[Senate Hearing 106-1130]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1130
AVIATION AND THE INTERNET
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
JULY 20, 2000
__________
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Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Republican Staff Director
Ann Choiniere, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
C O N T E N T S
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Page
Hearing held on July 20, 2000.................................... 1
Statement of Senator Bryan....................................... 27
Statement of Senator Cleland..................................... 28
Prepared statement of Senator Gorton............................. 2
Prepared statement of Senator Hollings........................... 3
Statement of Senator McCain...................................... 1
Statement of Senator Rockefeller................................. 24
Statement of Senator Stevens..................................... 25
Statement of Senator Wyden....................................... 26
Witnesses
Mims, A. Bradley, Deputy Assistant Secretary, Aviation and
International Affairs, U.S. Department of Transportation....... 4
Prepared statement........................................... 6
Mead, Hon. Kenneth M., Inspector General, U.S. Department of
Transportation, accompanied by Mark Dayton..................... 9
Prepared statement........................................... 13
Katz, Jeffrey G., Chairman, President and CEO, Orbitz............ 31
Prepared statement........................................... 34
Jones, Terrell B., President and Chief Executive Officer,
Travelocity.com................................................ 43
Prepared statement........................................... 44
Ruden, Paul M., Esq., Senior Vice President, Legal & Industry
Affairs, American Society of Travel Agents, Inc................ 50
Prepared statement........................................... 52
Silbergeld, Mark, Co-Director, Consumers Union................... 66
Appendix
Katz, Jeffrey G., Chairman, President and CEO, Orbitz, letter
dated August 25, 2000, to Hon. John McCain..................... 99
Linares, Nancy, CTC, Chairman of the Board and Alexander Anolik,
Esq., General Counsel, Association of Retail Travel Agents,
joint prepared statement....................................... 94
Response to written questions submitted by Hon. Max Cleland to:
Hon. Kenneth M. Mead......................................... 79
Paul M. Ruden................................................ 82
Mark Silbergeld.............................................. 84
Response to written questions submitted by Hon. Ernest F.
Hollings to:
Hon. Kenneth M. Mead......................................... 85
Response to written questions submitted by Hon. John McCain to:
Terrell B. Jones............................................. 86
Hon. Kenneth M. Mead......................................... 90
A. Bradley Mims.............................................. 93
Paul M. Ruden................................................ 93
Mark Silbergeld.............................................. 94
Southwest Airlines Co., prepared statement....................... 109
AVIATION AND THE INTERNET
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THURSDAY, JULY 20, 2000
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m., in
room SR-253, Russell Senate Office Building, Senator John
McCain, Chairman, presiding.
OPENING STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
The Chairman. Good morning. I want to thank our witnesses
for being here today to discuss the remarkable revolution that
is underway with regard to travel purchase on the Internet.
Analysts have concluded that travel rates are the number one
product that consumers want to buy on the Internet. Perhaps
that is the best indication that we have of the potential
benefits that the Internet offers air travelers.
American, Continental, Delta, Northwest and United Airlines
recently announced their joint efforts to establish an airline-
owned travel agency called Orbitz. Orbitz plans to use a
relatively new and sophisticated software program to analyze
airline flight and fare data for its consumers, to provide them
with the best travel options. The test site for the software is
impressive.
Even so, the announcement has caused a great deal of
controversy. Consumer advocates question whether collaboration
among competitors can ever operate in the best interests of air
travelers. Concerns have been heightened by the prospect of
additional consolidation in the airline industry.
This hearing intends to examine what consumers stand to
gain and what they stand to lose from the advent of on-line
travel agencies, including Orbitz. What this hearing does not
intend to do is focus on what Orbitz's established competitors,
namely Travelocity and Expedia, stand to lose from Orbitz's
presence in the market. These competitors are engaged in a
pitched battle for the growing Internet travel business. By and
large, it is up to the marketplace to decide how each
competitor ultimately fares, and I strongly believe that such
competition will ultimately benefit the consumer.
I suspect that the reaction of the low fare air carrier
community to Orbitz is one way for us to gauge the effect that
Orbitz will have on competition in the industry. Like it or
not, we depend on low fare air carriers for nearly all of the
benefits of deregulation. The Department of Transportation
estimates these benefits to be $6.3 billion in annual savings
to airline passengers.
