents that would meet Sabre’s interests in protecting the confidentiality of
the information while satisfying our need to give all interested persons an
adequate opportunity to review the information while preparing their comments.
We are therefore returning those documents to Sabre, and we have not considered
them at all in this rulemaking.
Some commenters requested a more formal hearing where they could cross-examine
members of our staff and representatives for other commenters. We found such
additional procedures would be unnecessary for the development of an adequate
record in this proceeding. 68 FR 12883 (March 18, 2003).
Several commenters assert that the record is stale or incomplete. See, e.g.,
Galileo Reply Comments at 9-13; ASTA Reply Comments at 4-8. We disagree. While
our notice of proposed rulemaking cited some factual material that may not have
reflected current conditions, the notice set forth our tentative factual
findings, our reasoning on the economic and policy issues, and, most
importantly, gave all interested persons ample opportunity to submit their own
factual information. Any commenter who considered the factual record outdated or
incomplete could have corrected any inadequacies by submitting current
information. We believe that the record is more than adequate for our decision.
We also disagree with those commenters who contend that we cannot reach a
rational decision on the issues without learning the details of the marketing
and other on-going relationships between Worldspan and its former airline
owners. See, e.g., Galileo Reply at 10. In this proceeding we are considering
what general rules, if any, should be adopted that will regulate each system’s
operations, not whether specific features of the arrangements between Worldspan
and its former owners may be unlawful as unfair methods of competition. The
record is entirely adequate for us to determine what general rules should be
adopted. If it becomes apparent that specific features of the relationships
between Worldspan and its former owners present questions about possible
violations of section 411, we can address those issues through our investigatory
and enforcement powers. In addition, the record does not include information on
the details of the relationships between Galileo and United, or between Sabre
and American or Southwest. Some commenters, however, have submitted evidence on
their experience with those relationships, and other commenters could have done
so as well. That evidence indicates neither that we must obtain additional
information nor that the existing relationships create a likelihood of
anti-competitive behavior that would injure airline competition and that
requires regulations.
Our notice of proposed rulemaking included an initial regulatory flexibility
analysis as required by the Regulatory Flexibility Act of 1980, 5 U.S.C. 601 et
seq. That analysis discussed the potential impact of our rule proposals on small
entities and invited comments on that analysis. 67 FR 69423-69424. Travel
agencies, several members of Congress, the Small Business Administration’s
Office of Advocacy, and some other commenters contend that we failed to comply
with the Regulatory Flexibility Act, because our initial regulatory flexibility
analysis allegedly failed to provide adequate analysis and an opportunity for
comment on several rule proposals affecting travel agencies, particularly our
proposal to restrict the systems’ incentive payment programs. See, e.g., June 9,
2003, Letter from Senators Snowe and Kerry; March 19, 2003, Letter from the
Democratic Members of the House Committee on Small Business; Comments of the
Small Business Administration Office of Advocacy; ASTA Comments at 51-54. We
recognize the importance of the goal of ensuring that our rules do not
unreasonably or unnecessarily affect small businesses and the importance of
compliance with the Regulatory Flexibility Act. We believe that we have
fulfilled our obligations under that statute. However, the issue is moot for the
most part because we are not adopting the rule proposals that generated most of
the complaints. In addition, certain other proposals sought by travel agency
groups, such as a requirement that every airline make all publicly-available
fares saleable through every distribution channel, are not alternatives that we
have the statutory authority to adopt on the basis of the record in this
proceeding. Our final regulatory flexibility analysis is set forth later in this
rule.
We also conducted a review under 5 U.S.C. 610 of the CRS rules, Part 255, in
this proceeding. As discussed below, we concluded that changes were necessary to
relieve regulatory burdens and respond to changed circumstances.
E. The Need for Limited CRS Regulation
1. Introduction
We adopted the current rules because we found that regulations were necessary to
prevent the systems from engaging in anti-competitive conduct that was likely to
prejudice competition in the airline industry (for example, display bias and
unjustly discriminatory booking fees). We additionally concluded that some
practices followed by the systems represented efforts to preserve their market
power over airlines (for example, subscriber contract provisions that kept
travel agents from using alternative booking channels). We further determined
that, if there were no rules, the systems would probably bias their displays,
thereby denying travel agents and their customers impartial and information on
airline services. 57 FR 43781-43787. In addition, as the Justice Department
observes, the system owned by an airline that dominated a region had a
substantially greater ability to obtain subscribers than did other systems. If
that system operated in ways designed to prejudice the competitive position of
rival airlines, it would reinforce its owner’s dominant position in the airline
market. Justice Department Reply Comments at 9.
We based these conclusions on our findings that airlines relied heavily on
travel agencies for distribution, that travel agents generally used a system to
determine what airline services were available and to make bookings, that each
travel agency predominantly or entirely used one system for these tasks, and
that the resulting need of almost all airlines to participate in each system
meant that market forces did not discipline the prices and terms offered by the
systems for airline participation. We further relied on the fact that each
system was then owned and controlled by one or more airlines or airline
affiliates. 57 FR 43781, 43790, 43794.
Recent developments, such as the systems’ ownership changes and the growth of
on-line bookings, have seriously eroded the basis for the findings on which the
current rules were based. We must thus examine whether the regulation of system
operations remains necessary. When we issued our notice, one system was still
controlled by three U.S. airlines, and we tentatively found that the rules
remained necessary because the systems still had market power over airlines and
because the continuing ties between the systems and their former owners created
a likelihood that systems would engage in conduct that would prejudice airline
competition. 67 FR 69377-69384. We nonetheless invited comments on whether we
should allow all of the rules to sunset, 67 FR 69368, and we stated that we
anticipated that the on-going changes in the marketing of airline tickets could
in time make the rules unnecessary. 67 FR 69376.
The commenters disagree on whether rules are still necessary. The Justice
Department recommends that we maintain only the rules prohibiting display bias
and possibly short-term rules barring certain types of most-favored-nation
clauses in the systems’ contracts with participating airlines. Some commenters,
such as Expedia and United, contend that the rules should be terminated now.
Sabre argues that no rules are necessary unless a system is still controlled by
U.S. airlines. Other commenters, like Orbitz, American, Continental, and
Northwest, contend that we should adopt regulations for a transition period to
ensure that the ultimate deregulation of the CRS business will be effective. And
still others, like Midwest, argue that the regulations are likely to remain
essential for a number of years. Some commenters, like United, argue that we may
not regulate non-airline systems at all and that we should not regulate systems
owned or controlled by airlines.
2. Final Rule
We have concluded that market forces are beginning to discipline the systems’
prices and terms for airline participation, and the systems’ competition for
subscribers is in large part eliminating contract provisions that substantially
restrict travel agents from using alternative electronic sources of airline
information and booking capabilities. Furthermore, the record does not contain
evidence showing a likelihood that a system will engage in conduct designed to
distort competition in the airline industry, except for display bias. Readopting
most of the existing regulations would not be justified without such evidence.
For these reasons, we have determined to permit most of the rules to sunset upon
their expiration on January 31, 2004.
The only exceptions are the rules that prohibit display bias and foreclose
certain contract clauses with airlines that would maintain the systems’ market
power. We find that the systems continue to have market power over airlines, as
argued by the Justice Department; that there is some potential for conduct by
the systems that could prejudice airline competition (most notably the sale of
display bias); and that systems could engage in practices that could
unreasonably preserve their market power. For these reasons, we will adopt
these rules for a six-month period in order to facilitate an orderly transition
to a completely deregulated distribution marketplace. We retain the power to
reexamine this decision if unexpected developments show that continuing
regulation may be necessary. We are also prepared to take enforcement action if
a system engages in conduct that appears to violate section 411.
We explain in this section why we have concluded that most of the current rules
are no longer needed, and that the remaining rules will be maintained only for a
short transition period. The several types of system conduct that create concern
require separate discussion, because they involve different groups of system
users -- airlines, travel agencies, and travel agents and their customers -- and
the degree and effectiveness of market forces for each group is different. For
airlines, the question is whether competition disciplines the prices and terms
for CRS services offered airlines. For travel agencies, the question is whether
the systems can engage in conduct that tends to preserve any market power they
may have over airlines by unreasonably restricting a travel agency’s use of
alternative information sources and booking channels. For travel agents and
their customers, the question is whether the systems could engage in display
bias and similar practices that would lead to consumer deception and undermine
airline competition. As a separate matter, we must determine whether, assuming
that the systems do have market power over airlines, they are likely to pursue
practices that would distort airline competition, even though no U.S. airlines
now control any system.
Most commenters supporting continuing regulation assume that any rules should
apply equally to all systems, whether or not owned and controlled by airlines.
None of the commenters argues that Amadeus’ ownership by three European airlines
provides a basis for regulating that system if the others are unregulated. We
agree. We doubt that the alliance relationships between each Amadeus owner and
one or more U.S. airlines will substantially increase the potential for
anti-competitive behavior affecting the U.S. airline market, especially since
the Amadeus owners belong to different alliances. In addition, Amadeus has
substantial public ownership, and its obligations to its public shareholders
should lessen any potential for action by Amadeus designed only to distort
airline competition in the United States. Amadeus also has the smallest market
share in the United States. Amadeus Comments at 32-33; Sabre Comments at 4, n.6.
The primary basis for our rule proposals was our belief that the proposals
appeared necessary to prevent system practices that would constitute unfair
methods of competition and that market forces would not prevent those practices.
We will begin our explanation of the need for maintaining some short-term,
residual regulation with our analysis of the systems’ market power over most
airlines, an analysis that begins with our conclusions on market definition. We
then discuss whether systems are likely to engage in conduct that would
prejudice airline competition, preserve their existing market power, or give
consumers and their travel agents misleading information on airline services.
Despite our conclusion that the systems have market power over airlines, we are
allowing most of the existing rules to expire because we find that the systems
are not likely to engage in practices that would prejudice airline competition
or tend to maintain their existing market power, except for display bias and the
potential imposition of some contract clauses on participating airlines that
would reduce the airlines’ bargaining power. Because we conclude that the
systems would probably sell display bias if our prohibition against doing so
were immediately terminated, thereby misleading travelers, we have decided to
retain that prohibition for a six-month transitional period to furnish the
industry notice of the change.
Where we find short-term, transitional regulation necessary, our analysis is
substantially the same for both airline and non-airline systems. Elsewhere, as
discussed below, our conclusions that rules are not necessary stems in large
part from the lack of any U.S. airline control of the systems now operating in
the United States. If Orbitz enters the CRS business, there would again be a
system controlled by U.S. airlines. However, we are unwilling at this time to
adopt general regulations based upon Orbitz’ potential entry.
3. Market Definition
In judging whether any regulation is necessary, the fundamental question is
whether market forces would discipline system practices. If competition would do
so, no rules should be necessary. Cf. Justice Department Reply Comments at 18.
When we adopted the current rules, we found that they were necessary because
each system had market power over almost all airlines and market forces would
not discipline the systems’ anti-competitive practices. We also adopted rules
governing subscriber contracts, even though we did not find that systems
generally had market power over travel agencies, because the systems’ contracts
with travel agencies contained clauses that would maintain the systems’ market
power over airlines. 67 FR 69405. In the current rulemaking, we again made a
tentative determination that the systems had market power over airlines.
Determining whether the systems have market power over airlines requires us to
define the relevant market. The relevant market must contain all products or
services that consumers -- here the airlines -- are likely to consider using for
the same purpose. The relevant market includes all reasonably interchangeable
products and services, because “the ability of consumers to turn to other
suppliers restrains a firm from raising prices above the competitive level.”
United States v. Microsoft Corp., 253 F.3d 34, 51-52 (D.C. Cir. 2001), quoting
Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir.
1986).
In our notice of proposed rulemaking, we tentatively found that, for airlines,
each system is a relevant market. Most airlines still obtain the great majority
of their revenues from travel agents, each travel agency office normally uses
only one system, and travel agents rarely make airline bookings outside a
system. If travel agents routinely used several electronic sources of airline
information and booking capabilities when making reservations for their
customers, an airline could then afford to withdraw from one or more systems,
because the travel agents’ use of alternative systems would still enable the
airline to obtain bookings. Travel agencies, however, typically rely entirely or
predominantly on one system for investigating airline service options and making
bookings. 67 FR 69375-69376, 69377-69381.
As a result, an airline that wants its services to be readily saleable by travel
agencies must participate in each system, because otherwise it will lose a
significant amount of revenue. As the Justice Department had stated in an
earlier rulemaking, quoted at 67 FR 69376:
Each CRS provides access to a large, discrete group of travel agents, and unless
a carrier is willing to forego access to those travel agents, it must
participate in every CRS. Thus, from an airline's perspective, each CRS
constitutes a separate market and each system possesses market power over any
carrier that wants travel agents subscribing to that CRS to sell its airline
tickets.
We further noted that, due to the economics of the airline industry, the
addition or loss of a few passengers on an airline flight will determine whether
the flight is profitable. The importance of marginal revenues in the airline
business meant that airlines cannot afford to lose access to any significant
distribution channel. In that regard, we quoted the statement of one industry
economist, Daniel Kasper, 67 FR 69375:
Airlines utilize many different distribution channels for the simple reason that
they must do so in order to ensure that their products are easily accessible to
the broadest possible array of prospective
travelers. . . . Because attracting incremental passengers is critically
important to an airline’s profitability, each airline strives to match or
surpass the visibility to purchasers enjoyed by its rivals. That is, airlines
must compete for “shelf space” in any channel where consumers prefer to shop.
The comments support our tentative factual findings on market definition. First,
most airlines still obtain the majority of their revenues from bookings made by
travel agencies through a system. The Justice Department states that the five
airlines that own Orbitz derived 65 percent of their total revenues in March
2002 from “brick-and-mortar” travel agency bookings. Justice Department Reply
Comments at 14. America West states that 67 percent of its revenues in 2002 came
from bookings made through the systems. America West Comments at 7. Alaska
similarly states that it obtains 56 percent of its revenues from travel
agencies. Alaska Comments at 5. Delta states that 55 percent of its revenues are
produced by “brick-and-mortar” travel agencies and that another 10 percent are
produced by on-line travel agencies through a system. Delta Reply Comments at
39. Sabre by itself produces about one-third of a typical airline’s revenues.
Orbitz Comments at 10. While the Justice Department suggests that the systems’
use by on-line travel agencies (as opposed to “brick-and-mortar” travel
agencies) adds little to their market power over airlines, because most
consumers check two or more websites before making a booking on-line, the
Justice Department agrees that the systems have market power due to their usage
by “brick-and-mortar” travel agencies. Justice Department Reply Comments at 15.
About 80 percent of CRS bookings made by travel agencies are made by
“brick-and-mortar” agencies. Galileo Comments, Guerin-Calvert, Jernigan, &
Hurdle Declaration at 24.
In arguing that the systems do not have market power, Sabre cites figures
showing that less than half of all tickets will be sold this year by travel
agencies using a system. See, e.g., Sabre Comments, McAfee and Hendricks
Declaration at 2; Transcript at 8. We believe that market shares based on
revenues, not individual tickets, should be determinative. A firm’s
profitability directly depends on its total revenues, not on the number of units
sold. The travelers who make bookings on-line tend to buy tickets that are sold
at greater discounts. The travelers using “brick-and-mortar” travel agencies are
more important to the airlines because they tend to buy the more expensive
tickets. Justice Department Reply Comments at 16.
We agree with Sabre that the travel agencies’ share of total bookings has been
declining and will likely continue to decline. See, e.g., Justice Department
Reply Comments at 14. However, as noted, the large network airlines still obtain
the large majority of their revenues from travel agencies using a system, a
situation likely to persist for some time to come.
Business travelers -- the travelers that produce a disproportionate share of the
network airlines’ revenues -- have been reluctant to make bookings on-line or
otherwise outside the travel agency channel. Justice Department Reply Comments
at 16; NBTA Comments at 11-14. Consumers make about five times as many on-line
bookings as do corporate travelers. Galileo Comments, Guerin-Calvert, Jernigan,
& Hurdle Declaration at 26, n. 40. We recognize that a growing number of
business travelers are booking on-line, but they appear to be doing so through
websites offered by travel agencies using a system, or through one of the
corporate booking firms acquired by systems like Sabre. Sabre Reply Comments at
34-35; American Reply Comments at 25.
It may well be that within several years even a large proportion of business
travelers will book their air travel outside of travel agencies using a system,
but they do not do so now. Most airlines, including the major network airlines,
derive the large majority of their revenues from bookings made through a system.
See also Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 29.
Secondly, travel agents continue to rely on systems for booking airline tickets.
ASTA states that, on average, 87 percent of travel agency airline bookings are
made through a system. ASTA Comments at 23. Galileo estimates that an even
higher percentage of travel agency bookings are made through a system. Galileo
Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 25, n. 37. Travel
agents generally have access to the Internet and use it, primarily for research
on travel options, but they have not made much use of the Internet for airline
bookings, as noted above, because using the Internet is significantly less
efficient than using a system. ASTA Comments at 12-13.
Thirdly, to operate more efficiently, most travel agencies use only one system,
as discussed above. While the largest travel agencies tend to have two or more
systems, they do not seem to make substantial use of all of them. Those agencies
typically rely predominantly on one system. The Large Agency Coalition states
that its members -- all large corporate travel agencies -- do not subscribe to
multiple systems in order to improve their ability to book airline travel, but
because of continuing business relationships between the agency and the dominant
airline in local markets, between some of their corporate customers and
airlines, or between an acquired agency and its system. Large Agency Coalition
Comments at 1-3. Carlson Wagonlit alleges that each of its branch offices relies
predominantly on one system even though the travel agency firm subscribes to all
of the systems: “Using multiple CRSs at one location creates numerous
operational difficulties related to training agents on multiple CRSs and because
client information is maintained within the CRS.” Carlson Wagonlit Comments at
11.
Fourthly, the airlines’ dependence on marginal revenues requires them to
participate in every significant distribution channel. No commenter denies that
marginal revenues are critical in the airline industry. Sabre’s experts agreed
with our finding: “Air transportation involves high fixed costs and low marginal
costs. Thus a few incremental bookings can spell the difference between profit
and loss.” Sabre Comments, Salop & Woodbury Declaration at 29.
We are unconvinced by the claims of several commenters that airlines can
nonetheless find substitutes for the travel agency channel and that travel
agents can use substitutes for the systems. We recognize that Southwest, JetBlue,
and some other low-fare airlines operate successfully without obtaining many
bookings from travel agents. Southwest and JetBlue reportedly obtain only 20
percent and 10 percent of their revenues, respectively, from travel agencies.
Justice Department Reply Comments at 15, n.14. Other airlines, particularly the
large network airlines, cannot now practicably end their reliance on the travel
agency channel. The low-fare airlines have traditionally focused on attracting
leisure travelers. As shown, leisure travelers are much more likely to book
flights through the Internet without using a “brick-and-mortar” travel agency
(or an on-line agency). Insofar as other airlines follow a business strategy
that involves attracting business customers -- the travelers most likely to use
travel agencies -- those airlines continue to be dependent on travel agencies
for the largest share of their revenues and may have limited bargaining leverage
against the systems, at least in the near future. The network airlines,
moreover, tend to operate more complex hub-and-spoke route systems than the
low-fare airlines, and that complexity limits their ability to obtain direct
sales, unlike airlines such as Southwest that primarily operate point-to-point
services. It may be that the network airlines would be more successful if they
adopted the same business strategy as the low-fare airlines. They have not done
so, however, and presumably could not do so without significant expense.
American Comments at 17-21; 67 FR 69379. As a result, these airlines rely on
travel agencies for the majority of their revenues. Our determination of the
relevant market must rely on the choices actually made by airlines and
consumers, not on the choices that some think they should make. Cf. U.S.-U.K.
Alliance Case, Order 2002-1-12 (January 25, 2002) at 42-43.
We recognize that airlines have been shifting some bookings away from the travel
agency channel to their own websites. This shift has been much stronger for
low-fare airlines than for the large network airlines. Despite these efforts,
some believe that the Internet is unlikely to produce more than 40 percent of
airline revenues by 2005. Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle
Declaration at 23-24. Airlines have also taken steps to encourage travel
agencies to bypass the systems. For example, American has an arrangement with
American Express that enables that travel agency to make bookings directly with
American. Amadeus Comments at 12-13. The record does not indicate that direct
booking arrangements will substantially reduce the agencies’ use of the systems
for airline bookings any time in the near future. As shown, the larger airlines
still obtain the large majority of their revenues from bookings made through the
systems.
Several commenters contend that travelers can use alternative distribution
channels and are not locked into the travel agency channel, or, alternatively,
can switch between travel agencies if one agency uses a system that provides
inferior service. See, e.g., Sabre Comments at 59-65. We agree that consumers
can choose where to book and need not book through a travel agency if they do
not wish to, and that many consumers can easily switch between travel agencies.
At least for corporate customers, however, changing agencies will impose some
switching costs. Justice Department Reply Comments at 16, n.19. Airlines do not
enjoy such choices. If a substantial number of travelers choose to use travel
agencies, as they do, and if those travel agencies, with few exceptions, use
only one system and do not readily make bookings outside the system, as is true,
then each airline must participate in each system used by a significant number
of travel agencies in order to avoid losing bookings from those agencies. As we
stated in the notice, 67 FR 69378:
The existence of one distribution channel that is attractive to a significant
and growing number of travelers does not make that channel competitive with
another channel that a larger if shrinking share of travelers finds preferable.
With a very few exceptions, any airline that uses only one channel will not
obtain the business of those travelers that prefer the other channel.
See also American Comments at 16-17 and Dorman Declaration at 5. While the
airlines’ customers have alternatives, that does not make irrelevant the
question of whether systems have market power over airlines. Cf. United States
v. Visa U.S.A., Inc., 344 F.3d 229, 239 (2d Cir., 2003); In Re Visa Check/Mastermoney
Antitrust Litigation, E.D.N.Y. No. 96-CV-5238, April 1, 2003, Memorandum and
Order at 5.
Some arguments made by the commenters opposing our preliminary analysis
mischaracterize our reasoning. Sabre wrongly alleges that we concluded that
systems have market power over travel agencies. Sabre Comments at 59, 71, 84.
Nothing could be further from the truth. We expressly found that systems compete
vigorously for travel agency subscribers, 67 FR 69371, 69405, and nowhere did we
state that systems have market power over travel agencies. Sabre additionally
misstates our analysis by asserting that we found that travel agencies control
their customers. Sabre Comments at 59, 63.
Sabre has failed to show that the relevant market is not each system, but the
broader market of providing travel information to consumers, or airline ticket
distribution, a market in which each system’s share would be relatively small.
Sabre Comments at 57-59, 79. As a practical matter, airlines wishing to
electronically provide information and booking capabilities to travel agencies
currently have no effective substitute for participation in each system.
Similarly, because travel agencies do not use multiple systems, Sabre’s
observation that no system has even a 50 percent share of the CRS business,
Sabre Comments at 81, is irrelevant. Each system is a separate market insofar as
airlines are concerned. Furthermore, each system has a dominant share of the CRS
business at cities where its former airline owners were the dominant airlines.
Justice Department Reply Comments at 22.
4. The Systems’ Market Power over Airlines
Because readopting CRS rules to block anti-competitive behavior will require a
finding that the systems have market power over most airlines, we must determine
whether they do have such power. If systems have market power over airlines,
they will be able to charge them prices that exceed competitive levels, and the
resulting costs will be passed on to consumers, even if many or most consumers
can choose between different distribution channels when buying airline tickets.
We are following the definition of market power applied by the Supreme Court in
antitrust cases. In Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451
(1992), the Court stated that market power is the power "to force a purchaser to
do something that he would not do in a competitive market," 504 U.S. at 464,
quoting Jefferson Parish Hospital v. Hyde, 466 U.S. 2, 14 (1984), and "the
ability of a single seller to raise price and restrict output," 504 U.S. at 464,
quoting Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495,
503 (1969). The courts have similarly stated that a firm is a monopolist “if it
can profitably raise prices substantially above the competitive level.” United
States v. Microsoft Corp., 253 F.3d at 51.
Our notice of proposed rulemaking stated our belief that each system still has
market power over most airlines. We noted in that regard that some airlines that
had otherwise supported the elimination of most or all of the rules still
conceded that the systems have market power. Northwest had thus stated, as
quoted by us at 67 FR 69378:
Sales to consumers made over the Internet, via both airline websites and online
agents, have provided significant new competition to CRSs, but each CRS
typically remains the only means by which to reach the travel agents who use
that system. Each CRS therefore continues to have significant market power based
on the travel agents to which it has exclusive access.
First, until now an airline or other firm could not practicably create
competitive alternatives for the systems. Among other things, building a new
system would be costly and time-consuming, and the great majority of travel
agencies already had contracts to use an existing system. 67 FR 69381. Entry
into the business has become easier, as argued by Sabre. Sabre Comments at
52-85. However, because travel agencies generally rely entirely or predominantly
on one system for information and bookings on airline services, new entry is
unlikely in the near term to eliminate the systems’ existing market power.
Secondly, airlines have generally been unable to persuade travel agencies to use
one system rather than another. If they could, they would have some bargaining
leverage against the systems. Airlines could then shift business to systems
offering better terms for airline participants and away from systems offering
poorer terms. Because travel agencies do not pay booking fees, they have no
direct incentive to use the system charging the lowest fees. The record
suggests, in fact, that the incentive payment programs used by the systems
encourage travel agencies to choose the system that is the most expensive for
participating airlines. The systems then obtain subscribers typically by
offering to give them bonus payments. The revenues used for those incentive
payments come from the fees paid by participating airlines (and to a smaller
extent by other travel suppliers). See, e.g., American Reply Comments, Dorman
Declaration at 2-4.
Airlines have had no effective incentives that they can offer travel agencies to
encourage the use of one system rather than another, except in local markets
where a dominant airline can influence travel agency choices by denying access
to its corporate discount fares and marketing benefits to travel agencies that
do not use its preferred system. As discussed in our notice of proposed
rulemaking, airlines that dominate an area’s airline markets, like Delta at
Atlanta and American in southern Florida, can influence local travel agencies to
use the airline’s preferred system, because those travel agencies cannot easily
succeed without the ability to sell the corporate discount fares offered by the
area’s major airline. 67 FR 69381.
Airlines have developed programs to encourage travel agents to agree to terms
that offset some CRS costs, or to bypass the systems, but those programs do not
yet seem to have had great success. American’s “Everyfare” program gave travel
agencies access to American’s webfares if they agreed to assume the airline’s
booking fee liability. Amadeus Comments at 10-13. Northwest and other airlines
have created websites designed for travel agent bookings. Sabre Supp. Reply at
2.
We recognize that airlines have been gaining bargaining leverage against the
systems, a factor that caused us to propose the elimination of the mandatory
participation rule and the rule barring discriminatory booking fees.
Nonetheless, the systems currently have significantly greater leverage. An
airline’s greatest leverage for obtaining lower fees or better terms for
participation will be a threat to withdraw from the system. If an airline
withdraws, however, it will immediately begin losing bookings from that system,
and those losses will not be entirely offset by increased bookings through the
Internet. Any saving in CRS participation expenses will arrive later, and will
not quickly offset the revenues lost from the reduction in bookings. Booking
fees, after all, equal about two percent of the revenues obtained by an airline
from sales made through a system. Orbitz Comments at 10, n.4. Cf. Amadeus
Comments at 18-19.
It is true that an airline’s withdrawal from a system will make that system less
attractive to travel agencies, and over time the system will lose subscribers.
Because the average travel agency contract has a term of three years, however,
only a relatively small portion of the system’s subscribers will have the
ability to switch to another system in the short term.
Thus the airline’s revenue losses from withdrawal will be substantial and begin
occurring immediately, while the system’s losses in subscribers will be gradual
and occur only over a period of some months. In these circumstances, the system
should have the upper hand in bargaining. See, e.g., Orbitz Comments at 10.
An airline could also put pressure on the system by attempting to reduce the
number of tickets sold through the system without withdrawing completely. One
possibility would be to increase their efforts to encourage travelers to book
directly with the airline. These lost sales would lower the systems’ revenues,
but may also increase the airline’s distribution costs.
An airline could put pressure on the system by lowering its participation level,
because doing so would make the system less attractive to travel agencies that
frequently book the airline without drastically reducing the airline’s bookings
from that system’s subscribers. The lower level of participation would make it
somewhat harder for travel agents to obtain information and reliably make
bookings, and could block travel agents from conducting functions that are
important to their customers. These functionality differences would not lead to
a loss of as many bookings as would withdrawal but presumably would still result
in lower revenues from the travel agents using that system. On the other hand,
the lower level of participation would have less impact on the system’s ability
to market itself to travel agencies in the future. We expect that airline
changes in participation levels will give airlines bargaining leverage.
Our notice of proposed rulemaking predicted that the airlines’ control over
access to their webfares could enable them to obtain better terms for system
participation. 67 FR 69381. As discussed above, Sabre and Galileo have begun
programs that give airlines a discount from the standard booking fee levels in
exchange for a commitment to provide all publicly-available fares, including
webfares. The commenters disagree over the implications of these programs. Some
commenters assert that airlines have gotten little in exchange for the
commitments required of them. See, e.g., American Reply Comments at 21-23.
America West states that Orbitz has offered substantially larger fee reductions
for airlines that agree to its most-favored-nation clause. America West Reply to
Supp. Comments at 2-3. Other commenters contend that the programs demonstrate
that airlines have bargaining power and that the systems do not have market
power. See, e.g., Sabre Reply Comments, Salop & Woodbury Declaration at 15-16.
We believe that the airlines’ ability to change their participation levels and
their control over access to webfares is reducing the systems’ market power.
Overall, however, we find that the systems currently still have market power
over most airlines, although the continuing changes in airline distribution,
particularly the growing importance of the Internet for airlines, travel agents,
and travelers, should continue to erode the systems’ market power. Our finding
that the systems have market power is consistent with the Justice Department’s
conclusions. Justice Department Reply Comments at 2, 16-17.
We disagree with Sabre’s contention, first made in its reply comments, that the
airlines’ contracts with corporate customers keep systems from having market
power. Sabre asserts that system practices cannot significantly affect airlines,
because ”much business travel” involves fares directly negotiated with specific
airlines, often booked through direct links. Sabre Reply Comments at 36; Sabre
Reply Comments, Salop & Woodbury Declaration at 7-9. Airlines obtain substantial
amount of business from corporate customers that do not have such contracts, and
the contracts do not normally bar employees from traveling on alternative
airlines.
We have based our finding of market power on the industry’s structural
characteristics, not on an analysis of whether the systems’ fees are at
supracompetitive levels. The best evidence of a firm’s monopoly power would be a
showing that it has been able to profitably charge prices that significantly
exceed competitive levels. Because direct evidence of this ability is usually
not available in Sherman Act monopolization cases, the courts usually rely on
market structure evidence to determine whether a firm has monopoly power. United
States v. Microsoft Corp., 253 F.3d at 51. We have taken the same approach here.
When we last compared the systems’ prices with their costs, we concluded that
the larger systems at least were charging supracompetitive prices. See 56 FR
12586, 12595 (March 26, 1991). We have not done such an analysis since then, as
we noted in our notice, but stated our belief that the systems’ booking fees
were probably above competitive levels, because they were not disciplined by
market forces. 67 FR 69382. t with our findings that the systems must compete
for travel agency subscribers but do not compete for airline participants.
The airline commenters generally support our finding that booking fees are not
disciplined by competition and contend that the fees substantially exceed
competitive levels. They point out, for example, that the network airlines’
financial crisis since 2001 has enabled them to drive down costs from other
suppliers while the systems have been raising their fees and reporting large
profits. See, e.g., America West Comments at 7-9.
In response, the systems have denied that their fees are not disciplined by
competition, and they argue that the fees are reasonable. They contend that
their costs have been rising due to increased functionality provided airlines
and the growing number of messages carried by their communications links. See,
e.g., Galileo Comments at 38-39. While the systems thus contend that several
important cost factors have increased significantly in recent years, they have
not submitted a detailed cost analysis that would show that their booking fees
do not significantly exceed their costs, nor have they attempted to demonstrate
that the booking fees charged before the beginning of the cited cost increases
did not significantly exceed their costs.
We continue to believe that the systems’ fees exceed competitive levels for the
reasons set forth in the notice of proposed rulemaking. We have not seen
evidence that the systems’ fees generally respond to market forces, although two
of the four systems have made modest concessions in exchange for access to
airline webfares. However, we have not done an analysis of the systems’ costs
and revenues that would demonstrate that their fees exceed competitive levels.
As explained above, a finding that the fees are at supracompetitive levels is
not necessary for our determination that the systems have market power over
airlines.
We also cannot accept Sabre’s claim that bookings made through a system are
relatively inexpensive for airlines while bookings made through airline websites
are not (and that bookings made through airline websites are more expensive than
those made by an airline’s reservations agents). Sabre Comments, Wilson
Declaration at 22. Sabre’s analysis is belied by the efforts of virtually every
airline to shift bookings to its own website. Several low-fare airlines have
claimed that their ability to obtain most of their revenues from direct sales
gives them a great cost advantage over other airlines. See American Reply
Comments at 32. See also 67 FR 69373, 69374. Sabre in any event has failed to
demonstrate that its calculation is valid. American Reply Comments, Dorman
Declaration at 8-9; United Reply Comments at 35, n.96; America West Reply
Comments at 27. See also Northwest Reply Comments at 19-20.
5. The Potential for System Conduct Undermining Airline Competition
Our finding that each system has market power over airlines is not sufficient by
itself to justify the adoption of rules. To adopt rules regulating the systems
in order to prevent potential unfair methods of competition, we should have
evidence that, if there were no regulations, systems would likely engage either
in anti-competitive conduct designed to preserve their market power, a subject
discussed below, or in conduct intended to distort airline competition. Any such
conduct would harm consumers, either by causing airlines to pay supracompetitive
prices for CRS services or by denying consumers the benefits of lower fares and
better service created by competition between airlines.
When each system was owned and controlled by one or more airlines or airline
affiliates, experience demonstrated that systems were likely to engage in
conduct designed to prejudice the competitive position of rival airlines, for
example, by biasing displays against the owner airlines’ competitors and
charging competing airlines discriminatorily high booking fees. See 56 FR 12589.
None of the systems now operating in the United States, however, is owned by a
U.S. airline. Obviously a system that is not owned or controlled by a U.S.
airline will not have the same incentives to prejudice the competitive position
of rival airlines. Justice Department Reply Comments at 13-14; Sabre Comments,
Salop & Woodbury Declaration at 26-30 and McAfee & Hendricks Declaration at
53-59. We must therefore determine whether a non-airline system (a system not
owned or controlled by an airline or airline affiliate) is likely to engage in
unfair methods of competition.
