[Federal Register: January 7, 2004 (Volume 69, Number 4)]
[Rules and Regulations]
[Page 975-1033]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ja04-12]
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Part III
Department of Transportation
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14 CFR Part 255
Computer Reservations System (CRS) Regulations; Final Rule
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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.
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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. SW., Washington, DC 20590, (202) 366-4731.
SUPPLEMENTARY INFORMATION:
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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.
[[Page 977]]
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.
[[Page 978]]
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.
[[Page 979]]
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:
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
off-line sales by airlines................................. 17
on-line sales by airlines.................................. 10
off-line sales by travel agencies.......................... 58
on-line sales by travel agencies........................... 15
------------------------------------------------------------------------
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:
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Sabre...................................................... 44.7
Worldspan.................................................. 26.5
Galileo.................................................... 19.7
Amadeus.................................................... 9.2
------------------------------------------------------------------------
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, U.S. Airways, and a number of
smaller airlines now participate in this program. Sabre Supplemental
Reply at 1.
[[Page 980]]
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 U.S. 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:
[[Page 981]]
------------------------------------------------------------------------
Percent
------------------------------------------------------------------------
Sabre...................................................... 30.8
Worldspan.................................................. 15.1
Galileo.................................................... 26.4
Amadeus.................................................... 27.7
------------------------------------------------------------------------
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):
[[Page 982]]
[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
[[Page 983]]
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,
[[Page 984]]
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 U.S. 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,
[[Page 985]]
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
[[Page 986]]
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 (DC Cir. 2001), quoting Rothery
Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (DC 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
[[Page 987]]
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
[[Page 988]]
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
[[Page 989]]
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,
[[Page 990]]
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
[[Page 991]]
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
[[Page 992]]
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
[[Page 993]]
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
[[Page 994]]
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.,
[[Page 995]]
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 section 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
[[Page 996]]
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
[[Page 997]]
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).
[[Page 998]]
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 (DC 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
[[Page 999]]
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
[[Page 1000]]
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 Sec. 255.2, and
the definition of ``system'' is in Sec. 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
[[Page 1001]]
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
[[Page 1002]]
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
[[Page 1003]]
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
[[Page 1004]]
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.
U.S. Airways prefers limiting the display of a domestic service to two
codes and an international service to three codes. U.S. 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
[[Page 1005]]
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,
[[Page 1006]]
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, Sec. 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
[[Page 1007]]
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
[[Page 1008]]
action. While this rulemaking was pending, Worldspan threatened to
expel U.S. Airways unless that airline made all of its webfares
saleable through Worldspan. U.S. 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 proposal 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 grounds 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
[[Page 1009]]
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, U.S. 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
[[Page 1010]]
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, Sec. 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
[[Page 1011]]
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 U.S. 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 U.S. 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.
[[Page 1012]]
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, Sec. 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 U.S. 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 U.S. 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; U.S. 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
[[Page 1013]]
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-
[[Page 1014]]
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.
Asociaci[oacute]n Internacional de Transporte Ae[eacute]reo
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 Comments 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
[[Page 1015]]
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
[[Page 1016]]
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
[[Page 1017]]
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.
[[Page 1018]]
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
[[Page 1019]]
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
[[Page 1020]]
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 CFR 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
[[Page 1021]]
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 Web sites. 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
[[Page 1022]]
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
[[Page 1023]]
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
[[Page 1024]]
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, Public
Law 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
[[Page 1025]]
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
[[Page 1026]]
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
[[Page 1027]]
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.
[[Page 1028]]
(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
[[Page 1029]]
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 Web site 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
[[Page 1030]]
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'')
[[Page 1031]]
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, Public Law. 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, Public Law 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
[[Page 1032]]
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.
0
1. Accordingly the Department revises 14 CFR Part 255 to read as
follows:
PART 255--AIRLINE COMPUTER RESERVATIONS SYSTEMS
Sec.
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.
Sec. 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).
Sec. 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.
Sec. 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.
Sec. 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
[[Page 1033]]
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.
Sec. 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.
Sec. 255.6 Exceptions.
The obligations of a system under Sec. 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.
Sec. 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 Sec. 255.4.
Sec. 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, DC, on December 31, 2003.
Norman Y. Mineta,
Secretary of Transportation.
[FR Doc. 03-32338 Filed 12-31-03; 3:16 pm]
BILLING CODE 4910-62-P