We need to explore why Southwest Airlines, for example,
submitted testimony today stating its unalterable opposition to
Orbitz. Orbitz claims to offer, for the first time, competition
on the Computer Reservation System booking fee, which would
disproportionately benefit the low fare carriers. Why, then,
aren't the low fare carriers racing to sign up for these
benefits?
The Committee has a history here. Several of us were around
when the airlines created Computer Reservation Systems (CRS)
for travel agency use to search flight and fare data for their
consumers. We found that over time, the airline owners used CRS
to disadvantage their competitors. Among other things, they
used display bias to shift sales to their airlines, and they
used their market power to impose excessively high fees on
participating non-owner airlines.
I realize that Orbitz is technically different from the
stand and Computer Reservation Systems. However, many of the
same problems face us now that faced us when the CRSs were
established. It would be foolish for us to ignore our past
experience. We need to look at the down-the-road market power
of a site that may be the only outlet for the best deals that
the airlines have to offer.
[The prepared statement of Senator Gorton follows:]
Prepared Statement of Hon. Slade Gorton,
U.S. Senator from Washington
In a relatively short period of time, the Internet has transformed
many aspects of social and economic life in the United States. One of
the most important facets of this phenomenon is the development of
electronic commerce. The Internet has empowered many consumers by
giving them access to seemingly limitless sources of information.
Comparing prices and options in various marketplaces has never been
easier for an expanding number of buyers, and free markets tend to work
best when the flow of information is maximized.
Within this wide open world of the Internet, travel-related
information and services form one of the fastest growing sectors. It
has been reported that more than 1,000 travel sites have emerged on the
Web, offering a staggering array of choices. While sales through the
Internet have lagged behind the boom in Web sites, online purchasing is
certain to make up an ever-increasing share of all travel bookings. As
a general rule, the more competitors there are in such an environment,
the better it is for consumers. An exception to this rule would be the
presence of a competitor that wields enough market power to tilt the
playing field.
The joint venture by the airlines, known as Orbitz, appears to have
characteristics that could give it substantial market power. On its
face, the banding together of the largest air carriers should give
anyone reason to be concerned. None of the major airlines is in
business to sell tickets at the lowest possible prices. It is
counterintuitive to assume that the big airlines are coming together to
do anything other than make more money. One-stop shopping for low air
fares is certainly an attractive lure for consumers in the short run,
especially if Orbitz offers deals not found in any other single place.
If that lure moves market share to Orbitz, however, the joint
venture may be able to act in subtle ways that harm consumers. The
history of airline ownership of computer reservation systems (CRS) is a
lesson we must keep in mind. Abuses were rampant before regulations
were imposed. By then, much of the damage to airline competition had
already been done. CRSs gave their owners artificial staying power,
which worked to the detriment of carriers that entered the field after
deregulation. Even after rules were imposed on the use of airline-owned
CRSs, these systems were still able to steer more business to their
owners. I recognize the differences between the Internet and CRSs, but
there are enough parallels for us to be concerned about Orbitz.
Another troubling aspect of Orbitz is the so-called Most Favored
Nation clause, which obligates participating airlines to give Orbitz
access to all publicly available fares as well as anything that the
airline offers to any other website. While MFN clauses can have
benefits in other contexts, it is questionable in this instance. For
example, other travel Web sites will never have a chance to best Orbitz
by offering unique fares or related offerings. The airlines themselves
will have less incentive to offer special Internet fares on their own
Web sites because they will have higher distribution costs when those
deals are purchased through Orbitz.
I am quite interested in what the witnesses have to say about these
issues. Perhaps Mr. Katz from Orbitz can allay some of my concerns. I
remain skeptical, however. The Departments of Transportation and
Justice must scrutinize this joint venture carefully. Between this
matter and the proposed merger of United Airlines and US Airways, both
departments will have their hands full in the coming months. I believe
their decisions with respect to these transactions will have a profound
impact on the course of the airline industry for many years to come.
Again, I want to thank our witnesses for their appearance
at this hearing. The first panel is Mr. A. Bradley Mims, who is
the Deputy Assistant Secretary of Aviation and International
Affairs, at the Department of Transportation, and the Hon. Ken
Mead, who is the Inspector General of the Department of
Transportation.
Thank you, Mr. Mims. Welcome, please proceed.
Before you do, who do you have with you today, Mr. Mead?
Mr. Mead. I have Mr. Mark Dayton, of my staff, who directed
this project.
The Chairman. Welcome, Mr. Dayton.
Mr. Mims.