We have found, as shown, that the systems have market power over airlines. To
the extent that they do, their booking fees may exceed the fee levels that would
exist in a competitive market, and the service offered airlines by the systems
may be below the level of service that would exist in a competitive environment.
The systems’ possession of market power, however, by itself would not justify
rules regulating their practices. The antitrust laws permit firms with monopoly
power to use that power as long as they do not engage in conduct that is
designed to maintain or extend that power. “[M]erely possessing monopoly power
is not itself an antitrust violation.” United States v. Microsoft Corp., 253
F.3d at 51. As explained below in our analysis of our authority under section
411, we may prohibit unfair methods of competition, which are practices that
violate the antitrust laws or antitrust principles.
Our notice of proposed rulemaking stated our belief that there was a risk that
non-airline systems would engage in anti-competitive conduct in order to
prejudice airline competition. Each of the non-airline systems still had ties
with its former U.S. airline owners, and each of the non-airline systems was
being marketed by one or more of its former owners. The record suggested,
moreover, that marketing airlines took actions favoring a system even when doing
so appeared to be contrary to their interests in selling their own tickets. We
therefore proposed to apply the rules, to the extent they were readopted, to
non-airline systems. 67 FR 69383.
The systems continue to have marketing relationships and other relationships
with their former owner airlines. See, e.g., Amadeus Comments at 25, n.24;
Galileo Supp. Comments at 3. The lack of control by any U.S. airline will not
eliminate the possibility that a system would agree with an airline to engage in
conduct that would undermine the competitive position of the airline’s rivals.
Each system, after all, continues to have market power over most airlines, and
each of the larger airlines dominates some local markets, primarily at its hubs.
A system and such an airline might agree that the system would change its
operations so as to benefit the airline while the airline would use its local
dominance to strengthen the system’s marketing efforts. Justice Department Reply
Comments at 19.
The record suggests that the systems are willing to sell preferential treatment
to airlines at least insofar as display bias is concerned. Their willingness to
do so is apparent from their own comments, which argue that we should allow
systems to sell bias. Amadeus Comments at 53-54; Sabre Comments at 141-142. The
Justice Department believes that the systems are likely to engage in display
bias. Justice Department Reply Comments at 19-21. See also American Antitrust
Institute Comments at 8. Our notice cited evidence that display bias is sold to
suppliers in other travel industries. 67 FR 69383. Although Amadeus has denied
that it biases its displays for hotels and rental cars, Amadeus Reply Comments
at 12, n.16, the other systems’ comments do not address this issue.
Apart from bias, however, the record does not indicate that systems are likely
to seek to operate in ways designed to prejudice airline competition. Our notice
of proposed rulemaking expressly invited commenters to submit evidence on
whether systems had sought to distort competition in other travel industries. 67
FR 69383. One speaker at our public hearing stated that he did not know of any
system practices that distorted competition in other industries, Transcript at
85, and one commenter asserted that there is no evidence of competitive harm
resulting from the systems’ treatment of firms in other travel industries.
Worldspan Reply at 17. See also Transcript at 116-117, 151-154. The record
further suggests that the marketing relationships between systems and airlines
currently give the marketing airline little incentive to help the system and
that marketing airlines, in fact, do little to help the system being marketed.
American Comments at 30; Large Agency Coalition Comments at 14-15; Large Agency
Coalition Reply Comments at 16-17. This suggests that the ties between airlines
and systems may have weakened enough so that systems would have little interest
in taking action that undermined airline competition in order to favor one
airline. The Justice Department additionally believes that contractual
arrangements between airlines and systems do not pose a sufficient threat to
competition to justify the adoption of general rules at this time. Justice
Department Reply Comments at 1-2. See also Expedia Reply Comments at 3, n.1. We
note, nonetheless, Amadeus’ complaint that American, Delta, and Northwest have
recently tied a travel agency’s ability to sell corporate discount fares with
the use of the system affiliated with the airline. Amadeus Comments at 91-92.
However, this tying affects competition between the systems and does not
necessarily show that systems will engage in conduct designed to distort airline
competition.
Furthermore, we cannot predict at this point what kinds of relationships may
arise as a result of the CRS industry’s deregulation. We do not wish to adopt
rules now when we do not know what types of potential anti-competitive
practices, if any, may occur. We therefore do not agree with the arguments of
some commenters that rules should be maintained on the ground that systems have
continuing marketing and other special arrangements with selected airlines. See,
e.g., Galileo Comments at 7-11.
We fully agree with the Justice Department, however, that there is a potential
for contractual relationships between systems and airlines that would be
designed to reduce competition in either or both the CRS and airline industries.
The Justice Department has stated its intent to take action against any such
agreements that violate the antitrust laws, and we also have statutory authority
to take appropriate action if such contractual relationships appear to be unfair
methods of competition that violate section 411. Under 49 U.S.C. 41708, formerly
section 407 of the Federal Aviation Act, we can obtain copies of any agreements
between airlines and systems if we see a need to investigate contractual
relationships between systems and participating airlines.
6. System Practices that Preserve Market Power
While we have determined that most of the rules should not be readopted, even
though each system continues to have substantial market power over airlines, we
are readopting for a short transition period the rule prohibiting parity clauses
and adopting an analogous rule prohibiting most-favored-nation clauses demanded
as a condition for any participation in a system. These types of contract
clauses would tend to maintain the systems’ market power and reduce the
bargaining leverage of participating airlines. Because we are essentially
deregulating the CRS business notwithstanding the systems’ market power, we
decided to adopt the parity and most-favored-nation clause prohibitions for a
period long enough allow affected parties to respond to the transition to
complete deregulation.
We originally adopted the rule prohibiting systems from enforcing parity clauses
(except as to airlines that owned or marketed a competing system) because three
of the systems had imposed parity clauses on airline participants. These clauses
required each airline to participate in the system at at least as high a level
as it participated in any other system. Thus, for example, Sabre’s parity clause
required Alaska to participate in Sabre at the full availability level as long
as Alaska participated in any other system at that level, even if Alaska
considered Sabre’s service at that level too costly or not as attractive as the
comparable service offered by other systems. 62 FR 59786-59787, 59791-59792.
Because these parity clauses eliminated some possibility of system competition
for airline participants, and required each airline to buy a level of service
that an airline might not wish to buy, we adopted a rule prohibiting the systems
from enforcing airline parity clauses except as to airline participants that
owned or marketed a competing system. 62 FR 59784.
We have concluded that this rule should be readopted for another six months. We
are also adopting for the same period an analogous rule that will prohibit each
system from requiring airlines as a condition to any participation in the system
to make all publicly-available fares saleable through the system. If we did not
provide for an orderly transition, a contract clause requiring a participating
airline to provide all webfares as a condition to participation, sometimes
referred to as a most-favored-nation clause, would deny the airline the ability
to use its control over access to its webfares as bargaining leverage to obtain
better terms and prices for system participation. Such a clause would
additionally tend to prevent the development of alternative sources of
information and booking channels, for a travel agency would have less incentive
to use alternatives if the system used by the agency already provided complete
information on webfares. It is our expectation that the six-month period during
which our prohibition on such clauses will remain in place will enable airlines
to prepare more effectively for the termination of these rules.
On the other hand, we have decided not to readopt rules designed to prohibit
system contract practices that would unreasonably restrict travel agency
subscribers from switching systems or using alternative systems or booking
channels. In the past, the systems engaged in subscriber contract practices that
appeared to be designed to preserve their market power. Travel agencies accepted
such contract clauses even though most travel agencies could choose between
systems. 67 FR 69405. We therefore adopted rules barring subscriber contracts
from having a term that exceeded five years and giving travel agencies the right
to use their own third-party equipment and software in conjunction with a
system.
As discussed above, the record shows that travel agencies in recent years have
been obtaining more flexible contracts from the systems. The term of the average
subscriber contract, for example, is well under five years. While most
subscriber contracts still have productivity pricing clauses, the productivity
pricing clauses in the contracts currently offered travel agencies do not seem
to effectively block travel agents from using alternative booking channels. And
travel agencies appear to have a substantial ability to switch systems at the
end of their contract term. While systems may have some contracts that may be
unreasonably restrictive, their contracts in general do not seem to block travel
agents from obtaining information and making bookings outside the system.
Moreover, the market is moving in a more competitive direction -- travel
agencies are obtaining more flexibility, not less, in their newest contracts.
As a result, the current record shows that rules regulating travel agency
contracts are no longer necessary. Several airline commenters and Orbitz have
argued that we should continue to regulate the systems’ subscriber contract
practices, because the existing contracts are alleged to unreasonably lock
travel agencies into using their existing system. See, e.g., Orbitz Comments at
46-49; America West Comments at 26-29; American Comments at 33-35; Continental
Comments at 17-20; Delta Comments at 41-42. For the reasons discussed below in
connection with the specific subscriber contract issues, the systems’ current
contracts do not appear to unreasonably keep travel agencies from using
alternative booking channels.
7. The Systems’ Ability to Engage in Display Bias
Display bias has been a concern since the systems were first developed.
Experience has demonstrated that travel agents are likely to book one of the
first services displayed by a system in response to a travel agent’s request for
information, even if services shown later in the display would better satisfy
the customer’s needs. If systems give preferential display positions to one
airline’s services, that display bias will harm airline competition and cause
consumers to be misled. 57 FR 43801-43802, 43807-43808.
Our rules have prohibited systems from biasing their displays in order to
prevent unfair methods of competition and deceptive practices. Display bias both
prejudices airline competition, by reducing the airlines’ ability to compete on
the basis of the relative attractiveness of their schedules and fares, and
causes travel agents to give misleading or incomplete advice to their customers.
Display bias is possible because of the way in which the systems present
information on airline service options. The systems display information on
computer screens. Each screen can display only a limited number of flights, so a
system must use criteria for ranking the available flights. Display position is
important, because travel agents are more likely to book the flights that are
displayed first. The number of airline services available in most markets also
requires the systems to edit their displays, because many services will be
unattractive to travelers (Los Angeles-San Francisco travelers, for example,
will not choose connecting services over Denver or Salt Lake City). Systems
display airline services in several different ways. The display traditionally
used by travel agencies ranks flights in a market on the basis of the criteria
developed by the system and shows whether seats are available on the listed
flights. Some systems rank flights in this type of display by listing all
nonstop flights first, then one-stop flights and other direct flights, and
finally connecting services. Others have ranked flights on the basis of relative
quality, such as each flight’s elapsed time or its displacement time (the time
difference between the departure time requested by the traveler and the time of
each flight). 67 FR 69370.
Every system also has a display that ranks flights on the basis of price, with
the lowest being listed first. Travel agents use that display for customers
whose major concern is finding the lowest fare. 67 FR 69370.
We have concluded that we should continue to prohibit display bias, both to
prevent anti-competitive conduct, as recommended by the Justice Department, and
to prevent consumer deception, but only for an additional six months. Were the
rule terminated immediately, systems would likely be in a position to bias
displays, as discussed above. Display bias could cause consumer harm by reducing
airline competition and by causing travel agents to book customers at times on
flights that do not best meet the traveler’s needs.
Display bias can mislead travel agents (and thus their customers), because by
definition it means ranking and editing airline services on some basis other
than neutral criteria based on general consumer preferences. Before the Board
adopted the rules on display bias, when each system was owned by one airline,
systems constructed displays that put their competitors at a disadvantage by
omitting services and fares offered by competing airlines that would be
attractive to many consumers. Each system often listed flights operated by its
owner airline above flights operated by competitors that better met the
customer’s travel requirements. 56 FR 12589. We later found it necessary to
revise our rules on display bias because Apollo, Galileo’s predecessor, created
displays that essentially gave the connecting services operated by network
airlines a preference over one-stop flights operated by point-to-point airlines.
For example, Apollo could display an Alaska one-stop flight in the
Seattle-Burbank market well after connecting services that left Seattle as much
as an hour before the Alaska flight and that arrived in Burbank after the Alaska
flight had landed. Apollo similarly displayed an Alaska one-stop Orange
County-Seattle flight after connecting services that took substantially longer
and that involved connections at Salt Lake City or Phoenix. 61 FR 42208,
42212-42213 (August 14, 1996). Apollo at that time was owned by several
airlines, not just by United, yet the owner airlines agreed to adopt a display
that would benefit United while prejudicing the travel agents’ ability to find
the best service for their customers. 61 FR 42209.
Display bias also can reduce competition. Bias can shift enough passengers from
disfavored airlines to a favored airline to make the former’s flights
unprofitable in the targeted markets. That can cause a disfavored airline to
reduce or eliminate its service in those markets. As we stated above in our
discussion of the systems’ market power over airlines, the profitability of an
airline flight often depends on marginal revenues, so the shift of traffic that
may result from display bias can have large competitive consequences. Justice
Department Reply Comments at 20, n.26. The resulting reduction in capacity and
potentially in the number of competitors will enable the favored airline to
raise fares and reduce service. Justice Department Reply Comments at 7. For
example, two of the airlines that complained about the Apollo display discussed
above -- Alaska and Midwest Express -- were point-to-point airlines whose
services fared worst in the Apollo display. Alaska estimated that the display
would reduce its annual revenues by $15 million, and Midwest Express estimated
that its annual revenue losses would equal several million dollars. 62 FR 63837,
63841 (December 3, 1997).
Experience thus shows that bias can be effective, notwithstanding the travel
agents’ interest in finding and booking the services that best meet their
customers’ needs. As noted, travel agents tend to book one of the first flights
displayed by the system. Travel agency customers depend on their travel agent to
extract information from the system display, which only the travel agent sees.
Travel agents generally work under time pressure that often keeps them from
searching through several display screens to overcome the bias. ASTA Comments at
41; AAA Comments at 2; Carlson Wagonlit Comments at 16; British Airways Coments
at 2-3. The systems can also hide the extent of their bias. 49 FR 32540, 32547
(August 15, 1984). A system arguably could choose to omit some services
altogether. For example, Priceline, an on-line seller of airline tickets, agreed
with Delta that Priceline would not sell seats offered by Delta’s competitors on
flights to or from Atlanta, Delta’s hub. Justice Department Reply Comments at
20, n.27, and 30, n.37. As a result, bias could keep consumers in many cases
from obtaining accurate and complete information on schedules and fares from
travel agents relying on a system for their information.
Display bias, moreover, provides no apparent consumer benefits. It does not
function like advertising, because it provides no information. In fact display
bias “would divert passengers without regard to airlines’ prices or quality.”
Justice Department Reply Comments at 19. Display bias is also unnecessary to
help travel agents who, due to a customer’s demands, are interested in seeing
only services offered by one airline. The rules do not bar systems from enabling
travel agents to create displays listing the services of a single airline. See
also Galileo Comments at 61 (Galileo subscribers can create displays tailored to
the preferences of their customers, including customer airline preferences).
When we readopted the rules against display bias at the conclusion of our last
overall reexamination of the CRS rules, we addressed several theoretical
arguments that assertedly showed that display bias was “beneficent.” Some
commenters argued that a flight’s display position would not affect travel
agency bookings, that display bias reflected the preferences of a system’s
subscribers, and that other airlines could buy display bias. We found that these
arguments were disproven by experience. 57 FR 43786-43787.
Several commenters have presented somewhat similar arguments here that bias
would not work and that there is no reason to prohibit it. While these
commenters may be correct in predicting that bias today would not be as
effective as it was in the past, we are not convinced that systems could engage
in display bias without causing consumer harm.
Systems clearly wish to be able to sell bias. That indicates that they believe
airlines will be willing to buy bias, and obviously airlines will be willing to
buy bias only if they expect it to be effective. Past experience with system
efforts to bias displays suggests that their expectation is correct.
We question whether airlines injured by display bias can practicably take steps
to offset it. In response to our example of the Galileo display that harmed
Alaska’s display position, Mercatus argues that Alaska could have either outbid
United for the bias or cut its fares to attract additional passengers. Mercatus
Comments at 10. While Alaska may have had the ability to take some steps to
offset the effect of the bias, Mercatus has failed to show that those steps
would have been practicable. Our concern, moreover, is not limited to the
Galileo display’s impact on competition. The display also caused travel agents
and their customers to receive incomplete or misleading information on the
available service options. The display was designed to cause travel agents to
book customers on airlines like United even when Alaska provided significantly
better service.
Travel agents use the Internet at times to search for alternatives to the
services displayed by a system. In theory, as argued by some commenters, the
Internet’s availability as a check on the quality of displays offered by a
system would deter a system from biasing its displays. See, e.g., Transcript at
123-124. We have doubts, however, whether travel agents regularly use the
Internet as a test of a system’s displays. As shown, travel agents are commonly
pressed for time, which is why bias works -- travel agents often do not wish to
take the time required to search several screens to find the best service for a
customer. The many complaints from travel agents about the unavailability of
webfares on the systems, and their assertions that almost no travel agency is
interested in using more than one system due to the inefficiencies involved, is
a further indication that travel agents making a booking for a customer are
unlikely to search several sources of information before selecting a flight to
recommend. Sabre’s evidence is consistent with this conclusion. A 2001 survey
indicated that only 11 percent of the travel agents with Internet access had
booked airline tickets on the Internet, that 13 percent often used the Internet
to check for lower fares, and that 23 percent occasionally used the Internet for
that purpose. Sabre Comments, Salop & Woodbury Declaration at 12. We assume that
the number of travel agents using the Internet to check for other services will
grow significantly, but not by such an extent as to make display bias
ineffective.
Travel agencies, moreover, cannot quickly shift to a different system if the
system they are using biases its displays. While travel agencies have some
ability to switch systems, many agencies would likely incur significant costs by
switching from one system to another. Galileo Comments, Guerin-Calvert,
Jernigan, & Hurdle Declaration at 81.
Any display bias by the systems would not be comparable to the practice of
grocery stores selling preferential shelf positions to their suppliers. Unlike
the grocery store shelf, which the shopper sees and can easily scan, the
traveller never sees the system display used by a travel agent, and systems can
create display bias that obscures the service alternatives to a much greater
extent than the shelf position used by grocery store suppliers. Airlines would
be willing to buy bias because it would be effective, and its effectiveness
means it is likely that a significant number of consumers will be booked on
inferior services when other services would better meet their needs.
Delta contends that bias should not prevail if travel agencies really desire
unbiased displays. Delta Reply Comments at 25. As noted, however, the systems
assume they can sell display bias, and experience indicates that systems have
some ability to hide the extent of the bias. Furthermore, the travel agents’
interests are not our only concern -- we wish to ensure that travel agency
customers can obtain accurate information, and to prevent the harm to airline
competition that could result if CRS display bias reappeared.
A travel agency customer’s ability to go to another travel agency if one travel
agency provides bad advice due to its use of a system that biases its displays
would not prevent display bias from causing harm. The consumers’ ability to
switch travel agencies would deter bias if customers find out that better
service was available and know that the travel agent booked the inferior service
because the travel agent was using a system that provided inferior displays.
That seems improbable. Customers instead are unlikely to know why the travel
agent did not book the better service. Customers might assume that the better
service was sold out, or that the better fare was not available when a
customer’s booking was made, as we concluded in our last major CRS rulemaking.
57 FR 43787. See also American Antitrust Institute Comments at 11. Furthermore,
travelers with confidence in their ability to obtain accurate fare information
on the Internet would be less likely to use a travel agent to book their
tickets.
While we conclude that systems are likely to bias displays in the absence of
rules prohibiting such bias, we believe that on-going developments are likely to
reduce the systems’ market power over airlines over time. We further expect that
these developments will enable travel agents and their customers to easily use
alternative sources of information to an extent that should deter the kind of
display bias that would significantly mislead travel agents and consumers.
Accordingly, we have decided to retain the prohibition against display bias only
for a transitional period of six months, with a termination date of July 31,
2004. Our expectation is that the notice provided by this transition period will
help to accelerate developments in the market that reduce the harm display bias
might otherwise engender.
F. The Department’s Statutory Authority To Regulate CRS Practices
Having concluded on economic policy grounds that some rules will remain
necessary for the next six months, and that the remaining rules should cover all
systems, not just those owned by airlines, we must address our statutory
authority to adopt the rules and make them applicable to both airline and
non-airline systems.
The basis for our adoption of CRS rules has been our authority under section 411
of the Federal Aviation Act, recodified as 49 U.S.C. 41712, to prohibit unfair
and deceptive practices and unfair methods of competition by airlines and ticket
agents in air transportation and the sale of air transportation. Section 411
states, “[T]he Secretary may investigate and decide whether an air carrier,
foreign air carrier, or ticket agent has been or is engaged in an unfair or
deceptive practice or an unfair method of competition in air transportation or
the sale of air transportation.” If the Secretary “finds that an air carrier,
foreign air carrier, or ticket agent is engaged in an unfair or deceptive
practice or unfair method of competition, the Secretary shall order the air
carrier, foreign air carrier, or ticket agent to stop the practice or method.”
Congress modelled our authority under section 411 on the Federal Trade
Commission’s authority under section 5 of the Federal Trade Commission Act, 15
U.S.C. 45, to prohibit unfair and deceptive practices and unfair methods of
competition in other industries. United Air Lines, 766 F.2d 1107, 1111-1112 (7th
Cir. 1985). In enforcing section 411, we must consider the public interest
factors set forth in 49 U.S.C. 40101. 68 FR 3293, 3294 (January 23, 2003).
Because section 411 limits our authority to practices affecting airline
distribution, we may not regulate the systems’ treatment of other travel
suppliers, such as hotels, rental cars, and Amtrak. 67 FR 69389.
As noted, section 411 covers airlines (both U.S. and foreign) and “ticket
agents.” The statute defines a ticket agent as “a person (except an air carrier,
a foreign air carrier, or an employee of an air carrier or foreign air carrier)
that as principal or agent sells, offers for sale, negotiates for, or holds
itself out as selling, providing, or arranging for, air transportation.” 49
U.S.C. 40102(a)(40).
The courts have construed the meaning of deceptive practices and unfair methods
of competition. A deceptive practice is one that will tend to deceive a
significant number of consumers. United Air Lines, 766 F.2d at 1113. An unfair
method of competition is a practice that violates antitrust laws or antitrust
principles. We may therefore prohibit some airline conduct permitted by the
antitrust laws. See, e.g., Pan American World Airways v. United States, 371 U.S.
296, 306-308 (1963); United Air Lines, 766 F.2d at 1114.
When several airlines sought judicial review of the original CRS rules, the
Seventh Circuit affirmed the Board’s adoption of the rules on the ground that
section 411 authorized the Board to prohibit anti-competitive conduct even
though the systems’ conduct might not violate the antitrust laws. United Air
Lines v. CAB, 766 F.2d 1107. The Board’s underlying findings were very similar
to those used in our past rulemakings. The Court stated that the Board's finding
that some of the systems had substantial market power was sufficient to
authorize the Board’s regulation of CRS practices: that finding "would bring
their competitive practices within the broad reach of section 411," for the
Board "can forbid anticompetitive practices before they become serious enough to
violate the Sherman Act." The Court reasoned that the types of conduct
prohibited by the Board on antitrust grounds -- price discrimination and denying
a competitor access to an essential facility on equal terms -- were "traditional
methods of illegal monopolization" that the Board could prohibit, even though no
system had a monopoly under Sherman Act standards. United Air Lines, 766 F.2d at
1114. In determining whether the Board properly held that display bias was a
deceptive practice, the Court viewed the test as whether the practice would tend
to deceive a significant number of consumers. 766 F.2d at 1113.
While Section 411 allows us to prohibit some conduct that is not prohibited by
the antitrust laws, it does not give us broad authority to regulate practices in
the airline and airline distribution businesses. Airlines are generally free to
determine how to distribute and sell their services, including sales through
travel agencies, as long as they do not violate antitrust principles. The
antitrust laws allow individual firms to choose how to distribute their products
and services as long as they do not violate one of the provisions of those laws.
67 FR 69384, citing Paschall v. Kansas City Star Co., 727 F.2d 692 (8th Cir.
1984) (en banc); and Auburn News Co. v. Providence Journal Co., 659 F.2d 273,
278 (1st Cir. 1981).
Similarly, the courts have held that the FTC’s comparable authority to prohibit
unfair methods of competition in other industries does not empower that agency
to regulate business conduct in order to make an industry more competitive. In
E.I. DuPont de Nemours & Co. v. FTC, 729 F.2d 128, 140 (2d Cir. 1984), the
Second Circuit stated, "[I]n the absence of proof of a violation of the
antitrust laws or evidence of collusive, coercive, predatory, or exclusionary
conduct, business practices are not 'unfair' in violation of §5 unless those
practices either have an anticompetitive purpose or cannot be supported by an
independent legitimate reason." In DuPont the court therefore vacated an FTC
order prohibiting certain types of pricing conduct in an oligopolistic industry,
which the FTC had prohibited in the belief that the industry's pricing would
then become more competitive. The FTC had not found that the pricing conduct at
issue violated the letter or the spirit of the antitrust laws or was otherwise
"collusive, coercive, predatory, or exclusionary." See also Official Airline
Guides, Inc. v. FTC, 630 F.2d 920 (2d Cir. 1980); Boise Cascade Corp. v. FTC,
637 F.2d 573 (9th Cir. 1980).
Our decision that most of the existing rules should be allowed to sunset follows
from our conclusions that those rules are no longer necessary. That decision
also reflects the limits placed by Congress on our authority to regulate airline
distribution practices. As a result of Congress’ decision to deregulate the
airline industry, we may not require firms in the airline distribution business
to change their practices without finding that those practices will violate
section 411.
We based our proposal to readopt rules proscribing display bias on both our
authority to prohibit deceptive practices and our authority to prohibit unfair
methods of competition. No one has contested our authority to regulate the
systems’ display practices under our authority to prohibit deceptive practices,
if the systems are ticket agents and our regulations are consistent with the
First Amendment (several commenters dispute these assumptions). The argument
over our authority to readopt the proposed rules involves both of our tentative
conclusions that the statutory definition of ticket agents includes the systems
and that system practices at issue could be unfair methods of competition. We
address these issues in detail below.
In our notice of proposed rulemaking, we observed that section 411 also
authorizes us to prohibit unfair practices by airlines and ticket agents, not
just deceptive practices and unfair methods of competition, but that we had not
relied on that authority as a basis for readopting CRS rules. 67 FR 69384. The
FTC has advised us that the FTC has adopted a strict definition of “unfair
practices” under the FTC Act and that Congress has since codified the
Commission’s definition. FTC Comments at 1-3. In its reply comments, America
West briefly suggests that we should bar systems from charging supracompetitive
booking fees on the ground that such fees violate public policy. America West
Reply Comments at 16, n.30. We are unwilling to adopt America West’s suggestion.
We have not previously based the CRS rules on our authority to prohibit unfair
practices, and we do not now intend to rely on that authority, when our notice
did not propose to do so and other commenters have not had the opportunity to
comment on America West’s suggestion.
1. Whether Non-Airline Systems Are Ticket Agents Subject to Section 411
The U.S. airlines’ divestiture of their CRS ownership interests requires us to
resolve whether we may directly regulate the systems under section 411, because
we based our authority to regulate system practices in the past on the systems’
airline ownership. Neither we nor the Board ever decided that issue in the
earlier rulemakings. 67 FR 69385. We tentatively concluded in our notice of
proposed rulemaking that the systems were ticket agents subject to section 411.
After considering the comments on this issue, we conclude that we may directly
regulate the systems under section 411, even though most of them no longer are
controlled by airlines. However, we are also adopting a rule barring airlines
from attempting to induce systems to create displays that would not comply with
the standards established by our rule prohibiting systems from engaging in
display bias.
A few commenters have suggested that we need not decide whether section 411
authorizes us to directly regulate the systems, because each of the existing
systems has ties with its former airline owners. We decline this invitation to
avoid the issue. Achieving all of our goals without directly regulating the
systems would be difficult. Neither relying on the existence of marketing
relationships between the systems and airlines nor barring airlines and travel
agencies from doing business with systems that engage in unacceptable practices
would provide a sound basis for regulating all of the systems’ operations.
Section 411 authorizes us to regulate the systems directly if they are “ticket
agents” within the meaning of our statute. As noted above, the statute defines a
ticket agent as “a person (except an air carrier, a foreign air carrier, or an
employee of an air carrier or foreign air carrier) that as principal or agent
sells, offers for sale, negotiates for, or holds itself out as selling,
providing, or arranging for, air transportation.” 49 U.S.C. 40102(a)(40). Our
notice of proposed rulemaking tentatively concluded that systems are “ticket
agents.” 67 FR 69384-69385.
Sabre, Galileo, United, Expedia, Travelocity, and ASTA contend that systems are
not ticket agents. Amadeus and America West, on the other hand, support our
tentative conclusion that the systems are ticket agents subject to section 411.
After considering the comments, we conclude that the systems are ticket agents
and that we may therefore prohibit them from engaging in unfair and deceptive
practices and unfair methods of competition in the sale of air transportation.
As we explained in the notice, the systems are active participants in the sale
of air transportation, not just communications links. 67 FR 69384-69385. The
systems enable travel agents to conduct booking transactions, require airlines
to accept any bookings made by a travel agent through the system, make credit
card authorizations, and issue tickets. They charge airlines fees based on
booking transactions. A system operates a central computer that collects
information on airline schedules and fares and the availability of seats,
arranges that information under its own editing and ranking criteria in displays
that are provided to travel agents, and provides a booking capability enabling
travel agents to make airline reservations for their customers. The systems also
require airlines to allow any system user to make bookings on the airline
through the system. See, e.g., Amadeus Reply at 34-35; America West Reply
Comments at 7-8. When the booking is made through the system, either through its
own central computer or by a direct connection feature in a participating
airline’s internal reservations system, the travel agent’s purchase is complete.
The systems’ contracts with participating airlines reflect their function as an
integral part of the distribution of airline tickets, not just as a
communications link. America West’s contracts with Sabre and Worldspan thus
state respectively that the parties “desire to enter an agreement concerning the
booking of reservations [and] the sale of the Participating Carrier’s air
services through SABRE” and “[t]he parties desire to enter into an agreement and
provide for the distribution of the services of Participating Carrier through
the WORLDSPAN system.” America West Comments at 13, 14.
In our view, the systems thus sell, offer for sale, and arrange for air
transportation, activities which bring them within the statutory definition of
ticket agent, because they are also carrying out these functions as a principal
or agent.
The statutory definition of “ticket agent” states that anyone carrying out the
listed functions as “principal or agent” is a ticket agent. This definition
should cover everyone involved in selling, offering for sale, or arranging for
air transportation no matter what status they may have under agency law
principles. A person involved in the sale or offering for sale of airline
tickets must be either a principal or agent. We do not see any third category of
actor that would be applicable here, and the commenters arguing that the systems
are not ticket agents do not contend that they are acting in some capacity other
than principal or agent. We think Congress included the phrase “as principal or
agent” to ensure that all persons conducting the listed functions were covered,
whether or not they were acting as an airline’s agent, acting under their own
authority, or acting under someone else’s authority. By using the terms
“principal or agent,” Congress did not mean to make a person’s status as ticket
agent depend on whether that person was a party to an agency relationship.
Congress surely meant to make section 411 applicable to persons who committed
unfair methods of competition or unfair or deceptive practices while engaged in
the sale or offering for sale of transportation, even if that person acted
entirely independently.
We believe that the systems operate as principals in the offering for sale and
arranging for air transportation. The systems act as independent firms that are
involved in the distribution of airline services. The commenters arguing that
systems cannot be ticket agents largely ignore the statute’s inclusion of
persons who act as principal and assume that a showing that a system is not an
agent necessarily means it cannot be a ticket agent. See, e.g., United Reply at
10-12. This implicitly assumes that the principal in the transaction must be the
carrier. The statute, however, states that a ticket agent is “a person (except
an air carrier, a foreign air carrier, or an employee of an air carrier or
foreign air carrier) that as principal or agent” performs one of the listed
functions, such as the sale of air transportation. Congress thus determined that
other persons participating in the distribution process, not just the airline,
could be principals and would be ticket agents. The commenters’ arguments that
the systems cannot be agents suggests that they must be acting as principals.
The commenters opposing the systems’ inclusion within the definition of “ticket
agent” argue that the systems are not the airlines’ agents. They contend that
the systems’ contracts with participating airlines specifically disclaim any
agency relationship. See, e.g., United Comments at 6-7. This argument misses the
point -- as shown, if the systems are not the airlines’ agents, they must be
acting as principals. To some extent, however, the systems may be operating as
the airlines’ agents, for example, in obtaining credit card authorizations for
sales made through the systems. Amadeus Comments at 27. While the commenters
arguing that systems are not ticket agents cite the systems’ participating
airline contracts, which state that no agency relationship is being created, the
contracts’ statements on the parties’ relationships are not binding on us. See,
e.g., Board of Trade v. Hammond Elevator Co., 198 U.S. 424, 437-438 (1905);
State Police Ass’n of Massachusetts v. C.I.R., 125 F.3d 1, 7 (1st Cir. 1997).
Furthermore, we disagree with the argument made by some commenters that travel
agents are the airlines’ agents and that the systems, therefore, cannot be
agents of the airlines. See, e.g., Sabre Comments, Fahy Declaration at 21-22.
This argument assumes that only one party in any each transaction can act as the
airline’s agent. We see no logical reason why only one party can act as an
airline’s agent in the course of a traveller’s purchase of airline tickets.
The statute states that a person is a ticket agent if the person “sells” or
“offers for sale” air transportation. The systems sell and offer for sale air
transportation because they present the travel agent with air service options
that the agent can purchase through the system. A system tells the travel agent
what flights are being operated, what the fares are, and whether seats are
available at each fare, and enables the travel agent to book the seat and pay
for it on the customer’s behalf by entering specified keystrokes. If the travel
agent follows the proper procedures for making the booking, the airline is
obligated by its contract to accept the booking as valid, whether or not any
record of the transaction appears in the airline’s internal reservations system.
The system thus offers air transportation for sale and sells it.
We further find that each system “holds itself out as selling, providing, or
arranging for air transportation.” As discussed, each system offers for sale and
sells air transportation. A system also arranges for air transportation, because
it enables the travel agent to choose the services best suited for the travel
agent’s customer and enables the agent to book whatever combination of services
may be required by the customer. The system holds itself out as performing these
functions, because it has informed its subscribers (and potential subscribers)
that it offers these functions.
We do not agree with the contention made by some commenters that the systems may
not be deemed as holding out the sale, provision, or arranging for air
transportation, because no system deals directly with the public or holds itself
out to the public as offering airline tickets for sale. See, e.g., Sabre Reply
Comments at 15. Travel agents, after all, act as the travelers’ agent, not just
as the airlines’ agent, and any representations made to a travel agent are
necessarily representations made to the travel agent’s principal, the customer.
The statute, moreover, does not state that the ticket agent must offer to sell
air transportation directly to the public, and we see no reason why such a
limitation should be read into the language of the statute.
We therefore conclude that each system is a ticket agent. Interpreting “ticket
agent” as including the systems would enable us to apply section 411 to firms
whose critical role in airline distribution enables them to substantially affect
airline competition and the accuracy of information provided consumers.
At the same time, our reading of the term “ticket agent” will not make firms
providing only information on airline services or communications links subject
to section 411. As shown, the systems do much more than just provide information
or a communications facility because they are active participants in the sale of
air transportation. As we explained in the notice, when a consumer uses the
telephone to buy goods and services, the telephone line links the consumer with
the firm selling the product or service, and the consumer conducts the
transaction directly with the retailer. In contrast, a travel agent using a
system to make a booking communicates exclusively with the system, not the
airline, unless the travel agent uses a direct access feature that enables
travel agents to obtain information and make bookings directly with an airline’s
internal reservations system. Furthermore, telephone companies do not choose
which data will be sent to the listener, but the systems edit their displays of
airline services. More importantly, a telephone company has no apparent interest
in whether transactions conducted by telephone are honored by the parties. Each
system, in contrast, requires airlines to accept bookings made through the
system and imposes fees based on the number of transactions made by subscribers,
not on the number of messages transmitted by them. Similarly, as described
above, the systems’ productivity pricing arrangements with subscribers award
incentive payments (or impose penalties) based on the number of transactions
made by the subscriber, not the number of messages, as discussed above.
The contentions made by the commenters arguing that systems are not ticket
agents are not persuasive. On the ground that the large majority of CRS bookings
are now made directly with an airline’s internal reservations system, Sabre
characterizes the systems as communications links. Sabre Comments, Fahy
Declaration at 23. However, Sabre concedes that a significant fraction of its
bookings are not made directly in an airline’s internal system. Furthermore, the
widespread use of direct access (referred to as seamless connectivity by Sabre)
does not negate the systems’ role as distributors of airline transportation, not
mere communications links. The system, not just the airline’s internal
reservations system, creates a record of the booking transaction, the passenger
name record. Sabre Comments, Fahy Declaration at 23. The system, moreover,
created the display that enabled the travel agent to choose which flights to
book.
Our notice of proposed rulemaking cited the passive booking capability offered
travel agencies by the systems as an example showing that the systems were more
than communications links. 67 FR 69385. In response, Sabre argues that a passive
booking -- a booking record stored in the system’s computer but not sent to any
airline’s internal reservations system -- cannot support our conclusion that
systems are active participants in the distribution channel because passive
bookings are “not active.” Sabre Comments at 28 and Fahy Declaration at 23. The
systems’ creation of the passive booking functionality, however, demonstrates
that they operate as more than just communications links. As Sabre states, a
passive booking does not cause any communication to go to an airline’s internal
reservations system. The passive booking functionality, however, benefits many
travel agents. Sabre Comments at 28. Travel agents can use the passive booking
function to issue tickets for customers who booked their seats directly with the
airline and to facilitate group bookings. 67 FR 69400. The systems created the
functionality in order to assist their customers, the travel agencies, in their
sale of airline services. This effort by the systems additionally confirms their
role as active participants in the sale and offering for sale of air
transportation.
Sabre further argues that the system contracts requiring participating airlines
to accept all bookings made through a system do not show that the systems are
active participants in the sale of air transportation. Sabre contends that the
systems require airlines to accept all such bookings, even if they have no
record of the transaction, as a result of travel agent demands and to avoid
libel attacks. Sabre Comments at 27, n.29. Sabre has understated the importance
of the systems’ requirement. Firms operating as communications links, like a
telephone or telegraph company, would not normally require the alleged recipient
of a message to assume the obligation of complying with the message, whether or
not the recipient actually received it. The requirement that airlines honor
bookings made by subscribers demonstrates the systems’ role as participants in
the sales process.
Sabre additionally notes that the systems operate automatically as machines,
unlike human travel agents, which assertedly shows that a system operates only
to provide information and process transactions. Sabre Comments, Fahy
Declaration at 22. We disagree. On-line travel agencies also operate
automatically, except when a customer needs advice or has a problem, but surely
no one would argue that an on-line travel agency is not a ticket agent because
the great majority of its bookings are made on-line without human intervention.
More importantly, the systems were not created by machines -- they were
developed by people, who also decide what services will be offered, how the
systems will be marketed, and what kinds of contractual relationships they will
have with their airline and travel agency customers, and who carry out these
business strategies. The machines have not chosen the algorithms used to edit
and rank air services, and they do not determine the types of restrictions, if
any, included in the systems’ contracts with participating airlines and travel
agencies.
We are aware of the statement made in United Air Lines v. CAB that suggests that
section 411 does not authorize us to regulate the practices of non-airline
systems. In the course of affirming the Board’s rules, which by their terms
covered only systems owned by airlines, the Court stated, “[T]he Board’s rules
are limited to systems owned by airlines; it has no regulatory authority over
the independent provider.” 766 F.2d at 1110. Whether the Board could regulate a
non-airline system was not an issue in that case. The Board rules did not cover
any non-airline system, the parties in the judicial review proceeding were not
arguing that the Board should have covered such systems (or urging the Court to
hold that the Board could not regulate them), and the definition of “ticket
agent” and the Board’s authority to regulate such systems were not issues in the
proceeding. The Court’s statement thus is dictum and not binding on us.
In arguing that past judicial and administrative precedent otherwise shows that
systems cannot be ticket agents, commenters cite other decisions which are not
controlling. United, for example, cites Official Airline Guides, Inc. v. FTC,
630 F.2d 920, as allegedly setting limits to the scope of section 411. United
Comments at 7, n.12. The decision actually addressed questions about the extent
of the FTC’s jurisdiction under section 5 of the FTC Act, not ours. Sabre cites
Foremost Int’l Tours v. Qantas Airways Enforcement Proceeding, 79 CAB 86, 102
(1978), for the administrative law judge’s statement that the “Board has no
jurisdiction over wholesale tour operators.” Sabre Reply Comments at 22. The
judge did not explain his conclusion but noted elsewhere that wholesale tour
operators do not issue airline ticket stock (or deal with the public), and that
a travel agent selling a tour sends the payment for the air transportation
directly to the airline, not through the tour operator. 79 CAB at 100. The
district court, moreover, had thought that wholesale tour operators were ticket
agents. Foremost Int’l Tours v. Qantas Airways, 379 F. Supp. 88, 95 (D. Hawaii
1974), aff’d, 525 F.2d 281 (9th Cir. 1975). Because the systems, unlike
wholesale tour operators, do issue tickets, the Foremost case is not
dispositive.
Expedia also argues that Congress amended section 411 to cover ticket agents in
order to prevent the fraudulent conduct by individuals ostensibly selling
tickets, especially on behalf on nonscheduled airlines. Expedia Comments at 17,
citing S. Rep. No. 82-1508 and H.R. Rep. No. 82-2420 (1952). While it is true
that Congress understood the need to prevent such conduct, the authority granted
by the legislation enacted by Congress is broader than that. Our authority under
section 411 is not limited by Congress’ primary intent at the time of enactment,
when the statutory language is not so narrow. Consumer Electronics Ass’n v. FCC,
D.C. Cir. No. 02-1312 (decided October 28, 2003). Cf. Independent Insurance
Agents v. Ludwig, 997 F.2d 958, 961 (D.C. Cir. 1993).
Thus section 411 authorizes us to regulate the systems as ticket agents when
necessary to prevent unfair and deceptive practices and unfair methods of
competition, despite the divestiture of their ownership interests by the U.S
airlines that formerly controlled the systems. Determining whether a system’s
conduct would be unfair or deceptive would not be affected by a system’s
ownership. The lack of U.S. airline ownership, however, could be very relevant
to the question of whether the practices barred by our rules would constitute
unfair methods of competition. We discuss that question next.
2. Antitrust Principles Relevant to System Practices
A system or airline practice will be an unfair method of competition if it
violates antitrust laws or antitrust principles. In our past rulemakings, we
determined that the system practices barred or restricted by our rules would be
unfair methods of competition, either because the practices unreasonably limited
competition in the CRS business or because they represented an effort to reduce
competition in the airline business. We relied on the systems’ ownership and
control by airlines and airline affiliates. Because the systems are no longer
controlled by U.S. airlines, we must reexamine whether the practices barred by
our rules would be unfair methods of competition.
Our notice of proposed rulemaking tentatively concluded that section 411
authorized us to readopt most of the existing rules, because we found that the
practices prohibited by them could be unfair methods of competition, even though
two of the four systems then had no airline owners. 67 FR 69385-69387.
Several of the commenters, especially Sabre and United, argue that the practices
at issue could not be unfair methods of competition. They primarily argue that,
even if the systems had market power in the CRS business over airlines, system
practices that affected airline competition could not violate antitrust
principles because the systems did not compete in the airline industry. United
Reply Comments at 16-20; Sabre Comments at 41-45.
We are readopting only the rules prohibiting display bias and adopting certain
rules prohibiting parity and most-favored-nations clauses in contracts between
systems and participating airlines, if those clauses are a condition to
participation in the system. The record does not provide a factual basis for
finding that the other system practices at issue would be unfair methods of
competition.
We may prohibit display bias under section 411 on the grounds that it would
constitute an unfair and deceptive practice and an unfair method of competition.
We have found that display bias is likely to mislead a significant number of
consumers by causing their travel agents to book relatively inferior flights
when other flights would better meet the travelers’ needs. The Seventh Circuit
upheld the Board’s rules barring display bias on the basis of findings that
display bias would tend to deceive a significant number of consumers. We have
made the same finding here. We may therefore readopt rules barring display bias
under our authority to prohibit unfair and deceptive practices.
Display bias could also constitute an unfair method of competition to the extent
that the system biases displays in order to benefit one airline at the expense
of competing airlines. Presumably a system would not bias its displays in favor
of one airline at the expense of rival airlines unless the favored airline had
given the system inducements to engage in display bias. In that event, the
system and the favored airline would be engaged in a joint effort to distort
competition in the airline industry, an effort that could succeed only because
of the system’s market power over the disfavored airlines.
Display bias does not promote competition on the merits. Instead, it is designed
to suppress competition by causing consumers and their travel agents to select
inferior airline services over other available services that would better suit
their needs. As the Justice Department points out, display bias “would divert
passengers without regard to airlines’ prices or quality.” Justice Department
Reply Comments at 19. Display bias could deter entry or expansion by more
efficient competitors and possibly cause competitors to exit some markets. Id.
at 19-20.
Contracts that unreasonably restrict one party’s ability to buy products or
services from competitors of the other party (or unreasonably restrict
competitors of one party from buying products or services offered by the other
party to the contract) can be unlawful, if they significantly restrict
competition without promoting efficiency. For example, the FTC held that a
series of contracts between a major retailer and its suppliers that restricted
each supplier’s ability to sell their products to the retailer’s competitors
violated section 1 of the Sherman Act. In the Matter of Toys “R” Us (October 13,
1998), opinion at 86-87, aff’d on other grounds, Toys “R” Us, Inc. v. FTC, 221
F.3d 928 (7th Cir. 2000).
In some cases, the courts have suggested that contracts giving one party a
competitive advantage by causing consumers to be misled may violate the Sherman
Act. As one court stated, “Competition would be harmed if consumers were routed
to particular glass repair companies based on factors other than competitive
pricing or quality in the marketplace.” Stewart Glass & Mirror, Inc. v. U.S.A.
Glas, Inc., 940 F. Supp. 1026, 1035 (E.D. Tex. 1996). In United States v.
Microsoft Corp., the Court held that Microsoft had violated section 2 of the
Sherman Act by providing software development tools to software companies
writing Java programs without telling them that Java applications written with
the Microsoft tools would work on the Windows operating system sold by
Microsoft. Microsoft’s intentional deception was unlawful, because it supported
the maintenance of Windows’ existing monopoly. 253 F.3d at 76-77.
While these cases involve different factual circumstances and were in part
decided under section 2 of the Sherman Act, they support a conclusion that
arrangements between a system and an airline to bias displays would constitute
an unfair method of competition that violates section 411. Display bias would be
designed to undermine the competitive position of the targeted airlines by
misleading consumers and their travel agents about which airline services would
best satisfy a consumer’s preferences. Any such arrangements would be intended
to handicap the ability of competing airlines to compete on the basis of price
and service quality. As such, they would be comparable to the agreements
condemned in Toys “R” Us. While the FTC based its decision on the existence of a
series of agreements between the retailer and the supplier, we think that a bias
agreement between one airline and one system would unreasonably restrict
competition, because the system has market power over airlines in terms of
access to the travel agencies subscribing to its services. In Toys “R” Us, on
the other hand, the retailer, unlike the airline buying display bias, could not
undermine the competitive position of competing stores without obtaining
agreements from a number of toy manufacturers. Given the nature of airline
markets, many of which are served by only a few airlines, display bias in some
cases could facilitate an airline’s acquisition of monopoly power in some such
markets.
The other practices being prohibited by our rules are airline parity clauses and
clauses requiring airlines as a condition to participation in a system to
provide the system with all fares, including fares such as webfares that an
airline would otherwise choose not to sell through the system. We are not
prohibiting parity and most-favored-nation clauses that result from bargaining
between a system and participating airlines, such as the clauses accepted by the
airlines participating in the Sabre DCA and Galileo Momentum programs.
When we initially prohibited the enforcement of airline parity clauses, we found
that such clauses constituted unfair methods of competition, because they
unreasonably restricted airline choices on participation levels in different
systems and were analogous to unlawful tying. 62 FR 59793-59797. As we said
then, and as is still true, parity clauses imposed by a system may violate
antitrust principles, because such parity clauses will maintain a system’s
market power. By denying an airline any opportunity to choose different levels
of participation in competing systems, a system’s parity clause makes it more
difficult for other firms to enter the CRS business and undermines the airline’s
ability to offer higher-level information and booking capabilities to travel
agencies through direct connections. 62 FR 59796. Parity clauses may also
constitute an anti-competitive tying of services. A parity clause imposed on
participating airlines represents a system’s use of its market power to compel
airlines to purchase services they may not want as a condition to obtaining any
service. We therefore reaffirm our past finding that parity clauses may
represent unlawful tying. 62 FR 59795-59796. Our conclusion is supported by the
recent decision in the Visa/MasterMoney case, where the court’s ruling largely
denying various cross motions for summary judgment held that contract clauses
imposed by the two credit card companies requiring stores to accept debit cards
as a condition to obtaining authorization to make credit card sales could be an
unlawful tie. In Re Visa Check/MasterMoney Antitrust Litigation, E.D.N.Y. No.
96-CV-5238, April 1, 2003, Memorandum and Order.
System clauses requiring participating airlines to provide all fares as a
condition to participation may similarly constitute unfair methods of
competition, because they unreasonably limit each airline’s ability to choose
how to market its services. That would buttress the systems’ market power, by
eliminating the potential development and use of alternative information sources
and booking channels by travel agents who want to book webfares. The Justice
Department thus states that such clauses “may reinforce CRS market power over
airlines, particularly if they discourage the development of alternative
distribution channels.” Justice Department Reply Comments at 26. Such clauses,
moreover, would eliminate the airlines’ ability to use their control over access
to webfares as bargaining leverage to obtain better prices and terms for
participation from the systems. The airlines’ control over access to webfares
has caused Sabre and Galileo to offer lower booking fees to airlines that agree
to provide them with all such fares. A system’s contract clause requiring an
airline to provide access to all fares as a condition to any participation would
also be analogous to an unlawful tying arrangement. The system would be denying
access unless the airline agreed to make all fares available, even though
airlines have typically chosen to make some types of fares, like webfares,
available only through selected distribution channels.
Our decision not to readopt the remaining rules largely reflects our policy and
economic judgment that those rules are unnecessary or unnecessarily restrictive.
That decision also reflects the limits on our authority under section 411. We
may adopt rules regulating system practices only if necessary to prevent
practices that would violate the antitrust laws or antitrust principles or cause
consumers to be misled.
While we are finding that each system has some market power over most airlines,
that finding by itself does not authorize us to regulate system practices under
section 411, even if a system’s practices impose unduly high costs on
participating airlines, as seems to be true with respect to booking fees. As the
Justice Department points out, “Supracompetitive fees, even when not used to
target specific airlines, are inefficient and harm consumers by artificially
raising the cost of air travel.” Justice Department Reply Comments at 3.
Nonetheless, a firm’s possession of monopoly power in itself is not an antitrust
law violation, even though the firm necessarily has the power to charge prices
substantially above competitive levels. United States v. Microsoft Corp., 253
F.3d at 51. See also United States v. Colgate & Co., 250 U.S. 300, 307 (1919).
If Congress finds that firms in an industry have market power and should be
restrained from exercising that power, for example, by barring supracompetitive
prices, Congress typically will establish a public utility-type regulatory
structure. Congress has not done so with respect to the airline distribution
business, and it determined 25 years ago that the comparable regulatory regime
for the airline industry should be abolished. A monopolist will violate the
antitrust laws only if it acquires or maintains, or attempts to acquire or
maintain, monopoly power by engaging in exclusionary conduct that does not
represent legitimate competition, such as the development of superior products
or services. United States v. Microsoft Corp., 253 F.3d at 58. Our authority to
prohibit practices that violate antitrust principles, not just the antitrust
laws, would not give us the power to generally regulate the conduct of a
non-airline firm that is a monopolist, even if the firm’s actions can
significantly injure airline business operations, although we may prohibit
practices by firms with market power that are designed to maintain that power if
they do not provide efficiency benefits or represent legitimate competition
America West nonetheless contends that section 411 authorizes us to regulate
system practices even if we have no evidence that relationships between one or
more airlines and a system will likely cause the system to take action to
prejudice airline competition. According to America West, “charging a
supracompetitive booking fee is . . . an unfair method of competition in the
sale of air transportation.” America West Reply Comments at 16. America West
provides no analysis showing how a system would be violating antitrust
principles by charging supracompetitive prices. As shown above, the antitrust
laws do not bar a firm from charging supracompetitive prices. America West’s
contention is inconsistent with the Federal Trade Commission’s position that it
would not consider practices by a monopolist to be unfair methods of competition
if they affected a market in which the monopolist did not operate. FTC Reply
Comments at 4.
On the ground that the primary purpose of section 411 is allegedly the
prevention of consumer deception, Expedia argues that we cannot regulate the
systems’ practices in order to prevent unfair methods of competition. Expedia
Comments at 17-18. This claim runs counter to the language of section 411, which
prohibits unfair methods of competition as well as unfair and deceptive
practices. Furthermore, when Congress transferred the section 411 authority to
us upon the Board’s sunset, Congress specifically stated that it did so in order
to maintain the authority to prevent anti-competitive conduct. Congress cited
the Board’s then pending CRS rulemaking as an example of regulatory action that
should be maintained. H.R. Rep. No. 98-793, 98th Cong., 2d Sess. (1984) at 5.
When airlines controlled the systems, the systems were likely to engage in
conduct that would violate section 411, and seemingly had done so before the
Board adopted the initial CRS rules. Without airline control of the systems or
other evidence of anti-competitive arrangements between systems and airlines,
system practices that affect airline competition are not likely to violate
antitrust laws or principles, except for display bias. The record does not
indicate that the existing relationships between systems and their former
owners, whether based on marketing agreements or otherwise, are likely to cause
the systems to take actions that would distort airline competition. The
commenters who urged us to readopt most of the rules, including the rule barring
the systems from charging discriminatory booking fees, have failed to show that
such rules must be adopted to prevent conduct likely to violate section 411.
Our notice of proposed rulemaking proposed an analysis that could enable us to
make our rules applicable to the non-airline systems. Including the non-airline
systems within the reach of the rules could be justified if the record indicated
that systems would take actions intended to benefit the competitive position of
some airlines at the expense of disfavored airlines. 67 FR 69387, citing, inter
alia, Official Airline Guides v. FTC; 68 FR 12622 (March 17, 2003). The record,
as noted, does not show that such conduct is likely to occur, except for bias.
As a result, we need not decide now whether that tentative analysis is valid. We
recognize that the FTC submitted comments stating that it no longer follows the
cases cited by us. The FTC additionally recommended that we reexamine our
analysis in light of the brief jointly filed by the FTC and the Justice
Department in Verizon Communications v. Law Offices of Curtis V. Trinko, LLP,
U.S. Sup. Ct. No. 02-682, which argued that neither the monopoly leveraging
principle nor the essential facilities doctrine provided an independent basis
for liability under section 2 of the Sherman Act. FTC Reply Comments at 4. In
view of our decision that the record does not provide a basis for readopting
most of the current rules, further discussion of these questions is unnecessary.
We find that the practices regulated by the rules that we are adopting here may
violate section 411, because they may unreasonably reduce competition in the
airline and airline distribution industries and are analogous to antitrust law
violations.
3. First Amendment and International Law Issues
Our decision to readopt the rules against display bias and only a few of the
other rules presents two other important legal issues, whether our regulations
are consistent with the First Amendment, and whether our decision is consistent
with the United States’ obligations under its air services agreements with
foreign countries that require the United States to prevent certain types of
system conduct that would deny foreign airlines fair and nondiscriminatory
treatment. We address the First Amendment issues in connection with our
discussion of the display bias rules, and we discuss the United States’
obligations under the air services agreements in our discussion of the
international issues.
G. The Specific Rule Proposals
Our reexamination of the need for CRS rules in light of the changes in the
systems’ ownership and the on-going developments in airline distribution has
convinced us that most of the rules are no longer necessary. This section states
our conclusions on the need for the individual rules on which the notice of
proposed rulemaking requested comments.
As discussed above, we are willing to adopt rules regulating system practices
only if they are reasonably necessary to prevent anti-competitive or deceptive
practices that are likely to occur and that market forces are unlikely to
remedy, if the rules will also be effective and enforceable.
We will begin our discussion of the major rulemaking issues by discussing the
scope of the rules and certain definitional issues, which will be followed by
our discussion of the rules that we have decided to readopt, the rules
prohibiting display bias and certain contract clauses in the systems’ contracts
with participating airlines that appear to be anti-competitive. After that we
will discuss (i) mandatory participation, (ii) booking fees, (iii) booking and
marketing information, (iv) the use of third-party hardware and software by
travel agencies and their ability to use one terminal to access several systems
and databases, (v) travel agency contracts, (vi) Internet regulation, and (vii)
international issues.
1. The Scope of the Rules
In our notice of proposed rulemaking, we proposed to modify the scope of the
rules by making them applicable to all systems without regard to any airline
ownership or marketing relationships. 67 FR 69382-69383. The existing rules
cover systems owned or marketed by airlines that are used by travel agencies to
obtain information, make bookings, and issue tickets for passenger air
transportation. They do not cover computer systems that do not provide all of
these functions, systems that are not owned or marketed by an airline or airline
affiliate, and system services that are not used by travel agencies (for
example, they do not cover CRSs when used by corporate travel departments). The
rules also do not govern the operations of traditional travel agencies or
on-line travel agencies. The description of the current rules’ applicability is
set forth in section 255.2, and the definition of “system” is in section 255.3.
We proposed to make the rules applicable to all systems, whether or not owned or
marketed by airlines, but to maintain the systems’ exclusion when providing
services to users other than travel agencies. 67 FR 69389. The non-airline
systems generally argue that there is no reason to regulate their practices due
to their lack of airline ownership (and, as discussed above, they argue that
section 411 does not authorize us to regulate systems not owned by airlines).
Other commenters, notably Amadeus, argue that the rules should cover all systems
equally. While no commenters advocate extending the coverage of all rules to the
systems when providing services to corporate travel departments and other
non-agency users, a few commenters essentially contend that the rules should
cover selected CRS practices when corporate travel departments are using a
system, because they urge us to regulate access to marketing and booking data
and access to corporate discount fares. See, e.g., NBTA Comments at 18-24;
American Express Comments.
We have determined, as discussed above, that the rules should cover non-airline
systems. Systems are likely to engage in bias whether or not they are owned or
controlled by airlines. We are prohibiting a few specific airline contract
practices -- mandatory parity clauses and demanding most-favored-nation clauses
-- because they would tend to maintain each system’s market power and reduce the
ability of airlines to obtain better terms for participation. Such clauses would
have harmful effects no matter whether the system is owned by airlines or by
non-airline firms. We accordingly are revising the language of the definition of
“system” by eliminating the current limitation that a system be owned or
marketed by an airline.
While including non-airline systems within the definition of “system” represents
an extension of the current rules, as a practical matter this change will have
no immediate impact, because all four of the systems are either owned or
marketed by airlines. Applying the rules to all systems will also be equitable,
because all competing firms providing essentially the same kind of services will
be subject to the same rules. Cf. Amadeus Comments at 31-36; Orbitz Comments at
43-45.
We recognize that this change in the definition of a system departs from our
earlier reasoning on whether the practices of non-airline systems required
regulation. In our last rulemaking, however, we were focusing on system
practices that were designed to prejudice airline competition, such as the use
of architectural bias, and on practices that unreasonably restricted the travel
agencies’ ability to switch systems or use multiple sources of information and
booking channels when competition between the systems represented a form of
competition between the airlines owning the systems. At that time, of course,
every system was owned and controlled by one or more airlines. In this
proceeding we are adopting only rules prohibiting display bias and certain
contract clauses that would unreasonably deny airlines the ability to choose how
to distribute their services and fares. This change in focus, and the
possibility that both non-airline and airline systems will engage in display
bias and seek to restrict airline choices on distribution channels, explain our
decision to expand the scope of the rules.
As noted, some commenters suggest that the rules should cover some system
operations when being used by corporate travel departments. We have decided not
to extend the rules to cover the use of the systems by persons other than travel
agents. In the past, even when we found that the systems’ practices required
strict regulation insofar as the systems were providing services to travel
agents, we concluded that we did not need to regulate CRS practices when the
system was being used by a corporate travel department or someone else besides a
travel agent. 57 FR 43794-43795. The record in this proceeding does not show a
need to expand the regulation of the systems’ practices. Doing so would be
inconsistent with our decision that virtually all CRS regulation should be
ended.
Furthermore, the proposals for expanding CRS regulation involve areas such as
directing certain airlines to make all of their services and fares, such as
corporate discount fares, available through all systems and barring airlines
from obtaining unrestricted access to the booking and marketing data generated
by the systems from bookings made by travel agencies and corporate travel
departments. See, e.g., NBTA Comments at 18-24; American Express Comments. As
explained elsewhere in this document, we have decided not to adopt rules on
these issues.
2. Exclusion of Internet-Based Systems
We proposed to revise the scope of our rules in a second respect, by excluding
firms that do not provide airline information and booking capabilities to travel
agencies under formal contracts. We expected that Internet-based firms such as
Orbitz could enter the CRS business by providing CRS services on a
transaction-by-transaction basis. We tentatively found that such Internet-based
firms would be likely to offer new competition in the CRS business but not
likely to obtain the kind of market power that made CRS rules necessary. We
doubted that such firms would present a potential for anti-competitive conduct
and deceptive conduct. We expected that travel agencies would use such a service
as an alternative to one of the existing systems, either on a
transaction-by-transaction basis or under short-term contracts. 67 FR
69389-69390.
Several commenters oppose this proposal on the ground that all systems should be
treated the same and that Orbitz in particular should be covered by the rules
because, unlike the four existing systems, it is owned and controlled by major
U.S. airlines. Some commenters argue that using the existence of a formal
contract to distinguish between systems covered by the rules and those not
covered by the rules would be irrational. See, e.g., Amadeus Comments at 42-43,
98-100; Southwest Comments at 7-10.
Orbitz supports the proposal. If a travel agency used a system on a
transaction-by-transaction basis, the system would assertedly have no assurance
that the travel agency would continue using its services, and thus the system
would have no market power. According to Orbitz, that would eliminate any basis
for regulation. Orbitz Comments at 41-43.
We have decided not to modify the definition of “system” to exclude firms that
do not offer services under a formal contract, as was proposed, or to create a
different exception for Internet-based firms that offer services that are
comparable to those being offered by the existing systems. Normally all
competitors in an industry subject to general regulations should be treated
alike, unless there are substantial reasons for a different result.
Moreover, we see a likelihood that any firm providing system services, even on a
transaction-by-transaction basis, may engage in the kind of practices prohibited
by our rules. Our proposal essentially assumed that travel agents would use an
Internet-based system in addition to one of the existing systems, not as a
substitute for such a system. The commenters generally agree, however, that the
great majority of travel agencies will use a single system, not multiple
systems. See, e.g., ASTA Comments at 3-4; Large Agency Coalition Comments at 20.
As a result, travel agencies using an Internet-based system would probably use
it as their only system. If such a system built a subscriber base consisting of
travel agencies using its services for almost all CRS functions, that system in
time would acquire the kind of market power that the existing systems have --
airlines would have to participate in that system if they wanted their services
to be readily saleable by its travel agency subscribers. In addition, travel
agencies will be reluctant to switch systems, whatever the form of contractual
arrangement, so subscribers using a system without having a long-term
contractual arrangement will likely continue using that system for a substantial
period of time. Furthermore, the firm most likely to benefit from the proposed
redefinition of “system” would be Orbitz. Given Orbitz’ affiliation with five
major airlines, and its access to the webfares offered by most airlines, Orbitz
may in time obtain a significant number of subscribers.
The proposed distinction between systems providing services to subscribers under
formal contracts and those that do so without formal contracts would likely be
difficult to administer. Even a short-term commitment by a travel agency to use
a system would arguably constitute a formal commitment. Amadeus Comments at 42.
Galileo contends that such a distinction would encourage firms to game the
system by developing business relationships that in form would not appear to
involve formal contracts. Galileo Comments at 44. See also Amadeus Comments at
42-43.
We also do not believe that our decision will deter Orbitz or other firms from
entering the CRS industry, assuming that doing so is otherwise an attractive
business proposition. The remaining rules will prohibit display bias and certain
types of restrictive clauses in airline contracts. Orbitz’ business plan has
included commitments to offer unbiased displays, which Orbitz has honored.
Office of the Inspector General, U.S. Department of Transportation, “OIG
Comments on DOT Study of Air Travel Services” (December 13, 2002), at 7-8. We
assume that our individual rules against display bias would not force Orbitz to
restructure its displays. We see no evidence that Orbitz has planned to impose
parity clauses and similar restrictions on airlines using its services. Orbitz’
most-favored-nation clause is consistent with the limited rule barring systems
from demanding access to all publicly-available fares as a condition to any
participation in a system, because Orbitz gives airlines a rebate on their
booking fees if they agree to the most-favored-nation clause and will sell their
services through Orbitz if they do not agree.
One firm, AgentWare, urges us to revise the definition to make sure that it does
not inadvertently cover Internet-based software applications such as AgentWare’s
Travel Console. AgentWare Reply Comments. AgentWare does not explain why our
definitions would create a problem, describe in detail how AgentWare provides
information and booking services to travel agencies, or propose a change to the
rules’ definition that would avoid the stated problem. Our review of the
description of AgentWare’s products set forth on its website suggests that the
rules should not apply to AgentWare, which appears to provide a link to other
sites where bookings can be made, does not provide a booking function itself,
and presumably is not charging airlines any fees. See also Galileo Comments at
66-67. If AgentWare believes that the rules would interfere with its operations
and can show that the application of the rules to its services would be
unnecessary to protect the public interest, we could exempt it from the rules
under 49 U.S.C. 40109. We do not wish to discourage firms like AgentWare from
offering new technology and new information services to travel agencies and
travelers.
American Express asks that we be sure to exclude direct connections between
travel agencies and airlines and proprietary software used internally by a
travel agency. American Express Comments. Our revised definition of “system”
expressly does not cover direct connections and would not cover software used by
a travel agency.
3. Definitions
The rules currently govern the operation of each “system,” defined as a
computerized reservations system that, among other things, is offered to
subscribers, charges any airline other than its affiliated airlines fees for
system services, and provides travel agents with the ability to make
reservations and to issue tickets. The rules define “subscriber” as a ticket
agent “that holds itself out as a neutral source of information about, or
tickets for, the air transportation industry and that uses a system.” Section
255.3.
We proposed to change the definition of “system” and “subscriber” to reflect
current industry conditions. Because the airlines are trying to phase out paper
tickets, we stated that we planned to eliminate the requirement that a system be
able to issue tickets. When we adopted the current rules, we assumed that travel
agencies would not choose a system that did not offer a ticketing capability.
Since then airlines have developed E-ticketing, and they often discourage
passengers from demanding paper tickets (an E-ticket, unlike a paper ticket, is
just a printed confirmation of the purchase of air transportation). The ability
to issue tickets therefore may no longer be a crucial function needed by travel
agencies. 67 FR 69390.
Similarly, because many travel agencies have incentive commission arrangements
with some airlines that are designed to encourage the travel agency to shift
bookings to those airlines, we proposed to eliminate the requirement that a
subscriber be impartial. While travel agencies generally offer impartial advice,
the existence of preferred supplier relationships between many travel agencies
and individual airlines might lead some to question whether the agencies were
entirely impartial. We therefore proposed to amend the definition in order to
eliminate any possible uncertainty over the rules’ applicability. 67 FR 69390.
No one commented on our proposal to change the definition of “system” by
deleting the ticket issuance function, and some support the proposed change in
the definition of “subscriber.” ASTA Comments at 50; Amadeus Comments at 44.
We will therefore adopt these changes for the reasons stated in our notice of
proposed rulemaking. In addition, our decision that most of the rules should not
be readopted has made other definitions unnecessary, such as “system owner.” We
are not readopting these definitions.
4. Rules Barring Display Bias
(a) Background
We have found, as explained above, that we should continue to prohibit display
bias for a six-month period. Display bias may both harm airline competition and
cause consumers to be misled, especially if it is not clearly disclosed, and
accordingly we believe it necessary to allow additional time for an orderly
transition to a deregulated marketplace.
Our rules prohibit systems from biasing their displays in favor of individual
airlines but do not prescribe how a system must display airline services. Each
system may develop its own criteria for editing and ranking displays of airline
services. Section 255.4. The rules define display bias as using carrier identity
in selecting flights from the database and ordering the listing of flights in
the display. Galileo, for example, may not give United’s flights a preference
just because they are operated by United. Other provisions additionally limit
the potential for bias. One such provision requires each system to apply its
editing and ranking criteria consistently to all markets. The system must select
connecting points (and double connect points) for constructing connecting
flights for each city pair on the basis of criteria that are applied
consistently to all airlines and all markets. Participating airlines can
designate five points to be used as connecting points in a market. Section
255.4(b)(1), (c).
Each participating airline must ensure that it provides complete and accurate
information to each system in a form that will enable the systems to display
flights in accordance with our rules on display bias. Section 255.4(f).
The rules do not prohibit systems from selling advertising on their displays.
The current detailed rules on display bias stemmed from findings by us and the
Board that rules prohibiting or restricting specific display algorithms were
necessary, due to the systems’ creation of editing and ranking criteria that,
while often ostensibly neutral, in fact gave the services of favored airlines an
unwarranted advantage in the system’s displays over the services offered by
competing airlines. See, e.g., 62 FR 63837.