[The prepared statement of Senator Hollings follows:]
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
Good morning. I want to thank the Chairman for holding this hearing
on the sale of airline tickets through the Internet.
This Committee has a long history of looking at the distribution of
air fares and other information through computers. We held several
hearings on Computer Reservation Systems (CRS's) in the 1980's to
review what the carriers/owners of the CRSs were attempting to do to
the ``have-nots.'' Today, with the creation of new technology, we are
at that same point again. This time, the use of the Internet Web sites,
even though the site will be owned by the airlines, is one that
operates outside of the CRS rules that were crafted in the 1980's by
the Civil Aeronautics Board (CAB), and that now fall under the auspices
of the Department of Transportation (DOT).
Under the new venture, the big carriers have agreed to set up a new
Web site to sell tickets. There are lots of these types of joint
venture arrangements among companies to use the Web to conduct
business. I want to encourage new technology and new innovations that
benefit consumers. However, most of the new joint venture Web sites
that have been created involve joint purchasing, not joint selling. The
collection of 80-85% of the U.S. domestic airline industry--probably
any industry--should give us pause to consider the competitive
ramifications. If the owners of Orbitz can demonstrate that there is no
harm to competition, and that pricing by the carriers is not adversely
affected, I hope consumers find all of these low fares.
Right now, to the traveler, it does not always seem that we have
much price competition, at least for those fares that are publicly
available. When one carrier announces a fare hike, the other major
carriers either match it or reject it. The proposed fare then either
sticks or is withdrawn. As a result, for many markets, the publicly
available fares are the same for each market. These are the types of
fares we see in the papers. However, there is a whole other side to
pricing--private fares that the carriers offer to corporations, travel
agencies and vacation destinations, whether it is a golf resort or
Disneyland. These deals are negotiated separately and are targeted at
specific groups of customers.
The carriers also publish on their own Web site fares a series of
fares, those that are publicly available through any travel agency, and
fares that are only available through that Internet site. The carriers
also send out targeted e-mails to selected customers, offering lower
fares. Many times, these fares are for last minute flights that the
carrier knows are not selling well--a sort of last minute fire sale.
These types of fares are difficult for another carrier to track. Under
Orbitz, some of these fares will become ``publicly available.'' This
could be a benefit to the consumer--he or she can instantly view all of
these low fares through one Web site, rather than have to search each
and every air carrier Web site. There is also a risk that must be
considered. If carriers will be able to track, or be in a better
position to track, pricing this may inhibit fare sales. This is
potentially troubling and I know that DOT will look into this.
We also have the new electronic commerce navigators, like
Travelocity and Expedia, that cut through all of the carrier price data
to figure out the best fares for consumers. They use their search
engines to plow through the Computer Reservation System data banks,
effectively getting around the air carriers' ``yield management''
systems. Those systems try to squeeze the last dollar out of every
consumer, offering seats at different prices, at different times for a
particular flight.
We also know that the air carriers want to cut their distribution
costs. Today, these costs are made up of a variety of fees--travel
agency commissions, running from about 5% of the price of a ticket to a
flat $10 per ticket for an Internet sale; and also CRS booking fees
(about $3-$4 per segment booked).
The carriers/owners of Orbitz have complained that the CRS fees are
too high, one of the reasons they cite for creating Orbitz. However,
according to a June 1983 Report to Congress by the CAB, CRS booking
fees were .25 cents in 1981, and there were different fares for
different participants in a given CRS system. The Report also notes
that CRS fees went up to $2-$3 per booking in 1982-83. While the major
carriers complain about high CRS fees, and argue that they need to
create a new competitor to drive down the CRS costs, what appears to be
happening is that Internet travel agencies refuse to give back any
rebate to the air carriers that they may get themselves from the CRS
vendors. It is not uncommon for a CRS vendor to give any large travel
agency an incentive rebate on an annual basis based on certain sales
thresholds. Travel agents, whether it is on line, like Travelocity or a
traditional travel agent, do not give these rebates back to the
carriers.
CRS vendors, like Worldspan, the company that is providing the CRS
services for Orbitz, is owned by two of the largest air carriers (and
equity participants in Orbitz). Worldspan may set CRS booking fees that
are too high, but the owners might have something to say about those
fees.
This is an area that I urge DOT to look at carefully. I know that
the Department of Justice is in the process of reviewing Orbitz, as
well.