The rules do not regulate the displays created by travel agencies and thus do
not prohibit a travel agency from biasing the displays used by its travel
agents. We determined in our last overall rulemaking that such a rule was
unnecessary because competition between travel agencies appeared likely to deter
them from offering customers misleading or incomplete advice on airline service
options. 57 FR 43809.
In our notice of proposed rulemaking, we proposed to maintain the existing rules
against display bias. We also proposed to bar airlines from inducing, or
attempting to induce, a system to create a display that would violate the rules
on display bias. 67 FR 69385, 69397, 69428.
We further proposed to modify the rules to address two other display issues.
First, we proposed to limit the number of times an airline service could be
displayed under different airline codes. 69 FR 69396-69397. Secondly, American
had once offered travel agencies software that would enable an agency to create
displays that gave American a strong preference. We tentatively determined that
the rules should prohibit any airline from offering programs to travel agencies
enabling agencies to bias their displays. 67 FR 69397. We did not propose to
regulate the displays created by travel agencies. 67 FR 69397-69398.
The commenters disagree over our proposal to readopt the existing rules. Sabre,
Delta, and Travelocity argue that no rules on display bias are necessary, and
the Competitive Enterprise Institute (“CEI”) argues that any restrictions on
system displays would violate the First Amendment. Other commenters assert that
rules prohibiting display bias remain necessary. See, e.g., America West
Comments at 39; American Comments at 35; Continental Comments at 24; Northwest
Comments at 12; ASTA Comments at 41. Commenters similarly disagree over our
proposals on limiting the display of code-share services and barring airlines
from providing software that could be used by a travel agency to bias its
displays.
After considering the comments, we have determined to maintain the existing
rules prohibiting the systems from biasing displays for an additional period of
six months. We will not adopt our proposals to bar airlines from distributing
software that can bias displays and to limit the number of times a single
service is displayed under different airline codes.
(b) Maintaining the Rules Prohibiting Display Bias
We explained above why we have decided to readopt rules prohibiting display
bias, for the next six months, in our discussion of why we find that limited CRS
regulation remains necessary. As discussed there, the record demonstrates that
systems are likely to have the wherewithal to bias their displays of airline
services if we allow our prohibition against such bias to terminate immediately.
Undisclosed display bias could prejudice airline competition and cause consumers
to receive misleading information on airline services. Display bias makes it
more difficult for travel agents to find the airline services that best meet a
customer’s needs. ASTA accordingly states, “Travel agencies should not be
required to waste time in an effort to defeat biased displays so they can serve
their clients. Airlines should win clients with better fares and service, not by
burying their competitors’ information in computer displays.” ASTA Comments at
41.
No commenter has argued that we must revise the existing rules, should we decide
to keep regulations against display bias. The commenters who argue that rules on
display bias are unnecessary have not suggested rule revisions that would
minimize the regulation of the systems’ editing and ranking of airline service
options, nor have they shown that the rules impose any significant burden on the
systems. We will therefore readopt the existing rules for a period of six months
with a sunset date of July 31, 2004. We will actively continue to monitor market
conditions. We, of course, retain the ability to propose readoption of rules
against display bias if conditions indicate, contrary to our present
expectation, that continuation of such rules is warranted.
(c) Barring Airlines from Encouraging Display Bias
We proposed to adopt a rule, section 255.11(a), that would prohibit airlines
from inducing or attempting to induce a system to bias its displays. If section
411 were not read as enabling us to directly regulate system practices, we could
prohibit some potentially prejudicial practices, like display bias, by barring
airlines from entering into contracts with systems that would encourage or
facilitate such practices, as explained in our notice of proposed rulemaking. 67
FR 69385.
No one has objected to this proposal, assuming that we have a basis for
regulating display bias at all, so we will adopt it. While we believe that
systems are ticket agents and thus subject to section 411, this rule provides an
additional basis for enforcing the prohibitions against display bias during the
six-month transitional period.
(d) First Amendment Issues
While section 411 authorizes us to regulate the systems’ displays, in exercising
that authority we must comply with the First Amendment, which restricts the
ability of government agencies to regulate commercial speech. Two commenters --
CEI and Sabre -- raise questions about whether our proposed rules would violate
the First Amendment (several other commenters argued that our proposed policy on
the disclosure of travel agency service fees would violate the First Amendment,
an argument that we will address in a separate rulemaking on that issue). CEI
contends that our proposed rules on display bias are contrary to the First
Amendment’s protection for commercial speech. CEI Reply Comments at 2-3. Sabre
does not argue that the proposed rules are unlawful and instead only suggests
that they may present First Amendment issues. Sabre Reply Comments at 73.
We believe that our rules against display bias will not violate the First
Amendment, as was true when we adopted the existing rules. 57 FR 43792. The
Supreme Court has held that government agencies may regulate commercial speech.
As the Court has explained, “Commercial speech . . . is ‘linked inextricably’
with the commercial arrangement that it proposes, so the State's interest in
regulating the underlying transaction may give it a concomitant interest in the
expression itself.” Edenfield v. Fane, 507 U.S. 761, 767 (1993) (citations
omitted). As a result, courts and agencies may enforce competition laws against
firms despite First Amendment claims. The Supreme Court has refused to block
suits and administrative actions taken to enforce the antitrust laws despite
assertions that the targeted conduct represents an exercise of First Amendment
rights. See, e.g., FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411
(1990); Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988).
The same principle should apply to our implementation of our statutory authority
to prohibit unfair methods of competition.
Furthermore, the First Amendment protects commercial speech that is not
misleading. As the Court stated in Central Hudson Gas & Electric Corp. v. Public
Service Comm’n, 447 U.S. 557, 563 (1980), “The government may ban forms of
communication more likely to deceive the public than to inform it,” for “there
can be no constitutional objection to the suppression of commercial messages
that do not accurately inform the public about lawful activity.” The Court has
declared, “But when the particular content or method of the advertising suggests
that it is inherently misleading or when experience has proved that in fact such
advertising is subject to abuse, the states may impose appropriate
restrictions.” In re R.M.J., 455 U.S. 191, 203 (1982). We are adopting the rules
on display bias because we seek to protect the public against misleading
communications, and experience has shown that systems are likely to bias their
displays if not barred from doing so. The courts have sustained restrictions on
speech where necessary to prevent possibly misleading messages. Nutritional
Health Alliance v. Shalala, 144 F.3d 220 (2d Cir. 1998); Bristol Myers Co. v.
FTC, 738 F.2d 554, 562 (2d Cir. 1984).
However, if displays of airline services of the kind proscribed by our rules
were considered protected by the First Amendment, our rules would satisfy the
test set forth in Central Hudson Gas & Electric Corp. v. Public Service Comm’n,
447 U.S. 557 (1980); Lorillard Tobacco Co. v. Reilly, 533 U.S. 525 (2001); and
Board of Trustees v. Fox, 492 U.S. 469 (1989). A government may restrict
commercial speech that concerns lawful activity and is not misleading, if the
government has a substantial interest and if the restrictions directly advance
that interest and are no more extensive than necessary to serve that interest.
Central Hudson, supra, 447 U.S. at 566; United States v. Edge Communications,
509 U.S. 418 (1993).
In considering whether our rules on display bias are consistent with the First
Amendment, the limited nature of the restrictions imposed by our rules is
important. Unlike the typical commercial speech case, our rules do not prohibit
the listing of any airline service or fare, nor do they prohibit airlines from
advertising their services on CRS screens or elsewhere. Our notice of proposed
rulemaking thus stated in the context of proposals to regulate on-line travel
agencies that we do not consider banner advertisements to constitute bias. 67 FR
69412. Our rules, moreover, are in large part designed to keep systems from
hiding or omitting information, for example, by constructing displays of
connecting services that arbitrarily exclude the hubs of disfavored airlines as
connecting points. The rules merely require systems to follow certain
requirements in listing flights in their displays of airline services rather
than prohibit the inclusion of information.
Our rules satisfy the first element of the commercial speech test, because we
have a substantial interest in preventing system practices that would mislead
consumers and harm airline competition. Congress has given us the responsibility
to prevent unfair and deceptive practices and unfair methods of competition in
the airline industry. Our readoption of the rules against display is, as shown,
consistent with the Justice Department’s position that display bias will injure
consumers by causing a reduction in airline competition.
Our rules meet the second element of the test, because they directly advance our
interest in preventing display bias that would harm competition and mislead
consumers. Our rules impose display requirements that experience has shown are
necessary to prevent systems from presenting displays that would mislead travel
agents and their customers and that would harm airline competition.
Finally, our rules meet the third part of the Central Hudson test. Under that
part of the test, there must be a reasonable fit (but not necessarily a perfect
fit) between the advertising limitation and the government's asserted interest,
and the restriction need not be the least restrictive means for defending that
interest. The rules are tailored to prevent display bias. They do not, for
example, prohibit systems from advertising airline services on their displays,
nor from providing a display of only one airline’s services. The rules also do
not generally prescribe how airline services must be edited and ranked. The
Court upheld the advertising prohibition in Edge Broadcasting because it was
"reasonable" without examining whether the prohibition was better than available
alternatives, 509 U.S. at 429-431. CEI, the commenter arguing that the display
bias rules violate the First Amendment, has not suggested any alternative
regulations that would be less burdensome and still prevent consumers from being
misled and prevent the harm to airline competition that would result from
display bias. Cf. Trans Union v. FTC, 295 F.3d 42, 53 (D.C. Cir. 2002).
(e) Display of Code-share Services
The display of services operated under a code-share arrangement can lead to the
multiple listing of single flights, because the service may be listed under the
code of each airline that has a code-share agreement with the airline operating
the flight. We asked for comments on whether we should adopt one of the
following limits on the number of times a single flight was displayed under
different codes: (i) an American proposal for a rule requiring that all airline
codes displayed for a flight be displayed in one listing, as is the case for
flights operated under one airline code, (ii) the European rule allowing a
service to be displayed under no more than two codes, and (iii) a Continental
proposal allowing one listing of an international nonstop flight or set of
connections for each code-share partner. Because we have found that code-sharing
usually benefits consumers by creating more integrated services, we did not
propose to prohibit code-sharing altogether. 57 FR 43805. We further noted that
airlines engaged in code-sharing understandably expect their services to be
listed under each partner’s code. Code-sharing is a significant feature of the
international alliances that we have found provide significant consumer
benefits. International agreements also provide bilateral rights to offer
code-share services. 67 FR 69396-69397.
Several commenters urge us to adopt the European rule, which bars a single
service from being displayed under more than two codes. Amadeus Comments at
55-56; American Comments at 35; Midwest Comments at 24-25; Air Carrier Ass’n of
America Comments at 13. Southwest contends that no service should be listed more
than once. Southwest Comments at 10-12. US Airways prefers limiting the display
of a domestic service to two codes and an international service to three codes.
US Airways Comments at 9-12. Continental argues that each service should be
displayed once under each airline code. Continental Comments at 24-25. See also
ASTA Comments at 41. Northwest opposes any limits on the display of code-share
services. Northwest Comments at 22.
During the comment period, we reviewed under 49 U.S.C. 47120 the domestic
alliance planned by Delta, Continental, and Northwest. We concluded that the
alliance presented significant competitive concerns but that we would not begin
a formal investigation of whether the alliance’s operations would constitute
unfair methods of competition in violation of section 411 if the three airlines
agreed to conditions alleviating our concerns. One of the conditions required
the three airlines to ask the systems to display their services under no more
than two of their three codes while we completed this rulemaking. We developed
that condition because we believed that the use of all of the partners’ codes on
their services could create an unreasonable competitive advantage for the three
airlines. 68 FR 10770 (March 6, 2003).
We have decided not to limit the display of code-share flights. While we remain
concerned about the potential competitive effects of the multiple display of
code-share services, we do not see a compelling reason to regulate the display
of code-share services at this time. However, nothing in our rules, or in this
discussion, should be read as prohibiting or discouraging systems from limiting
the display of code-share services if they wish to do so, and two of them --
Sabre and Amadeus -- have done so by listing a flight under the codes of no more
than two airlines, the operating airline and one of its code-share partners.
They are thereby following the European Union rules, which allow each airline
service to be displayed under no more than two airline codes. We assume that the
other systems will adopt similar limits if the display of code-share services
under multiple airline codes is disadvantageous for travel agencies, who can
choose between systems and should prefer a system that has the most useful
displays. That no system is now owned or controlled by U.S. airlines should make
it more likely that systems will respond to travel agent and consumer
preferences in this area.
Orbitz suggests that the adoption of the European Union rule by Sabre and
Amadeus violates our rule barring systems from discriminating against airlines
that sell services under another airline’s code, 14 CFR 256.4. Orbitz Reply
Comments at 16, n.8. We disagree. The Board adopted that rule because United’s
system, Apollo, planned to stop displaying flights of airlines that operated
entirely under another airline’s code, such as the Allegheny Commuter airlines,
which had no codes of their own and instead used US Airways’ code. Under
Apollo’s plan, the system would list connecting services only under the code of
the airline that operated the flight. 49 FR 9430 (March 13, 1984). In contrast,
the practice followed by Sabre and Amadeus does not prevent an airline’s code
from being used on flights operated by a second airline. Instead, the two
systems limit the number of times the code is displayed. We do not think that
violates the rule, which prohibits a system from denying access to its system to
airlines that share a single code or from discriminating against an airline on
the basis of its use of another airline’s code.
(f) Biasing Software Provided by Airlines
While we did not propose to bar travel agencies from creating biased displays,
we did propose to bar all airlines from providing software to travel agencies
that could be used to create biased displays. This proposal grew out of an
enforcement proceeding prosecuted by our Enforcement Office. That Office had
filed a complaint against American and Sabre based on American’s distribution to
some travel agencies using Sabre, then controlled by American, of a program that
enabled them to bias their displays in favor of American. American Airlines and
Sabre Travel Information Network Enforcement Proceeding, Docket OST-95-430. The
software enabled travel agencies to create several different displays, including
one that would show only American flights.
We thought that an airline’s distribution of software to be used for biasing
displays was essentially the same as a system’s offering of a biased display. We
recognized that travel agencies would decide whether to accept such software,
but we anticipated that a travel agency would be under some pressure to accept
such software from an airline that was the major airline in the agency’s market.
We saw no reason for allowing any airline to distribute such software. 67 FR
69397.
We have decided not to adopt a new rule that would prohibit airlines from
distributing software that could be used to create biased displays, although we
are prohibiting airlines from attempting to induce any system to create biased
displays. Travel agencies have to compete against other travel agencies, and
their need to satisfy their customers should check their willingness to create
biased displays. The airlines’ divestiture of their system ownership interests
should alleviate any problem that might otherwise exist, because the airline
affiliated with the system used by the travel agency would be the airline most
able to cause the travel agency to accept biasing software. American, for
example, distributed its software to travel agencies using Sabre. Furthermore, a
travel agency that is intent on creating a biased display could probably obtain
the necessary software from other sources. Delta Reply Comments at 60. Banning
airlines from providing biasing software therefore seems unlikely to stop such
conduct.
ASTA, moreover, alleges that the proposed rule is unnecessary. “A travel agency
would only want to bias a display when it was working with a corporate client
that had made an independent preferred fare arrangement with the favored
airline. In such cases the agency’s efficient servicing of that client will be
enhanced if the agency has available to it a display that shows the favored
carrier’s flight first.” ASTA Comments at 41.
The lack of a rule may lead to some harm. Some travel agencies, despite their
need to obtain repeat customers, may bias displays in ways that would cause
customers to book flights that do not best meet their needs, and a rule
prohibiting airlines from distributing biasing software would help prevent such
conduct. The competitive pressures on travel agencies nonetheless should make
the adoption of a general prohibition unnecessary. We do not wish to adopt rules
that would prevent all potential problems, because doing so would impose a large
body of regulation on industry participants and stifle innovation. As is true on
other issues, however, we will monitor the conduct of airlines and travel
agencies to see whether the lack of general rules is leading to deceptive or
anti-competitive practices that are not being corrected by market forces.
Amadeus argues that a system should also be able to sell software to travel
agencies that would allow agencies to create biased displays if they wish.
Amadeus Reply Comments at 12. Our proposed rule would have prohibited such
conduct. We have decided not to bar systems from selling such software. A
travel agency always has the option to decline to use such software and a
system, unlike an airline that dominates a region, should have little ability to
compel a travel agency into accepting software that the agency prefers not to
use. In contrast, we are prohibiting systems from biasing their displays,
because then an unbiased display is not available as an option.
5. Contract Clauses Restricting Airline Choices on System Usage
(a) Background and Our Proposals
We have found that the systems continue to have some market power over most
airlines, as explained above, although we expect that power to be diminished by
the on-going developments in airline ticket distribution. Airlines should have
some bargaining power against systems if each airline can choose which services
and fares will be saleable through each system and the level at which it will
participate in each system.
There remains a significant risk that systems may use their market power to
compel conduct that would limit the potential for competitive discipline in the
CRS business. First, until we prohibited them from doing so, three of the four
systems enforced parity clauses against participating airlines. A system’s
parity clause required each participating airline to buy at least as high a
level of service from the system as it did from any other system. To ensure that
each airline can choose its participation level in each system, we adopted a
rule prohibiting systems from enforcing parity clauses against airlines that do
not own or market a competing system, because we found that parity clauses
denied airlines the ability to select their participation level (and therefore
prevented competition that might otherwise exist). Section 255.6(e), adopted at
62 FR 59784 (November 5, 1997). Parity clauses made it unnecessary for systems
to compete for airline participation at higher levels of service (while almost
all airlines must participate in each system, as discussed, many airlines do not
need to participate at the higher levels, which are more expensive). As we
additionally explained, “[P]arity clauses cause airlines either to buy more CRS
services than they wish to buy from some systems or to stop buying services from
other systems that they would like to buy, which creates economic inefficiencies
and injures airline competition.” 62 FR 59784. We proposed to readopt that rule
in this proceeding. 67 FR 69392.
Secondly, we saw a risk that systems could try to take away the airlines’
control over access to their fares, especially webfares, which airlines could
otherwise use as leverage to obtain better terms from the systems. Travel
agencies wish to be able to find and book webfares through their systems,
because doing so is more efficient than using an alternative booking channel. 67
FR 69373, 69381. As discussed above, after we completed our notice of proposed
rulemaking, two of the systems -- Sabre and Galileo -- began offering lower fees
to airlines that agreed to make all their webfares available through the system.
Sabre’s comments on our advance notices of proposed rulemaking, however,
indicated that a system might by contract attempt to compel participating
airlines to make all fares saleable through the system. Sabre stated that its
contracts required participating airlines to make all publicly-available fares
saleable through Sabre, although Sabre had not yet required any airline to
comply with that provision. See 67 FR 69392-69393. Since then, Sabre has been
giving reduced fees to airlines that provide their webfares, although Sabre had
earlier sued American to compel that airline to provide its webfares, albeit
under a contractual provision applicable to airlines that owned or marketed
another system. American Comments at 24-26; Orbitz Comments at 36.
We also proposed to prohibit each system from enforcing clauses that bar
airlines from discriminating against travel agencies because they used that
system. Sabre had such a clause in its participating airline agreements. We
thought that clauses barring discrimination could block airline efforts to
persuade travel agencies to use systems that were less expensive for a
participating airline. 67 FR 69393.
We believed that these proposals would be consistent with our rule prohibiting
parity clauses, section 255.6(e). We did not propose to ban such clauses if they
resulted from negotiations between the system and participating airlines. 67 FR
69392-69393.
The Justice Department states that most-favored-nation clauses like those that
we proposed to prohibit can be anti-competitive, that the Justice Department
supported our proposal to prohibit parity clauses in 1996, and that the Justice
Department has filed antitrust enforcement actions against the use of similar
clauses in other industries. Justice Department Reply Comments at 25. The
clauses “may reinforce CRS market power over airlines, particularly if they
discourage the development of alternative distribution channels.” Justice
Department Reply Comments at 26. Such clauses can be beneficial, however, and
any broad prohibition of most-favored-nation clauses by us would be harmful if
it prevented airlines and systems “from freely negotiating mutually acceptable
contracts,” especially when systems are willing to offer discounted fees to
airlines willing to accept such a clause. Justice Department Reply Comments at
25-26. The Justice Department concludes that we could reasonably decide to
prohibit parity clauses and clauses requiring an airline to make all
publicly-available fares saleable through a system but that the opposite
decision could also be reasonable (the Justice Department seemingly assumed,
however, that our proposed rules would prohibit airlines from agreeing to accept
parity clauses and clauses requiring them to make all fares available, which was
not our intent). The Justice Department recommends against adopting the proposal
to prohibit systems from barring airlines from discriminating against their
subscribers. Justice Department Reply Comments at 27.
Orbitz and several airlines argue that we should prohibit most-favored-nation
clauses like parity clauses and should not allow systems to enforce them against
airlines that own or market a competing system. Orbitz Comments at 35-39; Alaska
Comments at 8; American Comments at 24-29; Continental Comments at 14-17; Delta
Comments at 33-39. Galileo supports the readoption of the existing rule barring
parity clauses with the exception allowing a system to enforce such a clause
against an airline affiliated with a competing system.
United contends that parity clauses clearly violate the antitrust laws but that
enforcement action, not the adoption of a general rule, is the proper way to
prevent such anti-competitive conduct. United Reply Comments at 46-54, 75-77.
Several commenters argue that systems should be able to negotiate for parity
clauses or most-favored-nation clauses from participating airlines. Amadeus
Comments at 46-48; Galileo Comments at 24; Sabre Comments at 133-135; Amadeus
Reply Comments at 16; Mercatus Comments at 8.
(b) Summary of Final Rule
We have determined to readopt for a transitional period of six months the rule
prohibiting parity clauses as a condition to any participation in that system,
but without the existing exception that allows a system to enforce such a clause
against an airline that owns or markets another system. We are also adopting for
six months a rule barring systems from requiring airlines to provide all
publicly-available fares to a system as a condition to any participation in that
system. We have decided not to adopt the rule barring a system from prohibiting
participating airlines from discriminating against its subscribers.
These rules will sunset on July 31, 2004. The six-month period, we believe, will
furnish the parties with notice of the forthcoming changes and an opportunity to
prepare for the absence of these rules. The six-month period will, we believe,
allow affected parties to arrange for an orderly transition to complete
deregulation of computer reservations systems. We, of course, retain the
authority to reexamine these issues at any time if warranted.
We agree with the commenters who contend that a system should be able to
negotiate for most-favored-nation clauses from participating airlines. Amadeus
thus states, “CRSs and airlines should be free to bargain for [parity clauses]
as part of their overall negotiation of fees and terms of participation,” and
“CRSs should have the right to bargain with airlines concerning whether an
airline must provide to the system fares provided to any other system, or to any
online travel site, or to any other distribution channel.” Amadeus Comments at
47. Our rules will not bar systems and airlines from doing so, and will not
affect the ability of Sabre and Galileo to continue their existing programs to
trade lower fees for access to webfares. Orbitz, of course, has a similar
program, which enables airlines to obtain a partial rebate of their booking fees
if they agree to make all of their publicly-available fares, including webfares,
saleable through Orbitz.
We disagree with United’s contention that we should rely on enforcement action
rather than rules to prevent systems from demanding most-favored-nation clauses
that are anti-competitive. United Reply Comments at 23. United itself agrees
that parity clauses are anti-competitive. United Reply Coments at 76. We would
be using our authority more efficiently if we establish rules barring specified
anti-competitive clauses rather than seek to block the imposition of such
clauses through enforcement proceedings.
Nonetheless, while we are not barring systems from creating and enforcing
bargained-for parity clauses and clauses requiring an airline to provide all
publicly-available fares to the system that are saleable through other
distribution channels, most-favored-nation clauses can be anti-competitive in
some situations, as pointed out by the Justice Department. America West
complains that the Galileo and Sabre Momentum and DCA programs will insulate the
two systems from competition from alternative distribution channels: “These
programs essentially require America West to relinquish control over how and to
whom it will distribute its inventory for a minimal discount off of Galileo’s
and Sabre’s booking fees” and would require America West to “forego any
opportunity to encourage the development of alternative distribution channels by
providing special fares exclusively through such alternate channels.” America
West Reply to Supp. Reply at 3. The systems’ market power possibly may enable
the CRSs to obtain access to webfares without significant reductions in booking
fees. At this time, however, we believe, as does the Justice Department, that
systems should be able to negotiate for most-favored-nation clauses, which do
offer participating airlines some reductions in booking fees and enable travel
agents to obtain more comprehensive information on airline services from their
systems.
(c) Airline Parity Clauses
We have determined to maintain the prohibition against the enforcement of parity
clauses that are demanded as a condition of participation for an additional six
months, and to eliminate the exception allowing systems to use such a clause
against an airline that owns or markets another system. Each airline should be
able to choose its level of participation in each system. Prohibiting parity
clauses for this additional period should give airlines additional bargaining
leverage against individual systems, and furnish time to make adjustments in
anticipation of the termination of the prohibition.
The existing rule, as noted, has an exception allowing a system to enforce a
parity clause against an airline that owns or markets a competing system. We
created that exception because an airline affiliated with one CRS as an owner or
marketer might participate in competing systems at a level lower than its level
of participation in its own system in order to induce travel agencies in regions
where it is the dominant airline to choose its affiliated system rather than a
competing system. We therefore allowed a system to enforce parity clauses
against airlines that owned or marketed a competing system. A system could not
enforce a parity clause, however, until it had given us and the airline 14 days
advance notice of its intent to do so. 62 FR 59797-59799.
Keeping such an exception would be inconsistent with our decision that the
mandatory participation should not be readopted. An airline that owns or markets
a system should have the ability to determine at what level it will participate
in any system. In theory, such an airline may choose a lower participation level
in some systems in order to give an advantage to the system that it owns or
markets, but substantial changes in participation levels do not seem likely. The
major network airlines need to be in every significant distribution channel, and
most of them have chosen to provide their webfares to Sabre and Galileo rather
than reserve them for Orbitz, even though they own Orbitz.
We note that Sabre argues that a rule barring parity clauses (or clauses
requiring an airline to make all publicly-available fares saleable through a
system), if such clauses are imposed as a condition to any participation in the
system, would not violate antitrust principles. Sabre Reply Comments at 58-61.
We disagree for the reasons set forth when we adopted the existing rule
prohibiting the enforcement of parity clauses. Sabre, however, does not seem to
oppose the actual rules we proposed. Sabre states that it seeks “the right to
bargain for nondiscrimination.” Sabre Reply Comments at 57-58. We wish to give
the systems that opportunity, for the record suggests that the result should be
pro-competitive. The existing Sabre and Galileo programs whereby systems agree
to charge lower fees in exchange for guaranteed access to all publicly-available
fares should benefit all parties to the arrangements and consumers as well.
(d) Clauses Mandating Access to All Fares
We also proposed a rule barring systems from requiring an airline, as a
condition to participation, to provide the system with fares that the airline
had chosen not to sell through any system. Any such condition could unreasonably
restrict a participating airline’s ability to bargain with the system for better
pricing and terms. Airlines should be free to choose to offer their webfares, or
other types of fares, only through their own websites, without being obligated
by system contracts to make them available through other distribution channels.
Airlines can use their control over webfares to win better terms for CRS
participation. As Amadeus states, “Airlines have attained, and are increasingly
using, the leverage of access to webfares to wrest better deals from the CRSs.”
Amadeus Comments at 10.
Contract clauses that required access to all publicly-available fares as a
condition to any participation in a system could frustrate our efforts to allow
airlines to create ways of bypassing the systems when doing so is more
cost-effective and likely to establish competitive discipline for the systems’
prices and terms for participation. As American contends, if we allow systems to
demand that an airline provide all of its publicly-available fares as a
condition to any participation, “Airlines would lose their most effective tool
for creating and encouraging the growth of lower cost distribution channels.”
American Comments at 27.
We originally proposed to bar contractual requirements that an airline provide
fares that it had chosen not to distribute through travel agencies or any
system. 67 FR 69393. On further consideration, we have determined that the
proposal was too narrow. As shown, several airlines have agreed with Galileo and
Sabre that they will provide all webfares to those systems in exchange for
reduced booking fees. The original proposal would allow the other two systems to
require those airlines to provide the same fares to them, even if they have
offered nothing in exchange for the ability to sell the fares. Our rules should
not be used to aid Amadeus and Worldspan in insisting that they be given access
to the same fares when they have not offered better terms to participating
airlines in exchange for the fares. Cf. Orbitz Comments at 39. We are therefore
barring systems from requiring an airline, as a condition to participation, to
provide access to fares that the airline does not wish to sell through that
system.
We are adopting this rule for six months even though our proposal stemmed from a
Sabre contract clause that that system is not now enforcing. We think there is
some likelihood that another system would seek to take such action. While this
rulemaking was pending, Worldspan threatened to expel US Airways unless that
airline made all of its webfares saleable through Worldspan. US Airways refused
to agree, and Worldspan did not follow through on its threat. Sabre Comments at
75; Sabre Reply Comments, Salop & Woodbury Declaration at 17. While Worldspan
did not carry out its threat, its decision may have been influenced by the
pendency of this proceeding. Cf. 57 FR 43817. Because we believe that a system’s
demand that an airline provide all publicly-available fares as a condition to
any participation would be anti-competitive, adopting our proposed rule is the
best course of action.
This rule, like the rule barring parity clauses, will not have an exception
allowing systems to demand access to all publicly-available fares from airlines
that own or market a competing system. All airlines should be able to withhold
access to attractive fares from a system unless the system offers acceptable
terms for the right to sell the fares.
We recognize that travel agents could operate more efficiently and provide their
customers more complete advice if every airline’s publicly-available fares were
saleable through each of the systems. Nevertheless, allowing systems to compel
airlines to provide all such fares without providing any benefits in return
would maintain the systems’ market power and deny airlines an opportunity to use
their control of webfares as a way to obtain lower fees. In addition, as
explained below in our discussion of proposals that we require airlines to make
all fares available for sale through all distribution channels, such a
requirement would be contrary to long-established operating practices. Airlines
have long chosen to offer some special fares only through selected distribution
channels.
Two airlines -- Delta and Northwest -- urge us to adopt a broader rule that
would prohibit systems from also demanding access to information and benefits
such as frequent flyer awards if an airline has chosen not to provide those to
the system. Delta Reply Comments at 34-35; Northwest Reply Comments at 11-12. We
have no evidence that systems have attempted to compel airlines to provide such
information and benefits. A broader rule, therefore, seems unnecessary at this
time.
America West seeks a rule prohibiting each system from providing access to any
airline’s webfares for their subscribers, if the airline has not chosen to
distribute the fares through that system. America West Comments at 31, 34-35.
This proposals stems from the systems’ use of firms like FareChase to search
airline websites for better fares not available through the system and to tell
the travel agent using the system when such fares are being offered. The travel
agent who wishes to book such a fare, however, cannot do so through the system
and must instead make the booking through the airline’s website (or another site
that has obtained access to the fares from the airline). Sabre Reply Comments
at 48.
We are unwilling at this point to adopt such a rule. When FareChase searches
airline websites for fares, it does not cause airlines to pay additional booking
fees to a system. Sabre Reply Comments at 48. It may, however, increase the
airline’s costs for operating its website and internal reservations system. The
record does not provide a basis for a careful analysis of the possible
competitive effects of the systems’ use of such services. We would need more
information and comments from more interested persons before adopting a rule
like that requested by America West. Barring systems from obtaining fare
information from other sources for their subscribers could also present
difficult questions of intellectual property law.
(e) Non-Discrimination Clauses
We are not adopting the proposal that would bar systems from enforcing any
prohibition against an airline’s discrimination against its subscribers. The
proposal would effectively allow airlines to treat a system’s subscribers
differently from subscribers to other systems if the difference in treatment was
based on the system’s providing lower quality service, or charging higher fees,
than other systems.
Several commenters complain that the language was ambiguous and would lead to
problems of interpretation. See, e.g., Amadeus Comments at 40-41; Amadeus Reply
Comments at 53. Delta argues that the rule would be unnecessary if airlines
could deny a disfavored system access to webfares. Delta Comments at 41-42. The
Justice Department recommends against the adoption of the proposal, in part on
the ground that the contract clause that led to the proposal had not been used.
Justice Department Reply Comments at 27. Continental, on the other hand,
supports the proposal. Continental Comments at 14-16. ASTA objects to our
proposal on the ground that travel agencies should not be used as weapons in
disputes between an airline and a system. ASTA Comments at 42-43.
We continue to believe that an airline should be able to offer better service to
the subscribers of one or a few systems without having to offer the same service
to the subscribers of every system. An airline’s ability to take such action
could be used to encourage travel agencies to use the system that offers the
airline better terms and lower prices for participation. However, commenters did
not express strong support for the rule proposal, and the proposal’s
qualification that the difference in treatment should be based on lower fees and
poorer service could create disputes about whether those conditions were met.
Moreover, we think the rules barring systems from demanding access to all fares
as a condition to participation will be a more effective and practicable means
of providing airlines some additional bargaining power. In addition, no system
thus far has enforced such a clause. If a system does so in circumstances
suggesting that the system seeks to maintain its market power and deny an
airline some bargaining leverage, we will consider taking enforcement action
under section 411.
6. Equal Functionality
In our last reexamination of the rules, a number of commenters had complained
that the systems engaged in architectural bias in an effort to obtain more
bookings for their owner airlines. Architectural bias means the creation of
system design features and functions in a way that enables travel agents to
obtain information and make bookings on the owner airline more reliably and
quickly than on other airlines. These features caused travel agents to book the
favored airline in cases where another airline provided service that satisfied
the customer’s needs better. 57 FR 43810-43811. As a result, we adopted several
rules designed to equalize the functionality for owner and non-owner airlines.
We required systems to give all participating airlines equal access to
enhancements and to provide equal treatment on the loading of information, and
we prohibited systems from using default features that favored the owner
airline. 57 FR 43814-43816. Because these rules had been effective, and because
no one complained that they were unduly burdensome or unnecessary, we had
proposed to readopt the equal functionality requirements without change. 67 FR
69398. On the other hand, we also proposed to eliminate the rule that
essentially requires equal booking fees.
The Justice Department contends that we should eliminate the equal functionality
rules, except for a rule requiring equal treatment on the loading of
information. The Justice Department reasons that airlines should be able to
bargain for special functionality as well as lower fees. Justice Department
Reply Comments at 31-32. Amadeus alleges that allowing systems to sell special
functionality to individual airlines will encourage innovation and efficiencies.
Amadeus Reply Comments at 13-14.
We agree with the position taken by the Justice Department. Maintaining the
rules requiring equal functionality would be inconsistent with our decision to
end the rule barring discriminatory booking fees. Airlines and systems should be
able to bargain over functionality along with fees. Eliminating the rule,
moreover, could encourage a system to share in the cost and risk of developing
new functions, as the Justice Department points out, Justice Department Reply
Comments at 32:
Such freedom might also allow CRSs greater leeway to share with airlines the
development cost and risk of new functions. For example, an airline might be
made the “launch partner” for a new CRS function and be granted a certain period
of exclusivity in exchange for sharing in the development and testing cost for
that function.
See also Amadeus Reply Comments at 13.
At the same time, the systems’ interest in increasing revenues should encourage
them to make new functionality available to all airlines, because doing so would
increase their fee revenue. As Delta contends, systems have an interest in
selling as much functionality as airlines will buy. Delta Comments at 19.
We will, however, maintain a requirement that each system provide participating
airlines equal treatment in the care and timeliness with which information is
loaded in the system, as suggested by the Justice Department. We agree with the
Justice Department’s position that “it is difficult to imagine a legitimate
business reason for differential treatment” in the loading of information.
Justice Department Reply Comments at 32. This requirement is essentially
equivalent to the requirement that displays be unbiased. Any significant
disparity in the loading of information would result in displays that did not
equally list each airline’s most up-to-date services and fares. See Justice
Department Reply Comments at 8, n.9. We are not persuaded by Amadeus’ argument
that systems should be able to bargain with airlines over the timing of
information loading. Amadeus Reply Comments at 14. A system’s willingness to
give some airlines preferential treatment on the loading of information would be
akin to display bias. For example, if a disfavored airline instituted new
discount fares, there could be a significant delay before the fares became
available in a system, which would deny important information to travel agents
and their customers and harm the airline’s ability to compete with other
airlines.
Under the current rule, systems must load information from participating
airlines with the same care and timeliness as they do for an airline with a
system ownership interest. However, because only Amadeus currently has airline
owners, the rule does not cover the three systems with the largest market shares
in the United States. To make the rule effective, we will revise it to require
that systems load information for all airlines with the same care and
timeliness. This change should not impose any significant burden on the systems.
7. The Mandatory Participation Rule
Under our mandatory participation rule, section 255.7, an airline that has an
ownership interest of five percent or more in a system (a “system owner”) must
participate in competing systems at the same level at which it participates in
its own system, if the other systems’ terms for participation at that level are
commercially reasonable, and must provide all systems with the fares that are
commonly available to subscribers in its own system. We imposed this requirement
because some U.S. airlines with an ownership interest in one system limited
their participation in competing systems in order to encourage travel agencies
in their hub cities to use their own system. Some airlines also withheld
complete information on their fares and services from competing systems. U.S.
systems have encountered similar conduct internationally by foreign travel
suppliers that own or market a competing system. 56 FR 12608.
As a result of the U.S. airlines’ divestitures of their system ownership
interests, the only airlines currently subject to the rule are the three foreign
airlines that own Amadeus: Lufthansa, Air France, and Iberia.
The commenters on our advance notices of proposed rulemaking disagreed over
whether the rule should be kept, strengthened, or eliminated. Several major
airlines and Orbitz argued that the rule was counterproductive, because it
allegedly enabled systems to dictate terms for airline participation. Some other
airlines and systems asserted that the rule should be maintained and extended to
airlines that market a system, not just airlines with a significant ownership
interest. Several commenters, including some travel agencies, argued that the
rule should prohibit each system owner from denying access to its corporate
discount fares to travel agencies that do not use its system. They argued that a
system’s airline owner could effectively compel travel agencies to use its
system by denying them access to its corporate discount fares if they used a
different system, even though the airline fully complied with the mandatory
participation rule. See, e.g., Amadeus Comments at 88-89.
We proposed to end the mandatory participation requirement because some airlines
might then be able to bargain for better terms for participation in return for
participating at higher levels. However, we also invited comment on whether the
rule should be kept and, if so, whether it should cover airlines that market a
system and require owner airlines to make their corporate discount fares
saleable through competing systems. 67 FR 69395.
Orbitz, Alaska, American, Delta, and Northwest support the proposed termination
of the mandatory participation rule, but Amadeus, Galileo, Southwest, US
Airways, and ASTA contend that we should readopt the rule.
We have determined to end the mandatory participation rule as proposed. The rule
was adopted, as noted above, when airlines owned each of the systems. The rule
was intended to keep airlines that owned a system from using their dominance of
regional airline markets to distort competition in the CRS business. Because no
system is now owned by U.S. airlines, the rule currently has no practical effect
on competition. The rule would have an impact if Orbitz goes ahead with its
plans to enter the CRS business, since Orbitz’ five airline owners would then
become subject to the rule, but Orbitz has said that it will not begin operating
as a system if doing so would trigger an obligation to comply with the mandatory
participation rule. Transcript at 78-79.
More importantly, the rule limits the ability of owner airlines to bargain for
better terms with the systems. If such an airline could credibly threaten to
reduce its participation level in a system, it would have some leverage for
obtaining lower fees or better service. The rule eliminates that option. As the
Justice Department states, if the rule is eliminated, “the airline would
therefore be in a better position to negotiate lower booking fees or to drive
bookings toward lower-cost outlets.” Justice Department Reply Comments at 23.
We do not expect the rule’s termination to cause significant harm to airline
competition or consumers. As noted, the rule currently covers only the three
European airlines that own Amadeus. If airlines with CRS ownership interests
take advantage of the rule’s termination to lower their participation level in
one or more systems, the travel agents using those systems may be unable to
perform the full range of booking functions for those airlines. In the unlikely
event that such an airline withdrew entirely from a system, the system’s
subscribers would then be unable to use the system to obtain complete schedule,
fare, and availability information for that airline and make a booking. The
travel agency’s operations would be less efficient. However, airlines generally
have no obligation to participate in every distribution channel, and Southwest
and JetBlue, for example, only participate in Sabre.
We think it unlikely that airlines will make radical changes in their
participation levels as a result of the termination of the mandatory
participation rule, despite efforts by owner airlines in the past to put
competing systems at a disadvantage by lowering their participation level. The
revenue needs of the major network airlines, as discussed above, require them to
participate in every distribution channel used by a substantial number of
potential customers. Transcript at 140. Galileo thus states that the behavior of
airlines that are not subject to the rule is generally the same as the behavior
of those that are. Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle
Declaration at 64. The marketing needs of the larger network airlines, moreover,
require them to participate at a high level in every system. Amadeus alleges
that every major network airline currently participates in each system at the
highest level. Amadeus Reply Comments at 24. Several of Orbitz’ owner airlines
have agreed to make their webfares saleable through Sabre and Galileo, even
though doing so reduced one of Orbitz’ principal competitive advantages, the
superior access that it has had to those fares.
Furthermore, our fundamental goal is the promotion of competition between
airlines, which will help consumers, not the promotion of competition between
CRSs for travel agency subscribers. 67 FR 69394-69395. Due to the ownership
changes and technological changes in the CRS business, competition between the
systems is no longer a direct form of airline competition. 67 FR 69406. The
mandatory participation rule, designed to promote competition in the CRS
business, has thus lost its importance for strengthening airline competition.
In that regard, the record does not show that ending the mandatory participation
rule will reduce airline competition. Galileo and US Airways predict that an
airline affiliated with one system that dominates a regional airline market
(Delta in Atlanta, for example) will lower its participation level in other
systems so that its affiliated system will dominate the CRS business in that
area. Other airlines serving that area will then be subject to the additional
market power thereby obtained by that system. Galileo Comments at 16-18; US
Airways Comments at 18-19. This theory assumes that Delta could actually lower
its participation level substantially in other systems. Delta contends that it
could not take such action. Delta Reply Comments at 39. Delta is probably
correct. The competing systems will be the major systems in other areas served
by Delta flights. Because lowering its participation level in those systems
would cost the airline bookings in those areas, the airline is unlikely to
drastically reduce its participation levels in competing systems.
We recognize that maintaining the mandatory participation rule could make fare
information more widely available, if some U.S. airlines again became system
owners. See, e.g., Large Agency Coalition Comments at 38-39; ASTA Comments at
45; AAA Comments at 2. Imposing such a requirement on airlines, however, would
unreasonably restrict their ability to bargain for better terms for
participation.
Finally, making the mandatory participation rule effective would require
expanding it to require each owner airline to provide every system with access
to its corporate discount fares. Galileo Comments at 21-22. The current rules
arguably do not require airlines to make those fares available to rival systems,
yet experience has shown that an airline can effectively compel a travel agency
operating in geographic areas dominated by that airline to choose the airline’s
affiliated system by allowing the agency to sell the airline’s corporate
discount fares only if it uses that system. See, e.g., Amadeus Comments at
88-90. Similarly, if the rule were readopted, it should arguably cover airlines
that market a system, because they may have incentives to limit participation in
competing systems. 67 FR 69395; Amadeus Comments at 50-52; Galileo Comments at
19-20 and Guerin-Calvert, Jernigan, & Hurdle Declaration at 69-70.
We are unwilling to engage in such additional regulation. The mandatory
participation rule, if maintained, would unreasonably limit airline
opportunities to bargain for better terms for system participation, and the
rule, as shown, no longer appears to be necessary to promote airline
competition.
8. Booking Fees
(a) Background
The rules have always prohibited each system from charging unreasonably
discriminatory booking fees, section 255.6(a). The Board adopted that
prohibition because some systems charged discriminatorily high fees to airlines
competing with the system’s owner. On the other hand, the Board did not regulate
the level of booking fees. The Board anticipated that some major airlines would
have bargaining leverage which could be used to keep systems from charging
unreasonably high booking fees. 49 FR 32543, 32551-32554.
When we last reexamined the rules, we maintained the prohibition against
discriminatory booking fees and declined to adopt any rule that would directly
limit fee levels, for example, by requiring fees to be reasonable or cost-based.
57 FR 43816-43818. At that time, of course, one or more airlines controlled each
system and would have an incentive to charge competing airlines unreasonably
high fees.
In their comments on the advance notices of proposed rulemaking, a number of
airlines complained that booking fees are too high and that the systems also
charge fees for transactions that are allegedly illegitimate and of no value to
airlines. See 67 FR 69398.
We declined to make proposals that would further regulate booking fees. We again
concluded that regulating fee levels would be impracticable. We decided against
regulating the systems’ arrangement of participation levels, even though some
airlines had complained that the systems unreasonably declined to provide some
service features (E-ticketing, for example) unless the airline agreed to buy
other services which unduly raised its fees. 67 FR 69399-69400. We tentatively
agreed with the complaining airlines that the systems’ past practice of charging
booking fees for one category of transactions, passive bookings, appeared to be
unreasonable, but the record indicated that the systems had reformed their
practices in a way that made the reasonableness of those charges moot. 67 FR
69400-69401.
Rather than continue to regulate fees, we proposed to eliminate the rule
prohibiting unjustly discriminatory fees (and the mandatory participation rule)
on the basis that doing so could give some airlines bargaining leverage against
the systems. As we noted, in most unregulated industries a firm is free to
demand better terms from its suppliers, even if its competitors cannot obtain
the same terms. The rule barring discriminatory fees may limit the ability of
individual airlines to negotiate for better terms and thus limit the operation
of market forces in the CRS business. 67 FR 69399.
We also invited commenters to address a zero fee rule, which would bar systems
from charging airlines fees for participation. As shown, the systems compete for
travel agency subscribers but not airline participants. Because travel agencies
can choose between systems, the systems compete on price. A zero fee rule thus
would cause the entire price for CRS services to be set by competitive market
forces, although a major beneficiary of the CRS services would not be charged.
We pointed out that such a rule could be disruptive, because the systems were
obtaining the great majority of their revenues from airlines, not from travel
agencies, and that it would enable airlines to obtain CRS services without
payment. 67 FR 69399.
Amadeus, Galileo, America West, Midwest, and US Airways oppose the proposal to
eliminate the bar against discriminatory booking fees. Orbitz and its owner
airlines support the proposal, as do several foreign airlines. Ass’n of Asia
Pacific Airlines Comments at 6; British Airways Comments at 8; Lufthansa
Comments at 3; Qantas Comments at 1. The Justice Department supports the
proposed elimination of the rule. The Justice Department additionally suggests
that the zero fee could be beneficial but is not recommending the adoption of
any booking fee rule now. Justice Department Reply Comments at 3, 32-34.
American, America West, and US Airways urge us to adopt a zero fee rule.
(b) Final Decision
We are eliminating the prohibition against discriminatory booking fees, as we
proposed, and not adopting a zero fee rule.
Because no system is now controlled by U.S. airlines, a system’s decision to
charge one airline lower fees than another airline cannot fairly be
characterized as discrimination. The differences between the fees charged one
airline and those charged other airlines should not be viewed as discriminatory.
A more accurate term would be differential pricing, for firms in other
industries commonly charge different customers different prices. Any difference
in prices will reflect market forces, not a seller’s decision to arbitrarily
discriminate against some buyers in favor of others.
Eliminating the rule barring differential booking fees should enable some
airlines to bargain for lower fees. Though most airlines must participate in
each system in order to make their services readily saleable by the travel
agents using that system, each system has an incentive to obtain the
participation of all important airlines, because travel agencies will be less
inclined to use that system if those airlines participate only in the system’s
competitors. Furthermore, an airline’s level of participation is important to
travel agencies, because a travel agency can make bookings more reliably and
quickly on airlines that participate at a higher level, and can use other
service features that are important to agency customers. 62 FR 59793. We
recognize, in view of our findings that each system has market power, that even
the largest airlines may have little leverage to obtain lower fees despite the
elimination of the rule. Nonetheless, eliminating the rule may provide some
benefits.
On the other hand, the systems’ ability to charge different airlines different
fees should not significantly harm competition or consumers. We understand that
airlines will not have an equal ability to bargain for lower fees. The Justice
Department thus states, “[R]emoving the prohibition against discriminatory
booking fees would inevitably result in carriers with less bargaining power
having higher CRS costs than others.” Justice Department Reply Comments at 33.
As we stated in our notice, “In most unregulated industries a firm is free to
demand better terms from its suppliers, even if its competitors cannot
successfully obtain the same terms. “ 67 FR 69399. Differential pricing is
widespread in other industries, including industries supplying other products
and services to the airline industry, such as aircraft manufacturers. United
Reply Comments at 40-41.
We disagree, moreover, with the commenters who argue that only the large
airlines will benefit from the elimination of the prohibition against
differential fees. See, e.g., America West Comments at 24. An airline’s ability
to obtain lower fees will depend in part on its own need to participate in a
system. An airline like Southwest that does not rely heavily on the travel
agency distribution channel -- and thus on the systems used by the travel
agencies -- should have substantial bargaining leverage. Smaller airlines that
are large players in a region (Alaska in the Far West, for example) should also
have some leverage, because a system will be less able to win subscribers in
that region if such an airline does not participate. American Comments at 18-19
and Dorman Declaration at 9-10; Sabre Reply Comments at 76. Because the systems
charge fees based on the volume of transactions, not on ticket prices, they
should value participation by low-fare airlines, whose low fares generate more
passengers and thus a higher volume of bookings. Sabre Comments, McAfee and
Hendricks Declaration at 58. Even if only the larger airlines benefit from this
rule change, as assumed by many commenters, the result would be consistent with
practices in other industries.
We doubt that the resulting differences in fees paid by different airlines will
be substantial. Galileo states that the fees charged other travel suppliers do
not vary by much. Transcript at 60. Although airlines are more dependent on the
systems than are other travel suppliers, and although travel agents rely on the
systems more for airline bookings than they do for other travel bookings, any
differences in fee levels between airlines seem unlikely to be very large. We do
not expect the systems’ fee practices to duplicate those followed before the
Board adopted the original rules. At that time there were substantial
differences between the fees charged favored airlines and those charged
disfavored airlines. Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle
Declaration at 60. Each system then was owned by one U.S. airline and had
incentives to charge its owner’s competitors unusually high fees in order to
prejudice their ability to compete. Systems without U.S. airline owners should
not have similar incentives. Sabre Comments, Salop & Woodbury Declaration at
26-30 and McAfee & Hendricks Declaration at 53-59.
We have determined not to readopt the rule barring differential booking fees on
economic policy grounds. However, our authority to prohibit unfair methods of
competition would not authorize us to readopt the rule, given the factual
information and policy arguments in the record. Firms in other industries are
not required to charge all customers the same price, and, as the Justice
Department points out, a firm’s offering of preferential terms to selected
customers is not necessarily anti-competitive. Justice Department Reply Comments
at 33, 34, n.39. The systems neither are owned by U.S. airlines nor compete in
the airline business. The record does not show a likelihood that systems would
charge some airlines discriminatorily high fees in order to prejudice airline
competition. These circumstances would not support a finding that a system’s
willingness to give some airlines, but not others, lower fees is an unfair
method of competition in violation of section 411.
While a number of foreign airlines supported the proposed elimination of the
rule barring differential booking fees, a few opposed it, in part on the ground
that the rule is required by the United States’ commitment in bilateral air
services agreements to prevent systems from treating foreign airlines
discriminatorily. Air France Comments at 6. This issue is discussed below in the
section on international issues.
Because we are ending the rule prohibiting differential pricing, we are not
readopting the requirement that a system treat all non-paying airlines the same,
section 255.11(a). When the rules do not require equal treatment for airlines
paying booking fees, there is no reason to require equal treatment for airlines
that do not pay booking fees.
We will not adopt a zero fee rule. As discussed in our notice of proposed
rulemaking, adopting a zero fee rule would present serious practical
difficulties. The only commenters now supporting a zero fee rule -- American,
America West, and US Airways -- have not convinced us that these difficulties
are negligible. A zero fee rule would enable airlines to get system services for
free, which would encourage all airlines to choose the highest level of
participation. That would discourage systems from improving the services offered
participating airlines. Sabre Reply Comments, Salop & Woodbury Declaration at
28; Worldspan Reply Comments at 22-23. A zero fee rule would also worsen the
travel agency industry’s financial position, because the systems would be forced
to obtain all of their revenues from travel agencies. ASTA Reply Comments at
15-16. American and America West suggest that the impact on travel agencies can
be adequately mitigated by phasing in the zero fee rule. America West Comments
at 21; American Comments at 23-24. We disagree. A zero fee rule, even if phased
in, would still shift a substantial cost burden unto travel agencies.
In addition, American, America West, and US Airways essentially argue that a
zero fee rule would create a more rational result in terms of economic
efficiency: the systems’ fees would be disciplined by market forces if the
systems could impose fees only on the users who can choose between systems.
America West Comments at 16-21; American Comments at 20-24; US Airways Reply
Comments at 7-8. Even if this economic efficiency argument is valid, we have no
authority under section 411 to regulate business practices to create a more
competitive or efficient industry, if the practices at issue do not violate the
antitrust laws or antitrust principles. Cf. E.I. Du Pont de Nemours & Co. v.
FTC, 729 F.2d 128 (2d Cir. 1984). That statute authorizes us only to prohibit
practices that violate the antitrust laws or antitrust principles, and the
systems’ exercise of their ability to charge monopoly-level prices to one set of
users -- airlines -- does not violate antitrust principles or the antitrust
laws.
A few commenters ask us to take action on one other issue, the systems’ charging
of booking fees for passive bookings. See, e.g., America West Comments at 9-10.
Our notice tentatively concluded that the systems’ past practice of charging
participating airlines for passive bookings appeared to be unreasonable, because
passive bookings did not normally benefit airlines and because the incentive
payment programs included in the systems’ subscriber contracts seemed to
encourage travel agents to make unnecessary passive bookings in order to meet
the programs’ minimum booking quotas. We decided not to propose any rules on
this issue, because the record indicated that the systems had stopped charging
booking fees for passive transactions. 67 FR 69400-69401. We additionally noted
that a rule barring systems from charging fees for passive bookings would likely
cause the systems to increase other fees to offset the revenue loss. 67 FR
69401.
The comments suggest that the systems have either stopped charging fees for
passive bookings or taken other steps that have substantially cut the number of
passive bookings. Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle
Declaration at 77-78; Sabre Comments at 111, 149; ASTA Comments at 33. Sabre
represents that only seven percent of its total bookings consist of passive
bookings. Sabre Comments at 149. Although America West contends that the rules
should bar the imposition of fees for passive bookings, America West also states
that passive bookings constituted 1.4 percent of its booking fee liability in
2002. America West Comments at 10. The airlines supporting restrictions on fees
for passive bookings have not shown that the fees charged for passive bookings
are so serious a problem that a rule is necessary. ASTA alleges that airlines
take disciplinary action against travel agents who make abusive bookings through
the passive booking function or otherwise. ASTA Comments at 33. Furthermore, as
we noted in the notice of proposed rulemaking, limiting the systems’ fees for
passive bookings is unlikely to reduce a participating airline’s total CRS
costs. America West has conceded as much. America West Comments at 10.
9. Booking Fee Bills
Our rules require the systems to provide booking fee bills in sufficient detail
so that participating airlines can audit the accuracy of the systems’ charges.
We adopted this rule largely to keep systems from evading the prohibition
against discriminatory booking fees by imposing false charges on disfavored
airlines. We stated, “The rule requiring [systems] to provide enough information
to allow the auditing of bills for fees is accordingly essential to maintain the
rule banning discriminatory booking fees.” 57 FR 43819.
We initially proposed to readopt this rule. 67 FR 69401. However, our decision
to eliminate the predicate for the rule -- the prohibition against
discriminatory booking fees -- removes the rationale for continuing to prescribe
requirements for booking fee bills.
We assume that the systems may stop providing airlines with information that
would enable them to audit the accuracy of their booking fee bills. However, as
discussed above in connection with other rule proposals, section 411 does not
allow us to regulate system practices in order to improve efficiency or prevent
unattractive behavior. We cannot readopt this rule under section 411 unless we
find that it is necessary to prevent unfair methods of competition. A firm’s
refusal to provide adequate billing data would not normally be an unfair method
of competition. We adopted the billing data requirement when airlines controlled
the systems and would engage in practices that would prejudice competing
airlines. Because the systems no longer are owned by U.S. airlines, we see no
basis at this time for a finding that a system’s refusal to provide enough
information backing up its bills would be an unfair method of competition.
10. Other Participating Carrier Contract Rules
The current rules have two other provisions governing contracts between systems
and participating airlines that we are not readopting. Section 255.6(b)
prohibits systems from conditioning participation on the purchase or sale of
other goods and services, a provision adopted by the Board due to efforts by
some systems to impose additional costs on airlines competing with a system’s
owner airline. 49 FR 32554-32555. Section 255.6(c) states that a system may
condition participation in its system in the United States on the airline’s
agreement to participate in that system or affiliated systems in other
countries, if those systems do not use any factor related to carrier identity in
their displays and if the fees will be non-discriminatory.
In keeping with our overall decision against readopting most of the existing
rules, we will not readopt these rules. The rule barring the tying of system
participation with the purchase of other goods and services should be
unnecessary if no system is owned or controlled by a U.S. airline. In addition,
readopting the rule would be inconsistent with our decision that we should end
the prohibition against differential booking fees. When we are not requiring
systems to charge equal fees, we should not tell them what other conditions may
be required for participation unless, as is true of parity clauses and clauses
requiring access to all publicly-available fares, the condition would entrench
the systems’ existing market power over airlines.
For similar reasons, we are not maintaining the rule limiting the systems’
ability to require worldwide participation. It is not clear to us on the basis
of this record that this practice would be comparable to unlawful tying under
the antitrust laws.
However, if demands by a system that participating airlines purchase unrelated
goods and services as a condition to participation or that they participate on a
worldwide basis are likely to reduce competition in the airline or airline
distribution businesses, we can take appropriate action under section 411 to
block the system from enforcing such demands.
11. Marketing and Booking Data
(a) Background
Systems generate valuable data from the bookings made by their subscribers. The
data show how many bookings are being made by individual travel agencies on
individual flights operated by each airline in each market. The information can
enable anyone using it to analyze the traffic in individual airline markets and
the booking patterns of individual travel agencies. 67 FR 69401-69402.
Section 255.10 of our rules requires each system to make available to all
participating airlines the marketing and booking data that it chooses to
generate from bookings made by system users. The rule does not restrict the
systems’ prices for the data. 57 FR 43820-43821.
While the rule does not require a system to generate any data, the systems have
found it profitable to sell data to airlines (the usual term for the data is
MIDT data) (for a description of the data sold by one system, see Amadeus
Comments at 62-64). Initially almost all of the airlines purchasing the data
were large airlines. In recent years, the systems have created smaller sets of
data that would be attractive to smaller airlines. 67 FR 69402; Transcript at
176; United Reply Comments at 87. The information sold by the systems does not
include fare amounts or information identifying individual passengers. Justice
Department Reply Comments at 35, n.40; Transcript at 175-176; Amadeus Reply
Comments at 47.
The rule also does not bar systems from providing data to anyone outside the
airline industry. The rule blocks systems from providing data to any foreign
airline that owns or controls a system in a foreign country, if that system does
not provide comparable data to U.S. airlines. The rule further prohibits
airlines receiving data derived from international bookings from giving anyone
access to the data, except to the extent that an airline uses an outside firm to
process the data, unless the system provides access to other persons.
(b) Proposals and Comments
The systems’ sale of the data has been controversial. In their comments on our
advance notices of proposed rulemaking, the systems selling the data and the
airlines buying the data alleged that airlines use the data for legitimate
pro-competitive purposes. These airlines stated that they rely on the data for
marketing research and route development purposes, to make decisions on pricing
and revenue management, and to implement their override commission and corporate
discount fare programs, which typically require travel agencies and corporate
customers to give an airline a certain share of their total business in order to
receive the additional commissions or discount fares. Some smaller airlines and
travel agencies, however, complained that the airlines purchasing the data
(typically large airlines) use the information to determine which travel
agencies have been selling tickets on a competitor and then pressure agencies
into cutting back their bookings on rival airlines. Travel agencies contended
that they should have control over access to the data created by their use of a
system. 67 FR 69402.
Although we recognized the data’s legitimate pro-competitive uses, our concern
that the data could be used in anti-competitive ways led us to propose
restrictions on airline access to the data in our notice of proposed rulemaking.
The possible restrictions included the denial of access to the data on any
airline’s bookings if that airline objected to the disclosure of that
information to any other airline or the denial of access to data showing the
bookings made by any individual travel agency. Because airlines had legitimate
uses for the data, we stated that any restrictions on access should be as few as
possible to avoid interference with the data’s legitimate uses. We noted,
moreover, that any restrictions on access arguably should be limited to data on
domestic travel. The complaints about the alleged misuse of the data all
involved domestic markets. In addition, while airlines could obtain comparable
data on domestic markets from other sources, comparable data appeared to be
unavailable for bookings for international travel. 67 FR 69401-69404.
Our proposed rule would govern only the data derived from bookings made by
travel agencies. We did not propose to regulate the availability of data derived
from bookings made by corporate travel departments (or anyone else using a
system to book airline travel).
America West, Southwest, the Air Carrier Association of America (a low-fare
airline trade association), and some travel agencies support the proposed
restrictions. The larger U.S. network airlines, the systems, firms processing
the data for airlines that buy the data (DOB Systems and Shepherd Systems), and
a number of foreign airlines (Lufthansa, Qantas, and Virgin Atlantic, for
example) oppose the proposals. Several travel agency commenters favor
restrictions on access to the data. ASTA Comments at 40-41 (each travel agency
should be able to block access to data on its bookings); Carlson Wagonlit
Comments at 12-15; Large Agency Coalition Comments at 36. NBTA alleges that the
airlines’ access to the data makes it harder for corporations to negotiate more
favorable air transportation contracts. NBTA Comments at 21. The Justice
Department opposes the proposals, because the record does not show that access
to the data is causing significant competitive harm and because the proposed
restrictions would interfere with the data’s pro-competitive uses. Justice
Department Reply Comments at 34-36.
The commenters disagree over whether comparable data are now available from
other sources, or soon would be. Some commenters claim that equivalent data will
become available. Amadeus Comments at 66, 73; Shepherd Systems Comments at
10-11. Other commenters argue that the type of data provided by the systems is
not available from other sources. Delta Comments at 24; United Comments at
35-36.
(c) Final Rule
We have decided not to adopt a rule restricting access to the data. Given our
decision that only rules that are necessary to prevent anti-competitive
practices should be readopted, we will also eliminate the existing rule
requiring systems to make data available to all participating airlines.
We remain concerned over the possible misuse of the data. However, the record
does not adequately demonstrate that the data’s availability causes competitive
harm that would justify the adoption of the proposed restrictions. The airlines
obtaining the data have legitimate uses for the information. See, e.g., Justice
Department Reply Comments at 34-35. If necessary, and supported by concrete
evidence, individual enforcement actions would be the better means for
addressing any airline’s anti-competitive usage of the data.
Adopting a rule restricting access to information that is currently available
would require substantial evidence in the record that airlines have used the
data in ways that have significantly harmed airline competition. The record does
not contain such evidence, although several commenters have stated that large
airlines do use the data to compel travel agencies to stop buying tickets for
their customers on competing airlines, or that the data could be used for that
purpose. Transcript at 216-217; America West Comments at 29; Carlson Wagonlit
Comments at 14. The use of the data to compel travel agencies to stop selling
tickets on rival airlines may constitute an unfair method of competition.
However, no airline has submitted evidence showing that it has lost a
significant amount of bookings from travel agencies who had been subjected to
pressure from large airlines, nor has any commenter estimated how widespread or
frequent are the alleged anti-competitive practices. We could not adopt a rule
that effectively reduced the data’s benefits without detailed evidence showing
significant harm to competition.
We recognize that such evidence may be hard to obtain, because travel agencies
will be reluctant to complain about alleged mistreatment by an airline due to
the airline’s ability to retaliate. Transcript at 216-217; ASTA Reply Comments
at 20-21. However, none of the low-fare airlines provided an estimate on the
basis of its own experience how many travel agencies were coerced into ending
their bookings with that airline, and that the data purchased from the systems
were the source of the airline’s information on the travel agency bookings. We
note as well that American has flatly denied that it used the data to deter
travel agencies in the Dallas area from booking Legend, a new entrant airline
operating from Dallas’ Love Field. American Comments at 46. That denial
contradicts the statements made by Legend to Department staff members that were
summarized in the notice of proposed rulemaking. See 67 FR 69403. Delta denies
that it has ever misused the data. Transcript at 130. Virgin Atlantic, the
target of British Airways’ efforts to keep travel agencies from booking British
Airways competitors, efforts not based on access to CRS data, argues that access
to the data should not be restricted. Virgin Atlantic Comments at 4-6. The
Justice Department contends that the lack of fare information means that the
data cannot be used to coordinate fares. Justice Department Reply Comments at
35, n.40. A number of foreign airlines, which should have less leverage with
U.S. travel agencies than the large U.S. network airlines, oppose the proposed
restrictions and allege that the data tapes are valuable to them. Asociaciớn
Internacional de Transporte Aéreo Latinoamericano Comments at 4; Ass’n of Asia
Pacific Airlines Comments at 7; British Airways Comments at 12; LAN Chile
Comments at 7; TACA Comments; Virgin Atlantic Comments.
In addition, any harm resulting from the continued sale of the data should
diminish. The airlines most interested in limiting access to the data, the
low-fare airlines, are shifting their bookings away from the travel agency
distribution channel. The low-fare airlines have operated much more profitably
in recent years than the network airlines, who wish to continue buying the data.
The low-fare airlines arguably would be more successful if the availability of
the data has caused them substantial competitive harm, but their relative
success despite the network airlines’ access to the data is a further reason why
the record does not convincingly show that the proposed rules are necessary.
On the other hand, the commenters opposing restrictions on the data allege that
the data provide invaluable information used for a variety of pro-competitive
purposes. A number of smaller airlines buy the data, as do foreign airlines
serving the United States. See, e.g., Amadeus Comments at 64; Shepherd Systems
Reply Comments at 11-12. Airlines use the data to learn when competitive
responses are necessary to increase their market share (responses such as fare
reductions or service increases), to check the relative attractiveness of their
schedules, and to see developing demand trends. Delta Comments at 22; United
Comments at 32; US Airways Comments at 13; Shepherd Systems Comments at 4. As
Delta puts it, “We also use [the data] to identify market trends to determine
where we should be offering lower fares, sales, more aggressive competition.”
Transcript at 130. American, moreover, represents that it relied on the data in
its recent broad-scale restructuring of its route schedules. American Comments
at 40. The proposed rules would interfere with these uses of the data. If
individual airlines were allowed to opt out of the data, the resulting data
including only bookings on the airlines that agreed to the release of data on
their bookings would give an incomplete picture of many markets. Amadeus
Comments at 64; United Comments at 34; United Reply Comments at 95-98; DOB
Systems Comments at 1-2. This restriction, moreover, would not directly address
the problem identified in the notice of proposed rulemaking, the large airlines’
alleged use of the data to pressure travel agencies to stop selling tickets on
competing airlines. 67 FR 69402-69403.
A restriction barring the release of data on bookings by individual travel
agencies could undermine the value of the data for overall market planning and
research. While airlines could still obtain aggregate data from each system for
local and regional markets, the systems do not use the same geographic areas in
their sorting of the data. The data from the four systems could not practicably
be combined for any local market due to the lack of common market definitions.
Shepherd Systems Comments at 11-12. Some airlines allege that they would no
longer buy the data tapes if we adopted our proposed restrictions. Lufthansa
Comments at 6, 8; Qantas Coments at 2.
Denying access to data on bookings by individual travel agencies would make the
data useless for monitoring the performance of individual travel agencies under
the airlines’ incentive commission agreements, which enable travel agencies to
obtain larger commission payments from an airline as it obtains a larger share
of the agency’s business. The major airlines’ use of override commissions has
raised competitive concerns, but we have not previously found that such
incentive commissions are unlawful. 67 FR 69404. Without such a finding, we
could not easily block airlines from obtaining the data needed to measure the
performance of those travel agencies that have incentive commission agreements.
ASTA Comments at 40.
Restricting access to the data would impose other costs as well. Obviously the
firms that process the data for airlines would lose a substantial amount of
business. Shepherd Systems Comments at 12; DOB Systems Comments at 2. Much of
the investments made by systems and airlines in developing the ability to
process and use the data would be lost. American estimates that it has invested
$15 million in the last five to six years building systems that use the data.
American Comments at 38. And the systems would lose the revenues now obtained
from selling the data.
Some commenters argue that the data tapes are unnecessary, because any airline
can assertedly see market trends and the effectiveness of its sales efforts from
data on its own bookings. Air Carrier Ass’n Reply Comments at 9-10. Although we
tentatively believed that airlines did not need to see data on the success of
their competitors’ marketing efforts, 67 FR 69403, the comments have persuaded
us that an airline reasonably needs to see data on the entire market in order to
assess the effectiveness of its own marketing efforts. Data on an airline’s own
sales will not show overall market trends or enable an airline to compare the
effectiveness of its marketing efforts with those of other airlines.
Some commenters charge that airlines use the data at times to “poach” customers
from other airlines. Transcript at 237-238; ASTA Reply Comments at 20-21. The
data, however, contain no information identifying individual passengers. An
airline can often identify a corporate customer from the data, because
corporations frequently have an on-site travel agency location. Transcript at
238. In any event, while poaching may be unethical, it may benefit travelers,
because the poacher presumably has to offer more attractive terms to the
travelers or their travel agencies in order to get them to switch. Transcript at
237.
We have also decided to eliminate the existing rule, which requires systems to
make any data generated from subscriber bookings available to all participating
airlines. The systems appear to be eager sellers of data. Because no system is
currently owned or controlled by U.S. airlines, the systems should have no
incentive to refuse to sell the data to any airline willing to buy the data. The
systems should have incentives to sell as much data as airlines will buy. Delta
Comments at 20. The rule thus is no longer necessary.
Eliminating the existing rule will also eliminate the restrictions on providing
any data to a foreign airline that owns or controls a system in a foreign
country that does not make comparable data available to U.S. airlines, section
255.10(b). We are not readopting these restrictions. The U.S. airlines that
provide the most international service have not specifically asked us to
maintain this restriction, and one of them, United, has argued that we should
eliminate all of the CRS rules. The statutes administered by us, however, give
us the authority to take countermeasures when a foreign airline engages in
discriminatory conduct that injures U.S. airlines. 49 U.S.C. 41310. The
termination of the rule will not affect our authority and willingness to take
steps necessary to end discriminatory conduct by foreign firms.
12. Third-Party Hardware and Software
In an effort to give travel agencies a greater ability to access multiple
sources of airline information and booking channels, in our last overall
reexamination of the CRS rules, we adopted rules allowing travel agencies to use
their own hardware and software in conjunction with a system and to access any
database with airline information or booking facility for airline services from
that equipment. If the travel agency instead obtains its equipment from the
system, the rule allows the system to determine whether the subscriber may
access other databases or booking channels from that equipment. 57 FR
43796-43800.
We adopted these rules because the systems then barred their subscribers in the
United States from using their own equipment and from accessing any other
database or system from the equipment provided by the system. While travel
agencies could obtain additional equipment from another source if they wished to
access alternative electronic sources of information and booking capabilities,
doing that would be inefficient. In adopting the rules, we reasoned that the
travel agents’ ability to access different systems and databases efficiently
could enable airlines to obtain bookings from travel agents that would bypass
the systems, which would place some market pressure on the systems’ terms and
prices for airline participation. See 67 FR 69390-69391.
Experience has shown that these rules in recent years have been effective in
important respects. 67 FR 69391. Many travel agencies have been acquiring their
own equipment, and subscribers are using their equipment, whether or not owned
by a system, to access the Internet and other booking channels, as discussed
above in our review of current industry conditions. However, travel agents are
not making a significant share of their airline bookings through the Internet or
other channels outside the travel agency’s primary system. As discussed above,
the commenters in this proceeding generally agree that travel agencies will
rarely be willing to make airline bookings outside their primary system due to
the inefficiency of doing so, even when travel agents can access the Internet
from the same equipment used to access their primary system.
In our notice of proposed rulemaking, we proposed to readopt the rule and to
strengthen it by eliminating a system’s ability to keep subscribers from using
system-owned equipment to access other systems and databases. 67 FR 69391. We
also invited comment on whether we should adopt a rule preventing systems from
discriminating against subscribers who used a back-office system in conjunction
with bookings made outside a system and from charging discriminatorily high fees
to subscribers who bought their own equipment. 67 FR 69392.
We have decided, in line with our overall approach in this proceeding, not to
readopt the rule. We recognize that the rule has had pro-competitive effects and
that any restrictions on a subscriber’s acquisition of third-party hardware and
software or on a subscriber’s use of any equipment to access other systems or
databases or booking channels would likely present competitive concerns.
However, market developments have made the rule unnecessary.
ASTA states that it knows of no evidence that systems now discourage travel
agencies from getting their own equipment. ASTA Comments at 14-15. Sabre
represents that it is withdrawing from the equipment-leasing business and that
most Sabre subscribers have their own equipment. Sabre Comments at 19-20, 131.
Amadeus similarly states that most of its subscribers own their own equipment,
and it alleges that it does not restrict its subscribers from accessing other
databases and booking channels when they use equipment provided by Amadeus.
Amadeus Comments at 45. Notwithstanding these statements from Sabre and Amadeus,
most travel agencies continue to use equipment provided by a system. Orbitz
Comments at 56. However, the record does not indicate that systems in recent
years have been placing roadblocks in the way of subscriber efforts to use
alternative booking channels. Even if Galileo and Worldspan subscribers have had
less success in using third-party equipment (or in accessing other databases and
booking channels), a travel agency that wants more flexibility in these areas
should be able to obtain it by switching to Sabre or Amadeus.
Furthermore, as discussed above, the systems’ subscriber contracts are giving
travel agencies increasingly more flexibility. Recent experience indicates that
systems will be unable to impose contractual restrictions on their subscribers
that would significantly restrict a travel agency’s ability to use alternative
sources of airline information and booking capabilities, due in large part to
the travel agencies’ increasing need to access the Internet. ASTA Comments at
14-15.
We are basing our decision to sunset the rules on third-party hardware and
software on our expectation that doing so will not lead to anti-competitive
behavior. Any unreasonable efforts by a system to restrict a subscriber’s use of
other systems or databases would presumably constitute an unfair method of
competition. In any such cases we will consider taking appropriate enforcement
action. We have full authority to prohibit systems (and airlines and travel
agencies) from engaging in conduct that would violate section 411 even if we
have no rule prohibiting that conduct.
13. Travel Agency Contracts
(a) Background
Since the first CRS rulemaking, the rules have regulated the systems’ contracts
with travel agency subscribers in an effort to give travel agencies a greater
opportunity to switch systems or use multiple systems (or booking channels). The
rules therefore prohibit certain types of travel agency contract clauses that
would unreasonably restrict a travel agency’s ability to use alternative
systems, such as clauses requiring an agency to use an airline’s affiliated
system for all of its bookings on that airline or denying a travel agency
commissions for bookings on an airline if not made through the airline’s own
system. The rules allow systems to offer travel agencies a contract with a
five-year term as long as they also offer contracts with a term of no more than
three years. The rules bar systems from imposing minimum use clauses (clauses
stating that an agency’s failure to make a certain number of bookings per month
per terminal will constitute a breach of contract). On the other hand, the rules
do not prohibit productivity pricing or the tying of access to an airline’s
marketing benefits to the travel agency’s use of the system affiliated with that
airline, nor do they bar systems from obtaining damages if a travel agency
breaches its subscriber agreement by canceling it before the end of its term. 57
FR 43825-43828.
We regulated the systems’ subscriber contracts, because practices that limit
competition between the systems were likely to impair airline competition. An
airline would be handicapped in entering new markets if its affiliated system
could not obtain travel agency customers in the region. Furthermore, system
contracts that restrict competition between systems (or keep travel agents from
using alternative systems and booking channels) would entrench the systems’
existing market power and keep airlines from finding alternative ways of
conducting the functions provided by the systems. 57 FR 43823-43824. In
addition, an airline that used its dominance of a region to obtain more
subscribers to its system thereby would increase its dominance of the regional
airline market. Justice Department Reply Comments at 9.
We have stated, however, that effective regulation would be difficult, and some
restrictions on the relationships between a travel agency and a system or its
airline owners might well be unenforceable or be evaded by the system. See,
e.g., 57 FR 43827 (restrictions on liquidated damages for breach of contract);
57 FR 43828 (prohibition against tying of marketing benefits with use of a
system).
Our notice of proposed rulemaking proposed to readopt the existing rules on
subscriber contracts and to make them stricter, although we recognized that the
systems competed vigorously for travel agency subscribers. We requested comments
on whether we should shorten the maximum permissible length of subscriber
contracts, for example, by adopting the European Union rule which allows a
subscriber to cancel its CRS contract on three months notice after the contract
has been in force for one year. We asked whether we should restrict the types of
damages obtainable by a system from a subscriber who cancels a contract before
the end of the contract term and whether we should prohibit airlines from tying
access to an airline’s marketing benefits with the agency’s use of the airline’s
affiliated system. We additionally invited comment on whether we should bar
systems from demanding a new contract if they provided additional equipment to a
subscriber during the term of an existing contract. And we proposed to restrict
productivity pricing, a form of incentive pricing that appeared to encourage
subscribers to use the system for all or almost all of their bookings. 67 FR
69406-69410.
We made these proposals because the record in this proceeding then suggested
that the systems were effectively using these kinds of contract provisions to
keep subscribers from using alternative booking channels. 67 FR 69405. However,
our notice specifically requested more detailed information on the current
relationships between travel agencies and the systems and on the systems’
business practices. 67 FR 69406. We further noted that the U.S. airlines’
divestiture of most of their system ownership interests was eliminating one of
the bases for the regulation of subscriber contracts, the interest of an owner
airline in obtaining subscribers for its system in cities that it planned to
enter. 67 FR 69406. As we pointed out, “[T]he systems compete vigorously for
travel agency subscribers” and “the systems’ competition for travel agency
customers usually disciplines the price and quality of services offered travel
agencies.” 67 FR 69405.
The Justice Department recommends that we eliminate the rules on subscriber
contracts. It contends that the travel agencies’ unwillingness to use multiple
systems means that any rules designed to encourage them to do so will be
ineffective. The systems compete for travel agency subscribers, and “behavioral
rules that regulate the terms of CRS-subscriber contracts may be unnecessary
because competition among CRSs for subscribers is apparently eliminating
contracts that limit subscriber options.” The existing rules also present
significant enforcement problems. Justice Department Reply Comments at 28-29.
The travel agency commenters strongly oppose restrictions on the systems’
incentive payments, which assertedly are essential for the survival of many
agencies, although some support restrictions on the systems’ ability to enforce
the penalty provisions in their productivity pricing arrangements. See, e.g.,
ASTA Comments at 35. The travel agency commenters represent that an individual
travel agency will rarely be willing to use more than one system and that any
rules intended to achieve that result will be ineffective and should not be
adopted. Travel agencies generally favor some stricter subscriber contract
rules. ASTA Comments at 30-35; Large Agency Coalition Comments at 36. Some argue
in contrast that the rules should not limit travel agencies from obtaining
whatever contract they wish. See, e.g., AAA Comments at 2; Transcript at
241-242. ASTA, moreover, suggests that non-airline systems are not ticket agents
subject to section 411, and the Large Agency Coalition asserts that it would
prefer to have the rules terminate rather than have restrictions on the systems’
incentive payments. ASTA Comments at 45-47; Large Agency Coalition Comments at
38. The travel agency commenters do not argue that subscriber contract rules are
necessary to protect travel agencies against system demands for unreasonable
contract lengths or undue restrictions on the ability of travel agents to access
other databases and booking channels.
Orbitz and several airlines argue that tougher rules are necessary, because the
systems’ existing contracts unreasonably keep travel agencies from switching
systems. See, e.g., Orbitz Comments at 46-49; Continental Comments at 17-20;
Delta Comments at 41-42; America West Comments at 26-29.
Galileo supports the continuation of the existing rules, while Amadeus suggests
that additional rules should be adopted.
(b) Final Decision
The updated information on industry practices provided by the comments has
persuaded us that we should not adopt our proposed changes to the rules and that
we should not readopt the existing rules. Rules generally governing subscriber
contract practices no longer appear to be necessary, because the market is
working. Moreover, the systems’ subscriber contracts do not appear to
substantially restrict travel agents from using alternative booking channels.
The comments show that the nature of subscriber contracts has changed
substantially in the last few years, as discussed above in our description of
the travel agency business. As stated there, the systems no longer obtain
contracts that will keep travel agencies from using other electronic channels
for obtaining information and making bookings. Large Agency Coalition Comments
at 7. A declining portion of subscriber contracts contain productivity pricing
provisions, current productivity pricing provisions allow travel agencies to
obtain bonuses (or avoid penalties) despite booking airline tickets outside the
system, and the length of the term of the typical subscriber contract has shrunk
dramatically. The agencies’ ability to obtain more flexible contracts is
consistent with our finding that the systems compete aggressively for travel
agency subscribers. A system that does not satisfy travel agency demands for
greater flexibility will lose subscribers. Given industry trends, we assume that
future subscriber contracts will provide travel agencies with even greater
flexibility. Transcript at 232.
While the systems have always competed for subscribers, in earlier years that
competition did not keep them from obtaining contract clauses that effectively
deterred travel agencies from using multiple systems or booking channels and
from switching systems. For example, 12 years ago Worldspan alleged that it
abandoned its efforts to obtain more subscribers by offering less restrictive
contracts, because doing so was not increasing its subscriber base. 57 FR 43824.
Moreover, while our 1992 rules required systems to offer travel agencies a
three-year contract in addition to a five-year contract, for some years the
systems were able to obtain five-year contracts from most of their subscribers.
67 FR 69405. In contrast, the record shows that the average contract term now is
three years. Sabre Comments at 17-18. Similarly, while the great majority of
subscriber contracts once contained productivity pricing provisions that
effectively discouraged travel agents from using alternative booking channels
for any significant share of their sales, the record does not indicate that this
is the case now. See, e.g., ASTA Comments at 15.
The record does not show that we should adopt a rule requiring systems to
provide new equipment to a subscriber during the term of a contract without
requiring a new long-term contract for the added equipment. ASTA states that it
considers it unlikely that a system “will refuse equipment additions late in a
contract term or gouge the agency on price,” because doing so “could persuade
the agency to buy its own equipment or even to switch vendors altogether.” ASTA
Comments at 32. While ASTA nonetheless suggests that we should bar systems from
requiring a new contract for the added equipment, we think that the systems and
subscribers should negotiate their own arrangements. As ASTA alleges, travel
agencies have some leverage with systems on this issue. If we restricted the
systems’ contractual flexibility by regulation, moreover, that might discourage
them from agreeing to provide any new equipment. 57 FR 43825-43826.
We see no reason to adopt stronger rules, or keep the existing rules, when
market forces are enabling travel agencies to obtain less restrictive contracts
and when the systems’ contracts do not appear to impose unreasonable restraints
on the subscribers’ ability to switch systems or use several electronic
information sources and booking channels in addition to their primary system.
The systems’ current contract practices, moreover, are not necessarily
unreasonable. Long-term contracts, for example, offer significant efficiency
advantages, as we pointed out in our notice of proposed rulemaking. Long-term
contracts reduce the parties’ negotiating expenses. Sabre Comments at 153-154.
Although Amadeus favors the European rule, which allows travel agencies to
cancel contracts on short notice after the first year of a subscriber contract,
Amadeus admits that the European rule could lead to somewhat higher transaction
costs. Amadeus Reply Comments at 64. One travel agency argues that a five-year
term is the best term for a subscriber contract. Travel Management Alliance
Comments. Some travel agencies, moreover, would like the opportunity to obtain
contracts with terms longer than allowed by our current rules. Transcript at
241-242; AAA Comments at 2.
Similarly, contracts offering customers incentives to rely on a supplier for a
greater share of its goods or services are also not unreasonable. Many airlines,
after all, offer travel agencies override commission programs that enable travel
agencies to obtain larger commissions from an airline if they book a larger
share of their business with the airline. Amadeus Comments at 86. Also,
virtually every airline has a frequent flyer program that rewards passengers for
traveling more with that airline. Cf. Galileo Comments, Guerin-Calvert,
Jernigan, & Hurdle Declaration at 81. Exclusive contracts are not inherently
unlawful. United States v. Microsoft Corp., 253 F.3d at 70.
In addition, we have recognized that systems should be able to obtain damages
for breach when a subscriber cancels its contract before the end of the term
without cause. 57 FR 43827.
We do not view the systems’ use of productivity pricing as a strategy created to
maintain their market power over airlines, but as a response to their
competitive struggle for subscribers and each travel agency’s knowledge that its
choice of one system rather than the others will enable the winning system to
obtain a stream of booking fees from airlines.
Subscriber contract terms that give a system some assurance that its subscribers
will continue using its services also give the systems “incentives to make
investments that enhance their value to travel agencies, including increased
automation, customized features and other functionality enhancements, and the
provision or upgrade of equipment.” Justice Department Reply Comments at 28.
Sabre concedes that it has contracts with small travel agency subscribers that
deny those subscribers incentive payments if they make bookings through another
system, but these provisions are allegedly reasonable because Sabre provides
substantial support for such an agency, the cost of which is offset by the
booking fees obtained by Sabre if they continue using Sabre for their bookings.
These subscribers account for a small part of Sabre’s total subscriber base.
Sabre Comments, Salop & Woodbury Declaration at 18-20.
In any event, insofar as the rules are intended to allow travel agencies to use
multiple systems, the rules will not work. Travel agencies will rarely use more
than one system because doing so is inefficient, as discussed above. If the
systems’ productivity pricing programs provide a disincentive to use alternative
booking channels, airlines can offer incentive payments of their own that could
encourage travel agents to make bookings directly with an airline. Galileo
Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 81.
Efforts to regulate travel agency contracts also present a practical problem,
the difficulty of obtaining effective compliance (in contrast, the rules on
display bias, equal functionality, and non-discriminatory booking fees have been
effective and complied with). Experience with our past attempts to prevent
certain contract practices has shown that systems can evade restrictions by
devising alternative contract terms that achieve the same result as the
prohibited terms but comply with the letter of our rules. 57 FR 43827. If we
adopted rules prohibiting productivity pricing arrangements, travel agencies and
systems would have incentives to maintain them, and enforcing those rules would
be impracticable. Justice Department Reply Comments at 29; Delta Reply Comments
at 52-53.
The record shows that the profitability of many travel agencies depends on the
incentive payments provided by productivity pricing contracts. See, e.g., Large
Agency Coalition Comments at 33. We would be reluctant to disallow such pricing
contracts when doing so seems likely to impose severe financial strains on many
travel agencies, as is claimed by many of the travel agency commenters. The
surviving travel agencies, moreover, would need to obtain additional revenues to
offset the loss of the systems’ incentive payments, which would either increase
the costs for consumers to use travel agencies or the airlines’ costs for
distributing their tickets through travel agencies. Sabre Reply Comments, Salop
& Woodbury Declaration at 22-24.
In any event, on balance, the systems’ current productivity pricing clauses seem
to allow travel agencies to make a significant number of bookings through
different booking channels. Large Agency Coalition Reply Comments at 13-16. The
systems do not discourage subscribers from accessing the Internet, and the
growing use of programs like AgentWare’s service, which provides travel agents
links to other booking sites, suggests that travel agents are able to make
bookings outside their primary system. We recognize that several commenters
contend that the systems’ productivity pricing clauses contain provisions that
deter travel agents from using alternative booking channels. For example, while
ASTA opposes restrictions on incentive payments, it suggests that we should
eliminate penalty clauses in the systems’ productivity pricing agreements
because penalty clauses do deter travel agents from using the Internet for
bookings. ASTA Comments at 26, n. 44, and 34-35. See also Southwest Comments at
16-20; Travel Management Alliance Comments. The Large Agency Coalition’s
comments address in detail the effects of the penalty provisions but not the
incentive payment provisions. The ASTA survey suggests that the systems’
productivity pricing programs are one of the three reasons why travel agents do
not make more bookings on the Internet. Orbitz Comments at 23, n. 10. Orbitz
asserts that the systems compel travel agencies to accept exclusive deals.
Orbitz Comments at 46-47. These complaints that productivity pricing does block
travel agencies from using alternative booking channels are not substantiated
enough to override the other factors in favor of eliminating the restrictions on
subscriber contracts -- the travel agencies’ inherent unwillingness to use
multiple systems, the difficulty of enforcing rules on issues like incentive
payments, and the dependence of many travel agencies on incentive payments for
survival. Equally important, the market seems to be moving in a more competitive
direction. The minimum booking quotas in subscriber contracts are declining, and
the systems’ incentive payments to travel agencies are now declining and will
continue to do so. Transcript at 232, 234, 235.
Other considerations make us reluctant to regulate many of the subscriber
contract issues. The U.S. airlines’ divestiture of their system ownership
interests has ended the direct link between system competition and airline
competition that was a principal basis for the adoption of subscriber contract
rules. Travel agency decisions to use one system rather than another, and to
accept longterm contracts for CRS services, should not affect airline
competition. In exercising our authority to prohibit unfair methods of
competition under section 411, our primary goal has been the protection of
airline competition. Regulating subscriber contracts for the most part would not
further that goal.
Given the record evidence on current market conditions, it is doubtful whether
section 411 would enable us to maintain rules governing travel agency contracts.
Practices like longterm contracts and incentive payment programs are not
inherently anti-competitive, as discussed above. If the systems’ current
subscriber contracts effectively deterred travel agents from using alternative
booking channels (direct links with an airline’s internal reservations system,
for example), the contracts could constitute an unfair method of competition,
because they would help preserve the systems’ existing power over airlines,
unless the contracts were justified by legitimate business reasons that
outweighed any adverse impact on competition. Because the systems are ticket
agents subject to our jurisdiction under section 411, we may regulate their
contract practices if they are engaged in unfair methods of competition that
affects airline distribution. The record in past proceedings indicated that the
systems’ contract practices could violate section 411, because the systems
imposed contract terms on travel agencies that appeared designed to preserve the
systems’ market power by deterring travel agents from using alternative booking
channels. 57 FR 43823-43825. Cf. United States v. Microsoft Corp., 253 F.3d at
71-74. The record here, in contrast, does not show that the systems’ contracts
effectively keep travel agents from making bookings that bypass the systems.
We recognize that prospective entry into the CRS business, by Orbitz, for
example, would be more successful if the systems’ existing subscriber contracts
were nullified, thereby enabling all travel agencies to make a new choice of
which system to use. Orbitz otherwise may be able to obtain subscribers only
from those travel agencies whose contracts are expiring. Orbitz in fact seeks to
give subscribers an option to void all existing contracts that do not comply
with new subscriber contract rules. Orbitz Comments at 50, 53. Northwest, one of
Orbitz’ owners, similarly argues that we should enable any travel agency to
terminate its existing contract with a system, if any of the airlines serving
the agency’s city withdraws from participation in that system. Northwest
Comments at 3-4.
Ending any substantial number of existing subscriber contracts would be
disruptive and impose substantial negotiating costs on the systems and travel
agencies. See, e.g., Galileo Reply Comments at 59. Imposing such burdens on the
industry would be at odds with our overall decision to end CRS regulation.
Furthermore, we doubt that section 411 would authorize us to grant Orbitz’
request. As stated elsewhere, section 411 does not empower us to impose our
views of the best possible competitive structure and practices on an industry.
It authorizes us instead to prohibit unfair methods of competition. Because the
record does not show that the systems’ current subscriber practices violate the
antitrust laws or antitrust principles, we do not have the power to undo the
existing contracts, even if they may hinder Orbitz’ entry into the business.
Orbitz and other commenters are legitimately concerned about the impact of
potential system contract practices that would unreasonably restrict travel
agency usage of alternative booking channels. We will monitor the systems’
practices to ensure that the end of our rules on contract practices does not
lead to new efforts to obtain contracts from subscribers that will unreasonably
limit airline competition.
14. The Tying of Commissions and Marketing Benefits
with a Subscriber’s Choice of a System
Our concern that an owner airline would use its dominance of airline markets in
some cities to obtain dominance in the CRS markets in those cities led the Board
to adopt a rule prohibiting an airline that owned a system from tying a travel
agency’s commissions to the agency’s use of the airline’s system. Dominance in
the local CRS market would reinforce the airline’s power in the local airline
markets. Justice Department Reply Comments at 9. For the same reasons, we have
considered proposals to prohibit the tying of a travel agency’s access to an
airline’s marketing benefits, such as the ability to waive advance-purchase
restrictions on discount fares, with the agency’s choice of the system
affiliated with the airline. We did not adopt such a rule because we expected
that any such requirement would be unenforceable. 57 FR 43828.
A few commenters complain that airlines affiliated with a system have distorted
competition in the CRS business by refusing to provide marketing benefits (or
the ability to sell the airline’s corporate discount fares) to travel agencies
that do not use the system owned or marketed by the airline. Some commenters
believe that such airlines have also tied access to override commissions with
the travel agency’s use of the airline’s affiliated CRS, even though doing so
would violate our rule. See, e.g., Amadeus Comments at 90-92.
Our notice of proposed rulemaking stated that we were willing to revisit the
issue of the tying of marketing benefits to the use of the airline’s affiliated
system, although we again expressed our concern about the potential
unenforceability of any such rule. 67 FR 69409-69410.
ASTA and Amadeus support the proposed prohibition against the tying of a travel
agency’s access to marketing benefits with the agency’s choice of a system. ASTA
Comments at 39-40; Amadeus Comments at 86-92. Other commenters oppose the
proposal. Delta Reply Comments at 53-58; Northwest Reply Comments at 24-25;
United Reply Comments at 54-65.
After considering the comments, we have decided to terminate the current rule
rather than broaden it. First, no U.S. airline currently owns a system, so the
existing bar against tying now covers only the three European airlines that own
Amadeus. Secondly, the existing and proposed restrictions on tying, even if
effective, seem unlikely to significantly affect airline competition, because no
system has U.S. airline ownership. Thirdly, an airline that is affiliated with a
system may have legitimate reasons for wanting to encourage travel agencies to
use that system. Bookings made through that system, for example, may be less
costly for that airline. United Reply Comments at 64-65. Also, some commenters
(but not Amadeus) allege that the airlines marketing a system do not
aggressively sell the system and that tying is a vanishing practice. Large
Agency Coalition Reply Comments at 16-17. Fourthly, a prohibition against the
tying of marketing benefits would not keep airlines that wished to use their
dominance of local airline markets from using their position in the airline
market to compel travel agencies to use their affiliated system. Airlines can
achieve that result by tying a travel agency’s choice of their favored system to
the agency’s access to corporate discount fares. Finally, we continue to believe
that prohibitions against tying are likely to be unenforceable, a view that the
Justice Department shares. Justice Department Reply Comments at 24. Although the
current rules thus prohibit the tying of a travel agency’s ability to obtain
commissions with the agency’s choice of a system, Amadeus alleges that it has
lost subscribers (or failed to win new subscribers) because an airline that
owned or marketed a competing system threatened to terminate the agency’s
commissions if it chose Amadeus. Amadeus Comments at 90-92; see also Large
Agency Coalition Reply Comments at 17.
Nonetheless, we will watch for any anti-competitive behavior in this area and
take enforcement action if appropriate.
15. Regulation of the Internet’s Use in Airline Distribution
When we last reexamined the need for the CRS rules and their effectiveness, the
Internet did not play a role in airline ticket distribution. The systems were
used by travel agencies, corporate travel departments, and by some consumers
through on-line services. At that time, “brick-and-mortar” travel agencies sold
about 80 percent of all airline tickets, and consumers bought most of the
remainder directly from the airlines. Few travelers bought tickets on-line. 57
FR 43794-43795. Our rules regulate the systems insofar as they are used by
travel agencies but do not otherwise regulate the systems, and they do not cover
the operations of travel agencies.
In recent years, the Internet has become a major avenue for the sale of airline
tickets. Both airlines and travel agencies have established websites where
consumers can research airline service options and make bookings. The number of
tickets sold through the Internet has been growing steadily, from 18 percent of
all tickets in 2001 to an estimated 25 percent of all tickets in 2003. Airline
websites account for about half of all tickets sold through the Internet.
Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 24. Some
firms have established themselves as on-line travel agencies, like Travelocity,
Expedia, and Orbitz, but many “brick-and-mortar” travel agencies have also
established websites. 67 FR 69374.
Our supplemental advance notice of proposed rulemaking asked for comments on
whether we should regulate the on-line distribution of airline tickets. 65 FR
45557. While a number of commenters argued that no Internet activities should be
regulated, others contended that some rules were necessary. See 67 FR 69410.
After considering the comments, we tentatively concluded that we should not now
adopt rules that would generally govern the Internet’s use in airline
distribution. Rather than propose rules on the basis of a relatively short
experience, we wished to see how the Internet’s use in airline distribution
develops and whether its evolving use threatens airline competition and consumer
access to accurate and complete information on airline services. We found that
our experience with the Internet thus far does not confirm that broad
regulations are necessary. We invited commenters who disagreed with our
tentative position on these issues to present their proposals with information
and analysis showing that they would provide public benefits without harming
competition or the development of new on-line marketing approaches. 67 FR 69410.
We did propose a change to our policy statement on fare advertising concerning
one Internet-related issue, the requirements for disclosure of travel agency
service fees. We plan to address that question in a separate final rule.
We still believe that we should not adopt rules governing airline distribution
over the Internet, whether through airline websites or on-line travel agencies.
As we stated in the notice, we intend to continue watching the Internet
distribution practices of airlines and on-line travel agencies and will take
action if that becomes necessary. The absence of rules specifically governing
Internet distribution practices will not excuse airlines and travel agencies
from complying with section 411, which prohibits unfair and deceptive practices
and unfair methods of competition in the distribution of airline tickets. In
addition, existing rules requiring travel agencies to provide accurate
information on airline services, 14 C.F.R. 399.80, are applicable to on-line
ticket sales by travel agencies. We are ready to take enforcement action against
any travel agency (or airline) that provides deceptive information on airline
services through the Internet, and we have done so in several cases. See, e.g.,
Orders 2001-5-32 (May 30, 2001) and 2001-6-3 (June 7, 2001).
The issues presented by the comments concern (i) regulation of on-line travel
agencies, (ii) regulation of airline choices on which distribution channels
should be given access to all publicly-available fares, and (iii) Orbitz.
We affirm our tentative decision that rules are not needed to regulate airline
websites. The commenters have not challenged that tentative decision. Consumers
assume that an airline website will favor the airline’s own services and not
present an impartial display of all airline services. Any airline offering a
website will seek to promote its own services and those of any allied airlines.
67 FR 69411.
(a) Regulation of On-Line Travel Agencies
On-line travel agencies such as Expedia, Travelocity, and Orbitz have become
major sellers of airline travel. We tentatively concluded that we should not
adopt rules regulating their conduct, despite the concern expressed by some
commenters that on-line travel agencies may bias their displays in favor of
preferred airlines if not prohibited from doing so. We noted that we were not
proposing to regulate the CRS displays created by travel agencies for their
travel agents. The existing CRS rules do not regulate the practices of
“brick-and-mortar” travel agencies. However, every on-line travel agency, like
every “brick-and-mortar” travel agency, is subject to section 411 and may not
engage in unfair and deceptive practices.
We thought that on-line travel agencies, like “brick-and-mortar” travel
agencies, want to keep their customers satisfied. That should deter them from
providing inaccurate or misleading advice to customers and so would keep them
from biasing their displays. Newspapers and magazines occasionally compare the
quality of service offered by different on-line travel agencies, which should
discourage the agencies from offering biased displays. And because consumers
usually search several sites before making a booking, they should not be harmed
if one on-line travel agency biases its displays. The record, moreover, did not
show that bias is a serious problem at on-line travel agency websites. Finally,
a rule requiring on-line travel agencies to follow prescribed display rules
could discourage new methods of offering airline tickets on-line, such as those
developed by Priceline and Hotwire. 67 FR 69411-69412.
A few commenters contend that we should adopt rules governing on-line travel
agency displays. America West Comments at 37; US Airways Comments at 5-9.
Amadeus contends that the systems should not be regulated if on-line travel
agencies are not regulated. Amadeus Comments at 93; Amadeus Reply Comments at
54-59. Midwest alleges that some on-line travel agencies offer displays that are
biased and inaccurate and do not show that its service is superior to the coach
service typically provided by other airlines. Midwest Comments at 10-16.
These commenters have not convinced us that on-line display bias is a widespread
problem that harms consumers and requires the adoption of rules. The examples
cited by Midwest, if accurate, are troubling, but we believe that individual
enforcement action would be the better approach if an agency is offering
displays that mislead consumers.
In finding that the record does not show a need for rules barring display bias
by on-line travel agencies, we are not determining that consumers have a greater
ability than travel agents to work around bias. We are instead finding that the
on-line travel agencies do not appear to be biasing their displays and that they
are unlikely to do so, because most consumers check more than one website and
because newspapers and other publications rate the relative accuracy and value
of the different on-line travel agencies. These factors should effectively
discourage on-line travel agencies from engaging in display bias, even though
many consumers investigate airline services on only one website and not all
consumers read published reports comparing the different on-line travel
agencies. 67 FR 69411. If an on-line travel agency does create displays that
mislead consumers, we can and will take appropriate enforcement action.
We also see no reason to exempt the systems from regulation if we do not adopt
rules regulating the on-line travel agencies. The systems are not direct
competitors of the on-line travel agencies, and the systems’ possession of
market power over airlines mandates the adoption for a transitional period of
some rules designed to prevent practices intended to maintain that market power
or to use it in ways that could cause consumer deception. The on-line travel
agencies do not have that kind of market power. Justice Department Reply
Comments at 15.
(b) The Airlines’ Differing Treatment of Different Travel Agencies
A number of the comments on our advance notices of proposed rulemaking had
argued that we should require airlines to make all of their publicly-available
fares, especially their webfares, saleable through every system. These
commenters complained that the airlines’ decision to make webfares available
only through individual airline websites, or through such websites and Orbitz,
was unfair to other travel agencies and the traveling public. The airlines, on
the other hand, asserted that their decision to sell their webfares only through
the least costly distribution channels was a rational decision. See 67 FR
69412-69413.
We declined to propose any rule requiring airlines to make all fares available
through all distribution channels, as was sought by a number of commenters.
Telling airlines how they must distribute their services and fares would likely
deter them from offering some fares that they wish to sell only through selected
distribution channels. Moreover, individual airlines have always given some
travel agencies access to fares and other benefits not given other travel
agencies. A rule requiring airlines to treat all distribution channels the same,
in terms of access to fares, would be contrary to the industry’s established
practices (and contrary to practices followed by the systems and individual
travel agencies as well). In addition, as we explained, the basis for this
rulemaking was our authority under section 411 to prohibit unfair methods of
competition, unfair methods of competition are practices that violate the
antitrust laws or antitrust principles, and the antitrust laws generally allow
individual firms to choose how to distribute their products and services. An
airline’s decision to provide certain types of fares or better treatment to one
type of distribution channel (or to some but not all firms within the same
channel) would not ordinarily violate antitrust principles. 67 FR 69413.
After we prepared our notice of proposed rulemaking, the National Commission to
Ensure Consumer Information and Choice in the Airline Industry, which had been
charged by Congress to study this and related issues, issued its report. That
report concluded that airlines should not be required to make all fares
available through all distribution channels. The Commission reasoned that such a
requirement would substantially harm consumers, because airlines would stop
offering some low webfares, would be contrary to the industry’s use of different
distribution channels to dispose of specific types of inventory, and would not
solve the travel agency industry’s basic problems, particularly the growing use
of the Internet. “Upheaval in Travel Distribution: Impact on Consumers and
Travel Agents,” National Commission to Ensure Consumer Information and Choice in
the Airline Industry” (November 13, 2002), at 56-58.
Several commenters continue to assert that airlines should be required to make
all publicly-available fares saleable through all distribution channels. Large
Agency Coalition Comments at 38-39; AAA Comments at 3; Carlson Wagonlit Comments
at 3.
Airlines object to any such requirement. See, e.g., America West Comments at
32-34; Continental Comments at 10.
We remain unwilling to require airlines to make their webfares (or other
publicly-available fares) available to each system so that travel agencies can
easily book them. For the reasons stated in our notice of proposed rulemaking,
any such requirement would be outside our authority under section 411 and lack
an economic or policy justification. Such a requirement would deny airlines the
ability to choose which distribution channel best meets their needs. As shown,
Southwest and JetBlue, two successful and growing airlines, have chosen to
distribute their services through only one system, Sabre, and to encourage
travelers to make bookings directly with the airline, either through the
airline’s website or a reservations agent. The requirement would be contrary to
the airlines’ established practice of selling some fares only through a few
selected channels. America West points out that it makes special fares available
only through some channels, like one or two of the on-line travel agencies,
rather than through all channels. America West Comments at 33. As noted, our
decision is consistent with the National Commission’s conclusions, and we agree
with the Commission’s analysis. As the Commission stated, requiring airlines to
make all fares available through all distribution channels will encourage
airlines to eliminate those fares that they wish to make available only through
selected distribution outlets.
Requiring airlines to make all publicly-available fares saleable through all
channels would be more efficient for travel agents and their customers, because
they would no longer need to search multiple places to check all the fares, and
would be able to make bookings through their primary system, which has been the
most efficient booking process for travel agencies. Our authority to prevent
unfair methods of competition would not allow us to override individual airline
decisions on how to distribute tickets unless we can show that doing so is
necessary to prevent conduct that would violate the antitrust laws or antitrust
principles. The record in this proceeding would not support such a finding. In
addition, a requirement that airlines must make all fares available through all
channels would deter airlines from offering many discounts, including presumably
their webfares. Airlines would have less incentive to offer discounted fares if
they were required to sell those fares through all channels, including the most
expensive. America West Comments at 32; United Reply Comments at 51-52.
Furthermore, the market is addressing this issue. Sabre and Galileo, as shown,
have created programs whereby airlines that make their webfares saleable through
the system will obtain lower booking fees in exchange. A number of major
airlines have agreed to provide their webfares to the two systems on these
conditions. As a result, Galileo and Sabre subscribers now have access through
their systems to the webfares offered by most major airlines. Amadeus and
Worldspan can similarly offer airlines terms attractive enough to obtain the
right to sell webfares. In any event, systems should obtain access to webfares
by making their sale through a CRS attractive for airlines, not by Government
edict.
(c) Regulation of Joint Airline Websites
Orbitz, the on-line travel agency, and Hotwire, an on-line firm that allows
consumers to obtain low fares but without providing a choice between airlines or
schedules, are owned and controlled by several major airlines. Orbitz has
obtained the ability to sell many discount fares that are not available for sale
through other travel agencies. Orbitz gives airlines a rebate on their booking
fees if they agree to make all of their publicly-available fares saleable
through Orbitz. Office of the Inspector General, U.S. Department of
Transportation, “OIG Comments on DOT Study of Air Travel Services” (December 13,
2002), at 2-3.
A number of parties had complained that any website owned by two or more
airlines, such as Orbitz and Hotwire, may well be operated in a manner which
will reduce competition and lead to consumers receiving biased or inaccurate
information. 67 FR 69413. Galileo contends, for example, that the
most-favored-nation clause used by Orbitz has led to fewer and smaller fare
discounts. Galileo Comments, Hausman Declaration. Travel agencies contend that
Orbitz’ most-favored-nation clause is intended to eliminate them from the
distribution business. See, e.g., Hewins Travel Consultants Reply Comments.
Expedia urges us to take enforcement action against Orbitz, but does not ask
that we adopt regulations governing joint airline websites. Expedia Comments at
10-13.
We decided not to propose rules regulating the operation of joint airline
websites in this proceeding. The only two significant jointly-managed airline
websites were Orbitz and Hotwire. Adopting general rules governing the operation
of joint airline websites would be premature. The enforcement process would be
the best means for addressing any problems with deceptive practices and unfair
methods of competition created by such a site. An enforcement proceeding could
effectively take into account the characteristics of an individual website while
a rule might be unable to do so. 67 FR 69413.
We further noted that we had been informally examining Orbitz’ business plan and
strategy to see whether it might have been engaged in deceptive practices or
unfair methods of competition. Our progress report to Congress on that
investigation, “Report to Congress: Efforts to Monitor Orbitz,” did not reach
any definitive conclusions on whether Orbitz’ operations may violate antitrust
principles, in part because of the continuing changes in the on-line
distribution business, and in part because the Justice Department had not
concluded its own antitrust investigation into Orbitz. The Justice Department
recently announced that it had completed its extensive investigation and
concluded that Orbitz had not reduced competition or harmed consumers. Statement
by Assistant Attorney General R. Hewitt Pate Regarding the Closing of the Orbitz
Investigation (July 31, 2003). The Justice Department’s announcement confirmed
our preliminary findings, set forth in our June 27, 2002, report to Congress,
that the formation of Orbitz and the Orbitz most-favored-nation clause have
neither reduced airfare discounting nor reduced competition in the on-line
distribution of airline services. This Department’s Inspector General reviewed
our report to Congress to evaluate the reasonableness and accuracy of the
report’s findings. The Inspector General concurred with those findings. He
concluded, “The Department has an ongoing responsibility to monitor the behavior
of all of the airlines to ensure that they are not engaging in unfair methods of
competition and as part of this general responsibility, should continue to
observe how the airlines use all distribution outlets, including Orbitz, to
distribute their services.” Office of the Inspector General, U.S. Department of
Transportation, “OIG Comments on DOT Study of Air Travel Services” (December 13,
2002), at 28-29.
If Orbitz or its owner airlines engage in unlawful conduct, we can and will use
our authority to end any unlawful practices. See, e.g., April 13, 2001, Letter
from Susan McDermott and Samuel Podberesky to Jeffrey Katz, at 6.
For the reasons stated in our notice of proposed rulemaking, we are not adopting
rules specifically governing joint airline websites like Orbitz at this time. We
also see no basis now for instituting any formal investigation into Orbitz’
operations. Our own informal review has not shown that such a proceeding would
be justified, and the Justice Department has concluded after an extensive
investigation that it has no evidence indicating that Orbitz has violated the
antitrust laws. Moreover, as we stated in the notice of proposed rulemaking,
Orbitz and any other website operated jointly by two or more airlines are
subject to the antitrust laws and section 411. The antitrust laws prohibit
competing firms from operating a joint venture in ways that unreasonably
restrict competition. See 67 FR 69414.
Insofar as Expedia’s concerns reflect the greater availability of webfares on
Orbitz than on competing on-line travel agencies, the market appears to be
addressing that issue. As discussed above, two of the systems have obtained
access to the webfares of several airlines by providing booking fee reductions
in return, and we see no reason why the other two systems could not create
similar arrangements. Expedia itself could seek to obtain access to webfares by
bargaining with the airlines that offer them.
16. Tying of Internet Participation
Each system generally follows a practice of requiring every participating
airline to agree that its services can be booked by every user of the system,
including all “brick-and-mortar” and on-line travel agencies. A non-accredited
travel agency, a corporate travel department, an on-line computer service, or a
consumer accessing the system through a travel agency website thus can book the
services of each participating airline through the system. Several airlines had
asserted that airlines should be able to determine which website could sell
their services and that the systems should be barred from tying access to a
system’s on-line users with access to its “brick-and-mortar” travel agency
subscribers. 67 FR 69414-69415.
We asked for comments on whether such a rule should be adopted. Such a rule
could be beneficial by giving airlines a greater ability to determine which
distribution channels could sell their services. A rule barring tying could
enable market forces to discipline the systems’ terms for participation in the
services they offer to on-line travel agencies and other Internet users, because
airlines might be able to decline participation if the terms were unreasonable.
67 FR 69414-69415.
We noted, however, that such a rule might be unnecessary. Southwest had been
able to keep on-line travel agencies from selling its tickets, and Northwest
successfully threatened to stop one on-line travel agency from selling its
tickets if the agency did not change its business practices. We asked the
parties to comment on whether a prohibition against tying would be
technologically feasible, and whether an individual airline could effectively
block any Internet site (or a “brick-and-mortar” travel agency) from selling its
tickets. 67 FR 69415.
Continental and Northwest support the proposal, while Amadeus and Sabre oppose
it.
We have decided not to adopt a rule barring the tying of access to
“brick-and-mortar” travel agencies with access to on-line travel agencies using
a system. The comments have not persuaded us that such a rule is necessary,
because airlines seemingly already have some ability to stop individual travel
agencies from selling their tickets. None of the commenters supporting the
proposal has explained why such a rule is necessary when an airline already has
the authority to stop an individual travel agency from selling its tickets.
Sabre and Amadeus assert that each airline can bar an agency from selling its
services by denying it an appointment as its sales agent. Sabre Reply Comments
at 68; Amadeus Comments at 101-102. Northwest, moreover, was able to obtain
better terms from Travelocity and Expedia by denying them commissions on their
bookings. Orbitz Comments at 17-18. Our notice pointed out that Southwest had
been able to keep on-line travel agencies from selling its tickets. Sabre also
asserts that implementing such a rule would be costly, for its programming
expenses would exceed $1.5 million. Sabre Reply Comments at 69.
America West contends without explanation that the systems’ market power would
currently preclude an airline from ending an on-line agency’s authority to sell
its tickets. America West Comments at 36. Because other commenters disagree with
America West’s position, we could not adopt the rule proposal without additional
evidence and analysis from America West and other commenters.
In addition, the systems’ worldwide participation agreements do not appear to
violate the antitrust laws or antitrust principles. Sabre has argued that the
antitrust laws’ prohibition against tying rule does not apply to the systems’
practice of requiring worldwide participation, since the offering of system
services to “brick-and-mortar” travel agencies and the offering of the same
services to on-line travel agencies do not constitute separate products. Sabre
Reply Comments at 67. See also Amadeus Reply Comments at 48. United, which
argues that all of the rules should be terminated, asserts that we should adopt
the proposal on tying if we maintain CRS rules. United further argues that the
systems’ worldwide participation agreements violate the antitrust laws. United
Reply Comments at 78-80. United essentially contends that access to each
subscriber is a separate product under tying principles. We disagree that a
system is necessarily engaged in the tying of two separate services when it
demands that a participating airline agree to allow all of the system’s
subscribers to sell its services (subject to the airline’s right to deny any
individual subscriber the authority to sell any of its services). Each system
has tens of thousands of subscribers worldwide, and Sabre and Amadeus each has
over 60,000 travel agency users. Sabre Comments, McAfee & Hendricks Declaration
at 11. United’s tying theory assumes that a system and airline should be able to
decide whether each individual subscriber should be able to sell the airline’s
tickets through the system. That would not be efficient. The record in this
proceeding does not contain evidence demonstrating that airlines would normally
demand that a system treat access to each individual subscriber as a separate
service. As a result, a system does not appear to be offering separate products
when it requires a participating airline to agree that any system user can sell
the airline’s services, subject to the airline’s right to terminate entirely a
travel agency’s authority to sell the airline’s services. Cf. United States v.
Microsoft Corp., 253 F.3d at 85-89.
17. International Issues
Our rules govern the systems’ operations within the United States. Section
255.2. This rulemaking nonetheless presents international issues, because the
systems operating in the United States operate throughout the world, because
foreign airlines serving U.S. points obtain ticket sales from bookings made
through the systems in the United States, and because the United States’
bilateral air services agreements (and one multilateral agreement) with a number
of foreign countries obligate each party to ensure that airlines domiciled in
the other country are not subject to discriminatory treatment from any system.
67 FR 69372. In addition, the European Union, Canada, Australia, and other
foreign countries have adopted their own CRS rules. The basic principles for all
of the rules are similar, but the actual rules are different, as in some
respects are the underlying regulatory philosophies. 67 FR 69372, 69415.
The major international consideration is the United States’ obligation under the
air services agreements to keep systems operating in the United States from
engaging in conduct that discriminates against foreign airlines, such as
charging discriminatory booking fees to foreign airlines and biasing displays
against foreign airlines. Congress has directed us to exercise our authority
consistently with the United States’ obligations under international agreements.
49 U.S.C. 40105(b)(1)(A).
Several of the commenters, notably Amadeus, contend that we must readopt the
existing rules and impose them on all systems in order to comply with the
obligations imposed by these agreements. Amadeus Comments at 36-41; Amadeus
Reply Comments at 20-22. See also Air France Comments at 6. Amadeus states that
it would not object to the rules’ termination if the only issue were whether
rules were required on economic policy grounds. Amadeus Comments at 4. Other
commenters, like United and Sabre, argue that satisfying those obligations does
not necessarily require us to maintain CRS rules and that we have no authority
to adopt rules in order to comply with the United States’ international
agreements if section 411 does not otherwise authorize us to regulate the
systems. United Reply Comments at 19-20; Sabre Reply Comments at 22-24. United
and Continental urge us to eliminate the rules even though they recognize that
foreign CRS rules typically contain reciprocity requirements. Transcript at 118,
140. A number of foreign airlines have supported proposals to eliminate some of
the rules, such as the rule prohibiting discriminatory booking fees. Ass’n of
Asia Pacific Airlines Comments at 6; British Airways Comments at 8; Lufthansa
Comments at 3; Qantas Comments at 1.
The final rules adopted in this proceeding no longer include the prohibitions
against discriminatory treatment contained in the existing rules. We recognize
that different airlines may obtain different treatment from the systems as a
result, especially on booking fees. However, because no U.S. airline now
controls any system operating in the United States, the systems should have no
incentive to discriminate against foreign airlines. Sabre Comments at 147. As
noted, our proposal to eliminate the rule barring discriminatory booking fees
was supported by several, though not all, foreign airline commenters. We have
also found that the elimination of those rules will benefit consumers and not
harm airline competition.
In addition, the statutory authority for our rules has always been section 411,
which authorizes us to prohibit unfair and deceptive practices and unfair
methods of competition. We may adopt rules that will prevent practices that
violate the antitrust laws or antitrust principles, but we do not have general
authority to regulate the business practices of the systems (or airlines). To
adopt any rule regulating CRS practices, we must find that the rule is necessary
to prohibit conduct that would violate section 411. Our decisions that several
of the rules should not be readopted at all, such as the rule prohibiting
discriminatory booking fees, flow from our decisions that the practices
regulated by those rules no longer appear to be violations of section 411 or
that the rules have become unnecessary for other reasons. As a result, section
411 does not authorize us to maintain those rules indefinitely.
We recognize the United States has signed bilateral air services agreements
obligating each party to ensure that airlines domiciled in the country of the
other party are not subjected to discriminatory treatment from systems operating
in its own territory. While we will no longer have rules carrying out all of the
obligations imposed by the bilateral air services agreements, we and the other
agencies of the United States government intend to take such action as is
necessary and appropriate to ensure that foreign airlines have a fair
opportunity to compete for travelers in the United States.
Amadeus has suggested that we attempt to harmonize our rules with those of the
European Union. As we stated in our notice of proposed rulemaking, we understand
that a greater similarity between our rules and the European rules (and the
rules of other countries) would provide benefits, especially by avoiding the
need for the systems to follow potentially different business practices in
different jurisdictions. However, our ability to regulate CRS practices is
subject to the limits of our authority under section 411 to prohibit unfair and
deceptive practices and unfair methods of competition by airlines and ticket
agents and our obligation to adopt only those rules whose benefits will outweigh
their costs. We cannot make our rules conform to those of the European Union
unless doing so will meet the requirements established by Congress.
18. Retaliation against Discrimination by Foreign Airlines and Systems
In some cases in the past, as discussed in our notice of proposed rulemaking, a
foreign airline limited its participation in a U.S. system (or imposed
restrictions on travel agencies using a U.S. system in its homeland) to deter
travel agencies in its homeland from choosing a U.S. system instead of the
system owned or marketed by the foreign airline. In a few such cases, we
proposed countermeasures to encourage the foreign airline to end its
discriminatory conduct. We acted under the International Air Transportation Fair
Competitive Practices Act, recodified as 49 U.S.C. 41310, which has authorized
us to impose countermeasures when a foreign airline or other firm engages in
discriminatory conduct against a U.S. airline. 67 FR 69372. Congress has since
amended 49 U.S.C. 41310 to give us broader authority to take countermeasures
against a foreign system or a foreign airline that controls such a system, if
the system engages in an unjustifiably discriminatory or anticompetitive
practice against a U.S. CRS or imposes unjustifiable restrictions on access by a
U.S. system to a foreign market. This broadens the statute by authorizing us to
take action when a U.S. system is subject to discriminatory conduct by a foreign
firm. Section 741 of the Wendell H. Ford Aviation Investment and Reform Act for
the 21st Century, P.L. 106-181 (April 5, 2000).
To further deter discriminatory treatment, our current rules authorize a system
to engage in discriminatory conduct against a foreign airline that operates a
foreign system, if that system subjects a U.S. airline to discriminatory
treatment and the system has given us and the foreign airline 14 days advance
notice of its plan to take countermeasures. Section 255.11(b).
We did not propose to strengthen this rule, although Sabre asked us to do so. We
explained that we would in any event continue to take appropriate action when a
U.S. airline or system is subject to discriminatory treatment by a foreign firm
designed to prejudice the U.S. firm’s ability to compete. 67 FR 69415-69416.
Although Sabre has argued that we have no authority to regulate its operations
under section 411 and that there is no longer any economic justification for the
rules, Sabre has urged us to strengthen our existing rule, but only if we
maintain CRS regulations. Sabre Comments at 168-169. Delta, on the other hand,
argues that the existing rule should be eliminated. Delta Reply Comments at 58.
We intend to carry out Congress’ mandate that action be taken when foreign
airlines and systems engage in discriminatory conduct against U.S. firms. We can
take such action without maintaining the existing rule. We have determined,
however, not to readopt the rule authorizing a system to take countermeasures
against a foreign system that discriminates against U.S. airlines. If we were to
readopt the rule, we would presumably have to modify it, because we are
eliminating the major rules barring each system from engaging in discriminatory
treatment of participating airlines. The rule should authorize self-help only
when a foreign system biases its displays against U.S. airlines.
Furthermore, the rule as written is outdated. The Board originally adopted the
rule at a time when each significant system operating in the United States was
owned by a major U.S. airline with international operations. As written, the
rule made sense because it allowed the system to take countermeasures if its
airline owner (but not the system itself) was subject to discriminatory
treatment from a foreign system that was owned or controlled by a foreign
airline. 49 FR 11668-11669. Sabre no longer has any airline owners and so should
have little incentive to take countermeasures if a U.S. airline is subjected to
discriminatory treatment overseas from a foreign system. The rule, moreover,
would allow Sabre to subject the offending foreign airline to discriminatory
treatment, not to take direct action against the foreign system. We think that
we can more rationally protect Sabre’s interests by reaffirming our willingness
to take appropriate action authorized by statute.
19. Sunset Date for the Rules
Our rules have had a sunset date to ensure that we would reexamine the need for
the rules and their effectiveness. Section 255.12. In our notice, we tentatively
decided not to propose a new sunset date for the rules in our notice of proposed
rulemaking. Instead, we stated that we would review the rules when necessary and
would consider comments on when that should be done. 67 FR 69416.
Some commenters asked us to establish a new sunset date that would establish a
time when the rules would be reexamined, while other commenters argued that a
new sunset date should establish the time when the rules would end without
further reexamination. See, e.g., Alaska Comments at 1-3 and Delta Comments at
2-3 (transitional rules should terminate in three years); American Comments at
49 (three-year sunset period with presumption that rules would then terminate);
Midwest Comments at 29 (at least five years).
Whether the rules should have a sunset date, and when that date should be, are
essentially moot issues as a result of our final decision in this proceeding. We
are readopting very few of the existing rules. The other rules will therefore
automatically expire on January 31, 2004. The rules adopted here will be
terminated as of July 31, 2004. We will, however, actively monitor conditions in
the market in order to verify our assumption that rules against display bias
will not be necessary beyond that time. We retain the authority to propose a
continuation of rules against display bias if, contrary to our expectation,
continued regulation is warranted.
20. Effective Date of the Rules
The Administrative Procedure Act states that new rules normally should take
effect no less than thirty days after their publication. Our notice of proposed
rulemaking invited comments on whether we should give firms additional time to
comply with any new requirements mandated by our final rule in this proceeding.
67 FR 69416-69417. In response to our notice of proposed rulemaking, which
proposed to readopt most of the rules and adding additional requirements for
some of them, like the rules on subscriber contracts, a number of commenters
asserted that one or more provisions of our proposed CRS rules should take
effect on a delayed schedule due to the expense or difficulty of compliance
within thirty days of the rules’ publication date. See, e.g., Amadeus Comments
at 104-106; Galileo Reply Comments at 59. Galileo further contends that we
should provide for a two-year transition if we determine not to readopt the
mandatory participation rule and the rule barring differential booking fees.
Galileo Reply Comments at 59.
We have decided to make January 31, 2004, the effective date of this rule. That
date is the sunset date for the existing rules. We have determined for good
cause to make the rule effective on that date, rather than thirty days after
publication as required by the Administrative Procedure Act except for good
cause shown. 5 U.S.C. 553(d). We are maintaining for a six-month transition
period the current rules prohibiting display bias and, with some changes, the
current rule prohibiting parity clauses in the systems’ contracts with
participating airlines. Our transitional rule barring airlines from inducing
systems to bias displays is new in form but merely bars airlines from
encouraging systems to violate their existing obligation to provide neutral
displays. We are adopting a transitional rule prohibiting each system from
demanding that an airline provide all public fares as a condition to any
participation in the system, but this rule is analogous to the existing rule
prohibiting parity clauses. These rules will not require any changes, as far as
we know, in the systems’ existing operations. Making them effective on less than
thirty days notice accordingly will not impose an undue burden on anyone. If the
rules did not become effective on January 31, 2004, there would be a short gap
between the expiration of the current rules and the effectiveness of the new
rules, which could cause systems for a brief period to engage in practices that
could harm competition and consumers. The January 31, 2004, effective date will
not prevent firms from taking immediate advantage of the substantial
deregulation resulting from our decision that most of the current rules should
not be readopted.
The elimination of other rules on participating airline contracts (the
prohibition against discriminatory booking fees, for example), and the rules on
subscriber contracts will not require any immediate change in the operations of
airlines, systems, and travel agencies. The parties are free to maintain their
existing contracts while they develop new agreements that take advantage of the
flexibility on these matters offered by our final decision. We cannot create a
transitional period by readopting the existing rules for a short period, because
the record in this proceeding would not justify doing so.
Amadeus has filed a petition asking us to eliminate the rules’ existing sunset
date, January 31, 2004. Docket OST-2003-16469. Amadeus notes that we have
submitted a final rule to OMB review but that the review process may not be
completed before the sunset date. In addition, Amadeus claims that industry
participants will need several months to adjust to any substantial change in the
current regulatory structure, such as partial deregulation. Galileo supports
Amadeus’ petition, but Delta, Northwest, Sabre, United, and Worldspan oppose it.
We see no need to eliminate the sunset date. As noted, we have decided that most
of the existing rules should be terminated. Maintaining the existing rules
beyond January 31 would prevent airlines, systems, and travel agencies from
taking immediate advantage of the industry’s deregulation. Moreover, we are not
directing any firms to change their current methods of operation. They may
continue to follow their existing business practices until they determine how
best to modify them in response to deregulation, if not compelled to change them
sooner due to market forces.
21. Divestiture
The American Antitrust Institute and US Airways have suggested that we should
require the divestiture of all airline ownership of any system. They argue that
airline ownership of a system creates the incentive (and ability) to operate the
system in ways that will reduce airline competition. US Airways Comments at 23;
American Antitrust Institute Comments at 6-7. See also Sabre Comments, Woodbury
& Salop Declaration at 3-5; Travelers First Reply Comments.
Amadeus opposes any such requirement. It contends that such a requirement would
be unfair and unlawful, because it would require the European airlines that own
the majority of Amadeus’ stock to divest it, even though the company is located
in Europe. Amadeus Reply Comments at 41-42.
We will not require divestiture. We did not propose such a rule, and we did not
require divestiture when the systems operating in the United States were
controlled by U.S. airlines. 57 FR 43830.
However, our decision that most of the current rules should not be readopted in
large part reflects the complete divestiture by U.S. airlines of their CRS
ownership interests. A system’s ownership by U.S. airlines would raise
competitive concerns. The Justice Department thus states, “Finally, DOJ’s
recommendation assumes that the recent divestitures represent a permanent change
in the ownership structure of the industry. DOT should therefore make clear that
any attempt at reintegration into CRS by airlines will be closely scrutinized by
the appropriate enforcement agencies.” Justice Department Reply Comments at 4.
As we stated above, we already intend to monitor airline distribution
developments during the next six months and beyond. We will pay particularly
close attention to any airline efforts to establish control over a system. We
retain the authority to bring enforcement cases against firms that violate the
statutory prohibition against unfair methods of competition, and we will take
appropriate action if we have evidence of unlawful conduct.
We recognize that Orbitz, owned by five major airlines, may enter the CRS
business, a prospect not specifically addressed by the Justice Department. The
Justice Department has been investigating Orbitz’ operation as an on-line travel
agency and concluded that it had no evidence that Orbitz’ current operations are
harming consumers or reducing competition. Statement by Assistant Attorney
General R. Hewitt Pate Regarding the Closing of the Orbitz Investigation (July
31, 2003). As we noted in our notice of proposed rulemaking, the antitrust laws
significantly restrict the operations of a joint venture among competitors. 67
FR 69414. The Justice Department will enforce those laws if necessary.
Furthermore, our examination of the CRS industry’s developments after the
effective date of our new rules will include a review of Orbitz’ operations as a
system, if it chooses to enter the business.
REGULATORY PROCESS MATTERS
Regulatory Assessment and Unfunded Mandates Reform Act Assessment
1. Unfunded Mandates Reform Act Assessment
The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531-1538, requires Federal
agencies to prepare a written assessment of the costs, benefits, and other
effects of proposed or final rules that include a Federal mandate likely to
result in the expenditures by State, local, or tribal governments, in the
aggregate, or by the private sector, of more than $100 million annually.
The legal authority for the rule is provided by 49 U.S.C. 41712, which
authorizes the Department to prohibit unfair or deceptive practices and unfair
methods of competition in air transportation or the sale of air transportation.
The Department is authorized by 49 U.S.C. 40113(a) to implement that authority
by adopting rules defining and prohibiting unfair or deceptive practices and
unfair methods of competition.
The rule would not result in expenditures by State, local, or tribal governments
because no such government operates a system or airline subject to the proposed
regulation. The Regulatory Assessment below provides detailed discussion of the
costs and benefits for the rule. The Regulatory Assessment also presents
alternatives to the rule.
2. The Department’s Regulatory Assessment
Executive Order 12866, Regulatory Planning and Review (58 FR 51735, October 4,
1993), defines a significant regulatory action as one that is likely to result
in a rule that may have an annual effect on the economy of $100 million or more
or adversely affect, in a material way, the economy, a sector of the economy,
productivity, competition, jobs, the environment, public health or safety, or
State, local, or tribal governments or communities. Regulatory actions are also
considered significant if they are likely to create a serious inconsistency or
interfere with the actions taken or planned by another agency or if they
materially alter the budgetary impact of entitlements, grants, user fees, or
loan programs or the rights and obligations of the recipients of such programs.
The Department’s Regulatory Policies and Procedures (44 FR 11034, February 26,
1979) outline similar definitions and requirements with the goal of simplifying
and improving the quality of the Department’s regulatory process. They state
that a rule will be significant if it is likely to generate much public
interest.
The Department has determined that these regulations are not an economically
significant regulatory action under the Executive Order, because the record does
not show that the rules would likely have an annual impact on the economy of
$100 million or more. The rules will not impose significant costs on the systems
or other firms. The cost of complying with the prohibitions against display bias
should be small, because the systems have been complying with those requirements
and must continue to comply with similar requirements imposed by other
countries. The rules will reduce the systems’ revenues by barring them from
selling display bias, but nothing in the record indicates that the revenue loss
would exceed $100 million, and the systems have not claimed that the
continuation of the rules barring display bias will reduce their revenues by
$100 million or more.
The rules are significant under the Department’s Regulatory Policies and
Procedures because of the amount of public interest they are likely to generate.
The Department has prepared a regulatory assessment for this final rule, which
has been placed in the docket for this proceeding. These rules have been
reviewed by the Office of Management and Budget under the Executive Order.
The notice of proposed rulemaking contained a preliminary regulatory impact
analysis of the proposed rules. That analysis tentatively concluded that the
benefits of the proposed rules would exceed the costs of those rules. The
analysis relied on a qualitative assessment of the costs and benefits of the
proposed rules, because we did not have information of the kind and detail
necessary for a quantification of those benefits and costs. We requested
interested persons to provide detailed information on the potential consequences
of the proposed rules. 67 FR 69419.
Our final regulatory assessment concludes that the benefits of the final rule
will outweigh its costs. The final rule will benefit airline competition by
preventing systems from agreeing with some airlines to bias displays in their
favor and against other airlines. If the final rule did not prohibit display
bias, the systems would be likely to bias their displays. That could harm
consumers by causing system users to obtain misleading information and by
reducing airline competition. A system has some ability to bias its displays,
because participating airlines have little ability to cause systems to stop
biasing displays, travel agencies can live with some bias, a system that sells
display bias can offer better terms to travel agency customers, and a travel
agency would incur switching costs if it changed systems in order to avoid one
system’s bias. Display bias has the potential to undermine airline competition
and distorts consumer choices. We believe that a rule prohibiting display bias
will impose relatively small costs on the systems.
The rules prohibiting systems from demanding that airlines agree to parity
clauses or clauses requiring an airline to make all of its publicly-available
fares saleable through a system as a condition to any participation will give
airlines some leverage in negotiating for better terms for participation. During
the transition period, this will offset to some extent the systems’ existing
market power and furnish airlines an opportunity to prepare more effectively for
the termination of the prohibition. The transition will give airlines some
ability to promote alternative distribution and booking channels and thereby
promote innovation.
Terminating the rest of the existing rules over time will promote efficiency and
reduce costs for firms involved in airline distribution and the airlines
themselves.
The final regulatory assessment concludes that the costs of readopting the other
rules would exceed their benefits.
Regulatory Flexibility Statement
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601 et seq., was enacted by
Congress to ensure that small entities are not unnecessarily and
disproportionately burdened by government regulations. The act requires agencies
to publish a final regulatory flexibility analysis for regulations that may have
a significant economic impact on a substantial number of small entities. Our
notice of proposed rulemaking, which assumed that the relevant small entities
included smaller U.S. airlines and travel agencies, included an initial
regulatory flexibility analysis. That notice also set forth the reasons for our
rule proposals and their objectives and legal basis. This is the regulatory
flexibility analysis for our final rule.
Our existing CRS rules primarily regulate the systems’ operations, although they
do impose some obligations on airlines participating in the systems and
indirectly regulate travel agencies by prohibiting certain types of conduct in
the travel agencies’ relationships with systems and their airline owners. Our
notice of proposed rulemaking proposed to maintain most of the existing rules
and to strengthen certain parts of those rules, primarily the rules governing
the systems’ contractual relationships with travel agency subscribers. We also
proposed, however, to eliminate the rule barring discriminatory booking fees and
the mandatory participation rule. We additionally asked for comment on whether
we should terminate more of the rules.
If adopted, the proposals would not have subjected small entities to direct
regulation, except for certain obligations imposed on participating airlines,
but would have affected the systems’ relationships with airlines and travel
agencies. The notice included an initial regulatory flexibility analysis, which
relied in part on the factual, policy, and legal analysis set forth in the
remainder of the notice, as allowed by 5 U.S.C. 605(a). We tentatively concluded
that our proposed rules would have a significant economic impact on a
substantial number of small business entities, especially travel agencies and
air carriers, including regional air carriers. The proposals would have given
travel agencies a greater ability to use multiple systems and booking channels.
To the extent that airlines could operate more efficiently and reduce their
costs, the rules would also affect all small entities that purchase airline
tickets, since airline fares may be somewhat lower than they would otherwise be,
although the difference may be small. We expected that our proposals to prohibit
or restrict productivity pricing could increase CRS costs for some travel
agencies, but that the affected travel agencies would be the larger agencies. 67
FR 69423-69424.
We invited comments on our initial regulatory flexibility analysis. 67 FR 69424.
We additionally gave interested persons ample opportunity to file comments and
reply comments on our rule proposals and to participate in a public hearing.
Members of the Congressional committees on small business, travel agency
commenters, and the NFIB Legal Foundation assert that our initial regulatory
flexibility analysis was inadequate and that we must give interested small
entities a better opportunity to comment on the proposals and their potential
impact on small businesses.
At the final rule stage, we have decided not to adopt most of the existing rules
and not to adopt our proposals to strengthen the rules on subscriber contracts.
We are not readopting the existing rules regulating the travel agencies’
relationships with the systems and airlines owning or marketing a system, and we
are not adopting the proposals to strengthen the existing rules on matters such
as the terms of the systems’ contracts with subscribers. Our rules will no
longer regulate the travel agencies’ relationships with the systems and any
airlines owning a system. Our final rule will still affect the airlines’
relationships with the systems, because it will prohibit display bias and bar
systems from imposing certain types of contract requirements on participating
airlines.
The Regulatory Flexibility Act requires us to publish a final regulatory
flexibility analysis that considers such matters as the impact of a final rule
on small entities if the rule will have “a significant economic impact on a
substantial number of small entities.” 5 U.S.C. 605(b). The rule may have a
significant economic impact on a substantial number of airlines that are small
entities, because almost 400 U.S. passenger airlines come within the definition
of a small entity, according to the Small Business Administration. That impact
will be beneficial, as the final rule will prohibit certain system practices
that would likely harm the business position of small airlines. In view of the
concerns expressed by commenters about the impact of any rule on travel agencies
that are small entities, we are also discussing the final rule’s impact on
travel agencies, even though the impact is indirect. That impact should also be
beneficial. As shown by the following discussion, we have carefully considered
how the final rule may affect travel agencies and other small entities.
1. The Need for, and the Objectives of, the Final Rule
For a six-month period, our final rule will maintain the existing rules against
display bias and will prohibit each system from requiring airlines to accept
parity clauses and clauses requiring the airline to provide all of its
publicly-available fares to the system as a condition to any participation in
the system. These rules are necessary for preventing display bias, which could
mislead travel agents using a system and their customers, and preventing
contract practices that could reduce competition for the systems and deny
airlines discretion on how to market their services through the systems and
alternative booking channels. The rules’ objectives are to prevent consumer
deception, promote airline competition, and encourage market forces to
discipline the systems’ prices and terms for airline participation. These
objectives will promote airline competition and lower costs for airline
distribution, which would lead to lower airfares and more efficient airline
operations.
2. Issues Raised by the Comments, and Our Assessment of Those Issues
Several commenters contend that our rule proposals would cause significant harm
to small entities, primarily small travel agencies, and that our initial
regulatory flexibility analysis was inadequate. See June 9, 2003, Letter from
Senators Snowe and Kerry; March 19, 2003, Letter from the Democratic Members of
the House Committee on Small Business; Comments of the Small Business
Administration Office of Advocacy; NFIB Legal Foundation Comments; ASTA Comments
at 51-54. These commenters allege that the rule proposals, if adopted, would
deny travel agencies the tools they need for serving their customers, eliminate
incentive payments to travel agencies from the systems (and thus make many
travel agencies unprofitable), and limit flexibility for travel agency contracts
for CRS services. These allegations involve our proposals to eliminate the
mandatory participation rule, to bar productivity pricing, and to strengthen the
existing rules regulating subscriber contracts, and our decision that we would
not propose rules requiring airlines to make all publicly-available fares, such
as webfares, saleable through each of the systems.
As a result of these comments as well as comments submitted by other persons and
the on-going changes in the airline distribution and CRS businesses, we have
decided not to adopt the proposed changes to the rules on subscriber contracts,
including the proposed restrictions on productivity pricing, and to eliminate
the existing rules regulating the contracts between the systems and subscribers.
We have further decided to make final our decision to eliminate the mandatory
participation rule and our decision not to adopt rules requiring each airline to
make its webfares or other fares available through all distribution channels
rather than just those channels selected by the airline.
We have discussed above in detail the basis for each of our decisions on the
significant rulemaking issues. We will summarize that discussion in this
regulatory flexibility statement.
In general, we have decided to terminate most of the existing rules, because the
record does not show a need for continued CRS regulation in most areas. Our
primary goal in adopting CRS regulations has always been the prevention of
system practices that would prejudice airline competition. The systems are no
longer subject to control by U.S. airlines, and the record does not show that
any non-airline system is likely to operate in a manner that would distort
airline competition, except insofar as the systems appear willing to sell
display bias. We are maintaining the rules prohibiting display bias, but not the
other rules that were originally designed to keep systems affiliated with
airlines from prejudicing the competitive position of rival airlines. The record
shows that, in other respects, the current rules unnecessarily limit the
business discretion of systems and airlines, are no longer necessary in light of
market developments, or are unlikely to be effective and enforceable.
Secondly, our statutory authority does not give us the authority to generally
regulate the relationships between the systems, on the one hand, and airlines
and travel agencies, on the other hand. As a result of Congress’ decision 25
years ago to deregulate the airline industry, we have no overall authority to
regulate the airlines’ distribution practices or to adopt rules requiring
changes in airline practices in order to promote fairer competition. Our
authority for CRS rules, section 411, authorizes us to prevent unfair and
deceptive practices and unfair methods of competition. We adopted the existing
CRS rules under our authority to prohibit unfair methods of competition, except
insofar as we have adopted rules prohibiting display bias, which we also based
on our authority to prohibit deceptive practices. We may adopt the rule
proposals discussed in the comments on our initial regulatory flexibility
analysis only if we find those rules are necessary to prevent unfair methods of
competition. As explained in our discussion above of the individual rule
proposals, the record would not support a finding that several of the rule
proposals advanced by travel agency commenters are necessary to prevent unfair
methods of competition.
Against this background, we will discuss the final rules and alternative rule
proposals of concern to the travel agencies and small airlines, beginning with
the proposals on subscriber contracts, followed by the proposals to readopt the
mandatory participation rule and to adopt a rule requiring airlines to make all
publicly-available fares saleable through all systems, the rules governing the
relationships between airlines and the systems, and the rule prohibiting display
bias.
(a) Regulation of Subscriber Contracts
Our existing rules impose several requirements on subscriber contracts in order
to give travel agencies a greater ability to switch systems and to use multiple
systems and booking channels. The rules bar systems from requiring contracts
with a term of more than five years (and require a system offering a five-year
contract to a travel agency to also offer a three-year contract), from imposing
minimum use requirements and parity clauses, from denying a subscriber the
ability to use third-party hardware and software, and from blocking a subscriber
from accessing any system or database from the subscriber’s equipment if the
equipment is not owned by the system. We proposed to maintain these rules, and
we requested comment on whether we should shorten the maximum term for
subscriber contracts (for example, by adopting the European Union’s rule) and
should restrict the types of damages recoverable by a system if a subscriber
breached its contract. We also proposed to limit the systems’ productivity
pricing arrangements. 67 FR 69404-69409. We made these proposals, because we
tentatively found, on the basis of the comments submitted in response to our
advance notices of proposed rulemaking, that the systems’ subscriber contracts
substantially restricted the travel agencies’ ability to switch systems or use
multiple systems and booking channels. For example, while the rules require
systems to offer travel agencies a three-year contract whenever a five-year
contract is offered, the three-year contracts offered by systems then were
sufficiently less attractive that most travel agencies until recent years were
accepting five-year contracts. 67 FR 69405. We recognized, however, that the
systems competed vigorously for subscribers. 67 FR 69371, 69405.
The comments submitted in response to our notice of proposed rulemaking allege
that the systems’ recent contracts now give travel agencies more flexibility.
See, e.g., Large Agency Coalition Comments at 7-14; ASTA Comments at 14-15;
Sabre Comments at 151-153 and Fahy Declaration at 14-15. For example, the
average subscriber contract has a term of no more than three years. The systems’
current productivity pricing arrangements similarly allow subscribers to make a
significant number of bookings outside the system without incurring a penalty.
ASTA suggests that the major reasons for the travel agencies’ insistence on more
flexible contracts are their need to use the Internet and their need to respond
to changing technology. ASTA Comments at 14-15. The systems’ competition for
subscribers requires them to meet travel agency demands for more flexibility. As
a result, travel agencies, large and small, are obtaining contracts with terms
that are more liberal than required by our existing rules.
The commenters additionally allege that any rules designed to encourage travel
agencies to use multiple systems rather than one system will inevitably be
ineffective. Travel agencies are unwilling to make substantial use of more than
one system because using multiple systems is inefficient for travel agencies.
See, e.g., ASTA Comments at 3-4.
The record thus suggests that the systems’ current contracts do not prevent
travel agencies from using alternative booking channels, like the Internet, when
travel agents wish to use them, that any efforts by us to encourage travel
agents to use multiple systems will be unavailing, and that the systems’
competition for travel agency subscribers will continue to enable travel
agencies to obtain flexible contracts if we did not readopt the existing rules.
We have therefore decided that we should neither readopt our existing subscriber
contract rules nor adopt any of the rule proposals on which we invited comment.
Our decision not to adopt restrictions on the systems’ productivity pricing
arrangements is, of course, consistent with the position taken by almost all
travel agency commenters.
Our decision not to readopt the existing rules on subscriber contracts is
consistent with the position taken by some commenters that the rules should not
limit the terms of contracts between systems and travel agencies, although some
travel agency commenters support the readoption of some restrictions on
subscriber contracts. Our decision to allow those rules to expire will not harm
travel agencies, because the systems are already offering travel agencies better
terms than those required by our rules.
(b) Access to Complete Information on Fares and Services
The other major issue raised by the commenters on our initial regulatory
flexibility statement was the complaint that our decision on which rules should
be proposed would allegedly deny travel agencies the tools that they need to
serve their customers. This complaint stems from our proposed elimination of the
mandatory participation rule and our tentative decision that we should not adopt
a rule requiring airlines to make all publicly-available fares, or at least all
webfares, saleable through each of the systems. The comments have not persuaded
us that either tentative decision was erroneous. Ending the mandatory
participation rule, and not requiring airlines to make all fares available
through all distribution channels, will promote competition in the airline
distribution business without causing significant harm to travel agents.
The travel agencies’ interest in these rule issues arises because of their
desire to be able to book webfares through their systems. If travel agents can
only book webfares through an airline’s own website, or through on-line agencies
that have access to webfares, travel agents will be unable to operate as
efficiently. Travel agents want access to webfares, even though webfares make up
a small share of all ticket sales, because webfares can be significantly lower
than other fares.
While maintaining the mandatory participation rule and the adoption of a rule
requiring each airline to provide each system with access to all of its
publicly-available fares could benefit travel agencies, the record in this
proceeding would not justify the imposition of such requirements on airlines, as
explained next, starting with the mandatory participation rule.
(i) The Mandatory Participation Rule
The mandatory participation rule covers airlines with a significant ownership
interest in a system. As a result of Worldspan’s sale by its three U.S. airline
owners, no system now has any significant U.S. airline ownership, although
Amadeus, the system with the smallest U.S. market share, is primarily owned by
three foreign airlines, Air France, Iberia, and Lufthansa. Those three airlines
are currently the only airlines subject to the mandatory participation
requirement. Orbitz’ five U.S. airline owners would become subject to the
requirement if Orbitz began operating as a system, but Orbitz represents that it
will not enter the CRS business if its owners would then become subject to the
mandatory participation rule. Transcript at 78-79.
We have concluded that maintaining the mandatory participation rule would
unreasonably restrict the ability of airlines to negotiate with the systems for
better terms for participation. An airline with a system ownership interest
should be able to choose whether and at what level it will participate in
competing systems, and its ability to choose will give it some bargaining
leverage that may enable it to obtain better terms for participation. See also
Justice Department Reply Comments at 23.
Furthermore, the U.S. airlines’ divestiture of their CRS ownership interests has
eliminated the original basis for the rule. We originally adopted the rule as a
result of evidence suggesting that some airlines with a CRS ownership interest
lowered their participation level in competing systems, or denied those systems
access to fares and functionality desired by travel agents, in order to give
their affiliated system a competitive advantage. 56 FR 12608. When we adopted
the rule, competition between the systems, each then controlled by one or more
airlines, represented another avenue for airline competition. That is no longer
the case, because no system now has a U.S. airline owner. While the systems
continue to have marketing relationships with their former owners, those ties
have become relatively unimportant in determining an airline’s decisions on the
extent of its participation in rival systems. American Comments at 30; Large
Agency Coalition Comments at 14; Large Agency Coalition Reply Comments at 16-17.
More importantly, eliminating the mandatory participation rule should not harm
travel agencies, even if the rule covered several U.S. airlines rather than only
three European airlines. Recent experience suggests that the elimination of the
mandatory participation rule will not lead to radical changes in CRS
participation levels by the airlines that have had a system ownership interest.
Each system has some market power over most airlines, because the airlines’
distribution needs require most airlines to participate in each system. All of
the major network airlines participate in each system at the highest level, and
they do so in order to promote the sale of their services by the travel agents
using each system. Transcript at 140; Amadeus Reply Comments at 24. United has
chosen to participate at the highest level even though it has not been subject
to the mandatory participation rule for some time. In addition, each of Orbitz’
owner airlines has agreed with Sabre and Galileo to make its webfares saleable
through the system in return for reduced booking fees and other commitments,
even though Orbitz’ ability to sell webfares had been a major selling point for
that on-line travel agency and some airlines complain that the booking fee
reductions were not as large as they should have been. The willingness of these
airlines to sell their webfares through Sabre and Galileo supports our
expectation that the elimination of the mandatory participation rule will not
lead airlines to deny the systems reasonable access to their fares and services.
Even if the record suggested, however, that the elimination of the mandatory
participation rule would harm travel agencies by leading to major changes in
participation levels, we would likely be unable to readopt the rule. Section 411
authorizes us to prohibit practices that violate the antitrust laws or antitrust
principles, as discussed above, but does not empower us to impose requirements
on airlines in order to increase the efficiency of travel agency operations or
give travel agencies a better opportunity to compete against other distribution
channels. For purposes of our regulatory flexibility analysis, we are not
obligated to treat rule proposals that could not be adopted under our statutory
authority as alternatives that must be considered in the final regulatory
flexibility analysis. Greater Dallas Home Care Alliance v. United States, 36 F.
Supp. 3d 765, 769-770 (N.D. Tex. 1999). Cf. American Airlines v. Dept. of
Transportation, 202 F.3d 788, 803-804 (5th Cir. 2000).
(ii) Requiring Airlines To Make Fares Available Through All Distribution
Channels
To facilitate their ability to win and serve customers, several travel agency
commenters also ask us to require airlines to make all fares available through
all distribution channels. This proposal originated in the airlines’ initial
practice of making webfares available only through an airline’s own website and
then, as a result of Orbitz’ offer to give airlines a rebate on their booking
fees in exchange for access to the webfares, of making the fares saleable
through Orbitz as well. Until recently webfares typically were not available
through any system. Travel agents thus could not book webfares through a system,
and they could learn whether the fares were available only by accessing the
airline’s own website or an on-line travel agency that offered webfares. Going
outside the system to look for webfares and booking webfares through Orbitz or
an airline website are not as efficient for travel agents.
A rule requiring airlines to offer all fares through all channels no longer
appears necessary. Two of the systems -- Sabre and Galileo -- have gained access
to the webfares of several major airlines by offering to reduce their booking
fees in exchange for a commitment to make all publicly-available fares saleable
through the system. Subscribers to Sabre and Galileo, which together have a 65
percent market share, now have access to the webfares offered by major airlines.
The other two systems -- Amadeus and Worldspan -- should be able to obtain
access to many webfares by making similar offers to participating airlines.
Requiring airlines to make all publicly-available fares saleable through each
system would provide efficiency benefits for travel agents and make it easier
for consumers to obtain comprehensive information on the fares and services
available in each airline market. Consumers, however, would be unlikely to
obtain all of the low fares now being offered by airlines. If airlines had to
make all fares, including webfares, available through all distribution channels,
no matter how costly, airlines would presumably cut back their offering of
discount fares like webfares. Airlines are more willing to offer lower fares
when they can use distribution channels that are less costly. Because the travel
agency/CRS distribution channel is a relatively costly channel for airlines,
requiring airlines to make low fares available through that channel would
probably eliminate the low fares that can be economically offered only when
doing so will save distribution costs. America West Comments at 32; United Reply
Comments at 51-52.
Such a requirement would also unreasonably limit each airline’s discretion on
how it should best distribute its services. Airlines should be free to offer
special fares and services through distribution channels that are less costly or
more effective. Airlines in fact have long given selected distribution channels
the ability to sell fares that other channels cannot sell. See, e.g., 67 FR
69413; America West Comments at 33. Travel agencies have engaged in similar
behavior. 67 FR 69413. Two successful low-fare U.S. airlines -- Southwest and
JetBlue -- have chosen not to participate in all of the systems and instead to
focus their marketing efforts on encouraging travelers to buy tickets directly
from their reservations agents and websites. New entrant airlines like JetBlue
will necessarily be small entities. Compelling those airlines to change their
distribution strategies would be a radical departure from our past use of our
section 411 authority.
Airlines, moreover, should be able to use their control over access to their
webfares as a bargaining tool for getting better terms for CRS participation.
Amadeus Comments at 10; American Comments at 27. The airlines’ ability to deny
access to their webfares has caused two of the systems, Sabre and Galileo, to
give airlines booking fee reductions in exchange for the ability to sell their
webfares.
The National Commission to Ensure Consumer Information and Choice in the Airline
Industry, which had been charged by Congress to study travel agency access to
webfares and related issues, issued a report that concluded that airlines should
not be required to make all fares available through all distribution channels.
The Commission reasoned that such a requirement would substantially harm
consumers, because airlines would stop offering some low webfares, would be
contrary to the industry’s use of different distribution channels to dispose of
specific types of inventory, and would not solve the travel agency industry’s
basic problems, particularly the growing use of the Internet. “Upheaval in
Travel Distribution: Impact on Consumers and Travel Agents,” National Commission
to Ensure Consumer Information and Choice in the Airline Industry” (November 13,
2002), at 56-58.
Furthermore, our authority under section 411 would not allow us to adopt a rule
requiring airlines to make all fares -- or even all webfares -- available
through all distribution channels. Such a rule accordingly is not an available
alternative to the rules we are adopting. As shown, section 411 authorizes us to
prohibit practices that violate the antitrust laws or antitrust principles. The
antitrust laws generally do not prohibit firms from choosing to distribute their
products and services through some outlets and not others. The antitrust laws do
not restrict a firm’s distribution choices, even if those choices undermine the
ability of some distributors to stay in business, unless the firm’s conduct
unreasonably restricts competition. While section 411 gives us somewhat broader
authority over business practices in the airline and airline distribution
businesses, the record in this proceeding would not justify a finding that an
airline’s decision to limit the offering of some fares or services to selected
distribution channels is an unfair method of competition.
(iii) Relationships between Airlines and Systems
The final rule will affect the systems’ treatment of airlines by prohibiting
display bias and certain types of contractual provisions that will tend to
maintain the systems’ market power and unreasonably deny airlines the ability to
determine how to distribute their services. The final rule will not include such
provisions of the existing rules as the rule prohibiting discriminatory booking
fees.
The commenters on our initial regulatory flexibility analysis did not address
the potential impact of our rule proposals on airlines that are small entities.
The final rule, as indicated, will prohibit certain types of system conduct that
could unduly prejudice the competitive position of some airlines and deny them a
reasonable opportunity to determine how best to distribute their services. These
provisions will give smaller airlines more choice. The final rule will also
maintain the rules prohibiting display bias. These provisions should benefit
participating airlines, particularly smaller airlines. At the same time, we are
not readopting other provisions, such as the prohibition against differential
booking fees, which could protect smaller airlines against potential system
practices that might undermine the competitive position of individual airlines.
As discussed earlier in this rule, we have concluded that the record in this
proceeding and the limits of our authority under section 411 would not allow us
to readopt those rules. In particular, the record would not justify a finding
that a system would be engaged in an unfair method of competition if it charged
some airlines higher fees than those paid by other airlines.
The earlier discussion in this document explains the overall basis for our
decision to bar the two types of unreasonably restrictive clauses in contracts
between airlines and systems. These rule provisions will impose no burden or
restriction on airlines. These provisions will benefit airlines that are small
entities, because the provisions will prevent system practices that would deny
an airline the ability to choose the level of service that it will buy from each
system and to choose which distribution channels (and which systems, if any)
will have access to its most attractive fares, including its webfares. Airlines
could potentially reduce their distribution costs if they could choose to buy a
lower level of service in one system without being compelled by a parity clause
to pay for a higher level of service in that system. Similarly, an airline could
encourage travellers to use lower-cost distribution channels, which would lower
its distribution costs, if it could reserve attractive fares for the lower-cost
channels rather then be required by contract to make the same fares available
for sale through travel agents using a system, which tends to be a higher-cost
method of distribution. Of course, airlines may bargain for lower CRS fees by
agreeing to make all of their fares available for sale through a system and by
accepting parity clauses. To the extent that systems may have market power and
could therefore impose unreasonably restrictive terms for system participation
if not barred from doing so, such system practices would be more likely to harm
smaller airlines than larger airlines.
(iv) Prohibition of Display Bias
The final rule will maintain the existing prohibitions against display bias for
six months. Maintaining the prohibition against display bias will enable travel
agents to operate more efficiently and give airlines a better opportunity to
compete on the basis of the relative price and quality of their services. The
six-month period will facilitate an orderly transition to complete deregulation.
Immediately ending the prohibition against display bias would enable systems to
sell bias -- preferential display positions -- to individual airlines. While an
airline’s purchase of bias would enable that airline to obtain more bookings,
even if rival airlines offered more attractive service or better fares, the
airline would incur the cost of buying the bias, which would increase its total
expenses. Moreover, allowing systems to sell preferential display positions
could increase the airlines’ aggregate expenses while not generating increased
traffic. Display bias could benefit larger airlines at the expense of smaller
airlines, because larger airlines could have additional resources for purchasing
bias, and operate route systems of greater scope.
Some airlines and travel agency commenters urge us to broaden the rule against
display bias by prohibiting systems from displaying a single service under
multiple airline codes. We have determined not to adopt that proposal. The
multiple display of code-share services for a single flight can put competing
airline services at a disadvantage by lowering their position in a system’s
display. Code-sharing arrangements generally involve at least one large airline.
However, the arrangements typically involve smaller airlines as well, such as
commuter airlines serving smaller communities from a major airline’s hubs or
airlines like Alaska that have entered into code-share agreements with larger
airlines. Two of the systems -- Sabre and Amadeus -- already limit the display
of code-share services, and the other two systems could do so if they wish.
Because the systems no longer are owned or controlled by U.S. airlines, they
should have an incentive to limit the display of code-share flights if travel
agents consider the multiple listings of a single service under different codes
to reduce the value of the display.
(c) Description of Small Entities To Which the Rule Will Apply
Our final rule will directly regulate the systems’ practices in several
respects, but none of the systems is a small entity.
Most U.S. airlines are small entities, and our final rule will bar systems from
imposing certain types of contract requirements on participating airlines. The
statistics given us by the Small Business Administration (“SBA”) indicate that
there are 383 small entities that are U.S. passenger airlines out of a total of
397 U.S. passenger airlines. These rule provisions will benefit small airlines,
as will the prohibition against display bias.
The rule will not apply to any other small entities. The rule will indirectly
affect travel agencies, most of which are small entities, primarily because the
rule will continue to prohibit display bias, a practice that decreases the
efficiency of travel agency operations and the ability of travel agents to
select the airline services that best meet their customers’ needs. The final
rule maintains none of the existing rules regulating contracts between systems
and subscribers. The SBA has concluded that less than 500 travel agencies are
not small entities. In 2001, there were 18,425 travel agencies, of which 117 had
annual airline ticket sales that exceeded $50 million while 1,015 had annual
airline ticket sales between $5 million and $50 million and the remaining 17,293
had annual airline ticket sales of less than $5 million. “Upheaval in Travel
Distribution: Impact on Consumers and Travel Agents,” National Commission to
Ensure Consumer Information and Choice in the Airline Industry” (November 13,
2002), at 113.
The NFIB Legal Foundation suggests that we should consider the interests of
small businesses as consumers of air transportation, particularly because many
of them rely on travel agents for researching and booking air transportation.
NFIB Legal Foundation Comments at 2. We expect that our final rule will
encourage more competition in the airline and airline distribution businesses,
which will benefit consumers. The Regulatory Flexibility Act, however, requires
a final regulatory flexibility statement only insofar as the agency rule
directly regulates small entities. American Trucking Ass’ns v. U.S. EPA, 175
F.3d 1027, 1043-1045 (D.C. Cir. 1999), rev‘d on other grounds, 531 U.S. 457
(2001); Motor & Equipment Mfrs. Ass’n v. Nichols, 142 F.3d 449, 467 (D.C. Cir.
1998); United Distribution Companies v. FERC, 88 F.3d 1105, 1170 (D.C. Cir.
1996); Mid-Tex Electric Cooperative v. FERC, 773 F.2d 327, 342 (D.C. Cir. 1985).
No additional analysis is therefore required by the Regulatory Flexibility Act
on the possible impact on consumers, but, as noted, we expect that the final
rule will benefit consumers.
(d) Reporting, Recordkeeping, and Other Compliance Requirements
Our final rule contains no direct reporting, record-keeping, or other compliance
requirements that would affect small entities. There are no other federal rules
that duplicate, overlap, or conflict with our proposed rules.
(e) Steps Taken to Minimize the Significant Economic Impact
Our discussion above of the significant issues raised by the public comments and
our response to those comments explains why we are adopting the final rule
rather than the other rule proposals suggested in our notice of proposed
rulemaking and the comments. As stated, our final rule will have no direct
economic impact on any small entities, except small airlines, because the final
rule regulates only the systems’ displays and certain features of their
contracts with participating airlines. The final rule will impose no direct
regulatory requirements on airlines that are small entities (or on travel
agencies or other firms that are small entities). We have found, as discussed
above, that the rule’s direct economic impact on airlines should be beneficial.
We have considered as a matter of overall economic policy whether we should
adopt fewer rules, or rules that would impose fewer restrictions on the systems’
operations. Because the impact on small entities should be beneficial, we have
not needed to whether alternatives are available that would minimize the rule’s
impact on the small entities affected by the rule, the smaller airlines. The
final rule contains no provision regulating the systems’ relationships with
travel agencies. The final rule will indirectly affect small entities, because
we are not readopting most of the existing rules governing the systems’
relationships with participating airlines or any of the current rules governing
subscriber contracts.
Assistance for Small Entities
Under section 213(a) of the Small Business Regulatory Enforcement Fairness Act
of 1996, P.L. 104-121, we want to assist small entities in understanding the
rule so that they can better evaluate its effects on them and take it into
account in operating their businesses. If the rule affects your small business,
organization, or governmental jurisdiction and you have questions concerning its
provisions or requirements, please consult Thomas Ray at (202) 366-4731.
Paperwork Reduction Act
These rules contain no collection-of-information requirements subject to the
Paperwork Reduction Act, P.L. No. 96-511, 44 U.S.C. Chapter 35. See 57 FR at
43834.
Federalism Implications
These rules will have no substantial direct effects on the States, on the
relationship between the national government and the States, or on the
distribution of power and responsibilities among the various levels of
government. Therefore, in accordance with Executive Order 13132, dated August 4,
1999, we have determined that the rules do not present sufficient federalism
implications to warrant consultations with State and local governments.
Taking of Private Property
These rules will not effect a taking or private property or otherwise have
taking implications under Executive Order 12630, Government Actions and
Interference with Constitutionally Protected Property Rights.
Civil Justice Reform
These rules meet applicable standards in sections 3(a) and 3(b)(2) of Executive
Order 12988, Civil Justice Reform, to minimize litigation, eliminate ambiguity,
and reduce burden.
Protection of Children
We have analyzed these rules under Executive Order 13045, Protection of Children
from Environmental Heath Risks and Safety Risks. These rules do not concern an
environmental risk to health or risk to safety that may disproportionately
affect children.
Consultation and Coordination with Tribal Governments.
These rules will not have tribal implications, will not impose substantial
direct compliance costs on Indian tribal governments, and will not preempt
tribal law. Therefore, they are exempt from the consultation requirements of
Executive Order 13175. No tribal implications were identified during the comment
period.
Energy Effects
We have analyzed these rules under Executive Order 13211, Actions Concerning
Regulations That Significantly Affect Energy Supply, Distribution, or Use. We
have determined that they are not classified as a “significant energy action”
under that order because they are a “significant regulatory action” under
Executive Order 12866 and would not have a significant adverse effect on the
supply, distribution, or use of energy.
Environment
These rules will have no significant impact on the environment. Therefore, an
Environmental Impact Statement is not required under the National Environmental
Policy Act of 1969.
List of Subjects in 14 CFR Part 255
Air carriers, Antitrust, Consumer protection, Reporting and recordkeeping
requirements, Travel agents
1. Accordingly the Department revises 14 CFR Part 255 to read as follows:
PART 255 -- AIRLINE COMPUTER RESERVATIONS SYSTEMS
255.1 Purpose.
255.2 Applicability.
255.3 Definitions.
255.4 Display of information.
255.5 Contracts with participating carriers.
255.6 Exceptions.
255.7 Prohibition against carrier bias.
255.8 Sunset Date.
AUTHORITY: 49 U.S.C. 40101, 40102, 40105, 40113, 41712.
§255.1. Purpose.
(a) The purpose of this part is to set forth requirements for the operation of
computer reservations systems used by travel agents and certain related air
carrier distribution practices so as to prevent unfair, deceptive, predatory,
and anticompetitive practices in air transportation and the sale of air
transportation.
(b) Nothing in this part operates to exempt any person from the operation of the
antitrust laws set forth in subsection (a) of the first section of the Clayton
Act (15 U.S.C. 12).
§255.2. Applicability.
This part applies to firms that operate computerized reservations systems for
travel agents in the United States, and to the sale in the United States of
interstate, overseas, and foreign air transportation through such systems.
§255.3. Definitions.
"Availability" means information provided in displays with respect to the seats
a carrier holds out as available for sale on a particular flight.
"Carrier" means any air carrier, any foreign air carrier, and any commuter air
carrier, as defined in 49 U.S.C. 40102 (3), 49 U.S.C. 40102 (22), and 14 CFR
298.2(f), respectively, that is engaged directly in the operation of aircraft in
passenger air transportation.
"Display" means the system's presentation of carrier schedules, fares, rules or
availability to a subscriber by means of a computer terminal.
"Integrated display" means any display that includes the schedules, fares,
rules, or availability of all or a significant proportion of the system's
participating carriers.
"On-time performance code" means a single-character code supplied by a carrier
to the system in accordance with the provisions of 14 CFR Part 234 that reflects
the monthly on-time performance history of a nonstop flight or one-stop or
multi-stop single plane operation held out by the carrier in a CRS.
"Participating carrier" means a carrier that has an agreement with a system for
display of its schedules, fares, or seat availability, or for the making of
reservations or issuance of tickets through a system.
"Subscriber" means a ticket agent, as defined in 49 U.S.C. 40102 (40), that
holds itself out as a source of information about, or reservations for, the air
transportation industry and that uses a system.
"System" means a computerized reservations system offered to subscribers for use
in the United States that contains information about schedules, fares, rules or
availability of carriers and provides subscribers with the ability to make
reservations, if it charges any carrier a fee for system services. It does not
mean direct connections between a ticket agent and the internal reservations
systems of individual carriers.
§255.4 Display of information.
(a) All systems shall provide at least one integrated display that includes the
schedules, fares, rules, and availability of all participating carriers in
accordance with the provisions of this section. This display shall be at least
as useful for subscribers, in terms of functions or enhancements offered and the
ease with which such functions or enhancements can be performed or implemented,
as any other displays maintained by the system vendor. No system shall make
available to subscribers any integrated display unless that display complies
with the requirements of this section.
(1) Each system must offer an integrated display that uses the same editing and
ranking criteria for both on-line and interline connections and does not give
on-line connections a system-imposed preference over interline connections. This
display shall be at least as useful for subscribers, in terms of functions or
enhancements offered and the ease with which such functions or enhancements can
be performed or implemented, as any other display maintained by the system
vendor.
(2) Each integrated display offered by a system must either use elapsed time as
a significant factor in selecting service options from the database or give
single-plane flights a preference over connecting services in ranking services
in displays.
(b) In ordering the information contained in an integrated display, systems
shall not use any factors directly or indirectly relating to carrier identity.
(1) Systems may order the display of information on the basis of any service
criteria that do not reflect carrier identity and that are consistently applied
to all carriers and to all markets.
(2) When a flight involves a change of aircraft at a point before the final
destination, the display shall indicate that passengers on the flight will
change from one aircraft to another.
(3) Each system shall provide to any person upon request the current criteria
used in editing and ordering flights for the integrated displays and the weight
given to each criterion and the specifications used by the system's programmers
in constructing the algorithm.
(c) Systems shall not use any factors directly or indirectly relating to carrier
identity in constructing the display of connecting flights in an integrated
display.
(1) Systems shall select the connecting points (and double connect points) to be
used in the construction of connecting flights for each city pair on the basis
of service criteria that do not reflect carrier identity and that are applied
consistently to all carriers and to all markets.
(2) Systems shall select connecting flights for inclusion ("edit") on the basis
of service criteria that do not reflect carrier identity and that are applied
consistently to all carriers.
(3) Systems shall provide to any person upon request current information on:
(i) All connecting points and double connect points used for each market;
(ii) All criteria used to select connecting points and double connect points;
(iii) All criteria used to "edit" connecting flights; and
(iv) The weight given to each criterion in paragraphs (c)(3) (ii) and (iii) of
this section.
(4) Participating carriers shall be entitled to request that a system use up to
five connect points (and double connect points) in constructing connecting
flights for the display of service in a market. The system may require
participating carriers to use specified procedures for such requests, but no
such procedures may be unreasonably burdensome, and any procedures required of
participating carriers must be applied without unreasonable discrimination
between participating airlines.
(5) When a system selects connecting points and double connect points for use in
constructing connecting flights it shall use at least fifteen points and six
double connect points for each city-pair, except that a system may select fewer
such connect or double connect points for a city-pair where:
(i) Fewer than fifteen connecting points and six double connect points meet the
service criteria described in paragraph (c)(1) of this section; and
(ii) The system has used all the points that meet those criteria, along with all
additional connecting points and double connect points requested by
participating carriers.
(6) If a system selects connecting points and double connect points for use in
constructing connecting flights it shall use every point requested by a
participating carrier up to the maximum number of points that the system can
use. The system may use fewer than all the connect points requested by
participating carriers to the extent that:
(i) Points requested by participating carriers do not meet the service criteria
described in paragraph (c)(1) of this section; and
(ii) The system has used all the points that meet those criteria.
(d) Each system shall apply the same standards of care and timeliness to loading
information concerning every participating carrier. Each system shall display
accurately information submitted by participating carriers. Each system shall
provide to any person upon request all current data base update procedures and
data formats.
(e) Systems shall use or display information concerning on-time performance of
flights as follows:
(1) Within 10 days after receiving the information from participating carriers
or third parties, each system shall include in all integrated schedule and
availability displays the on-time performance code for each nonstop flight
segment and one-stop or multi-stop single plane flight, for which a
participating carrier provides a code.
(2) A system shall not use on-time flight performance as a ranking factor in
ordering information contained in an integrated display.
(f) Each participating carrier shall ensure that complete and accurate
information is provided each system in a form such that the system is able to
display its flights in accordance with this section.
(g) A system may make available to subscribers the internal reservations system
display of a participating carrier, provided that a subscriber and its employees
may see any such display only by requesting it for a specific transaction.
§255.5 Contracts with participating carriers.
(a) No system may require a carrier to maintain any particular level of
participation or buy any enhancements in its system on the basis of
participation levels or enhancements selected by that carrier in any other
foreign or domestic computerized reservations system, as a condition to
participation in the system.
(b) No system may require any carrier as a condition to participation to provide
it with fares that the carrier has chosen not to sell through that system.
§255.6 Exceptions.
The obligations of a system under §255.4 shall not apply with respect to a
carrier that refuses to enter into and comply with a participating airline
contract with that system.
§255.7 Prohibition against Carrier Bias.
No carrier may induce or attempt to induce a system to create a display that
would not comply with the requirements of §255.4.
§255.8 Sunset Date.
Unless extended by a document published in the Federal Register, these rules
shall terminate on July 31, 2004.
Issued in Washington, D.C. on _________________, 2003.
Norman Y. Mineta
Secretary of Transportation