STATEMENT OF A. BRADLEY MIMS, DEPUTY ASSISTANT
SECRETARY, AVIATION AND INTERNATIONAL AFFAIRS, U.S. DEPARTMENT
OF TRANSPORTATION
Mr. Mims. Good morning, Mr. Chairman.
I appreciate the opportunity to appear before the Committee
to address the issue of the marketing of airline services on
the Internet. I also appreciate the Committee holding hearings
on this issue, which is of great importance.
The Internet offers consumers new ways to shop for and book
travel, but also provides airlines new ways to sell their
tickets, and gives travel agents new tools to enhance and
expand services to their consumers. This fast-evolving practice
has the potential to be very beneficial to consumers.
Though this fast-evolving practice has this potential, and
while we applaud the innovation being offered in this regard,
the Department of Transportation also has a responsibility to
ensure that new practices in airline services distribution do
not become anticompetitive and/or harm consumers.
Because of the Internet's importance in airline services
distribution, my office and the Office of the General Counsel
have begun reviewing whether airlines' use of the Internet
raises competition and consumer deception issues that may
require Departmental action.
Since we have not completed our review, we have not come to
any conclusions at this particular time. However, please allow
me to make a few observations about developments to date.
In addition to providing consumers with convenient 24-hour
access to comprehensive information on travel services, the
Internet gives communities, especially smaller ones, an
efficient, cost-effective way to market themselves.
The Internet also provides airlines and other travel
suppliers with cost-effective methods for obtaining bookings.
The Internet has also made possible the growth of on-line
travel agencies, which last year captured just over half of all
the airline bookings made through the Internet.
It is important to keep in mind that while the on-line
travel environment is booming, it is also still a small piece
of the travel distribution picture. Only 4 percent of all
airline bookings were made on line in 1999, and on-line
bookings are expected to account for 11 percent of all bookings
in 2003.
Most airline tickets are still sold by traditional travel
agencies. Not every consumer would be willing to buy travel on
the Internet. A large number of travelers prefer to use travel
agents, and many travelers value the personal relationship that
they have with their travel agent. And the key part of that
relationship is a travel agent's ability to solve problems if
something goes wrong.
Some studies have shown that consumers are more likely to
find the lowest available fare when they use a travel agency
than when they use other sources of travel information.
In short, consumers do not just want to buy tickets; they
want travel arranged for them. But we recognize the rapidly
changing developments put significant pressure on travel
agencies as they try to adapt to a new and very dynamic
environment.
As with many developments that promise to benefit many
consumers, the use of the Internet in airline distribution
might in some ways present potential threats to consumers and
competition.
The Department is aggressively examining these issues in
order to carry out our responsibility to see whether airlines
are engaged in activities that may constitute unfair or
deceptive practices or unfair methods of competition. We have
therefore requested Orbitz to answer a series of questions on
its organizational and operating plans, and further, to provide
documents relevant to our inquiry.
If Orbitz's organization and operational plans seem to
involve practices that would violate the statutory prohibition
against unfair methods of competition, we will take action to
redress those problems.
As a separate matter, we are reviewing the enforcement
complaint filed by the Association of Retail Travel Agents
against the major airlines that created Orbitz. We will be
considering whether that complaint warrants the institution of
an enforcement proceeding.
The Justice Department is conducting its own investigation
into Orbitz, and as Ken Mead will outline, the Inspector
General's office is examining Orbitz and the airlines' use of
the Internet.
In addition to our review of Orbitz, we are informally
reviewing other recent developments in airline distribution.
The primary purpose of our efforts is to educate ourselves on
the distribution matter so that we may exercise our oversight
responsibility intelligently when questions do arise on airline
marketing practices that fall within our jurisdiction.
We are also asking interested parties in our pending
rulemaking on the Computer Reservation Systems to submit
comments on whether our existing CRS rules should be extended
to cover in some respects the use of the Internet for airline
distribution.
Finally, Mr. Chairman, I'd like to thank you and the
Committee for being engaged in these issues, and particularly
for holding what I anticipate will be a very informative
hearing, which will not only add much to the record but will
help the Department in dealing with the many complex issues
I've mentioned today.
Thank you, Mr. Chairman--thank you, Mr. Stevens.
[The prepared statement of Mr. Mims follows:]
Prepared Statement of A. Bradley Mims, Deputy Assistant Secretary,
Aviation and International Affairs, U.S. Department of Transportation
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to come before this Committee to
address the Internet's role in the marketing of airline services. The
Committee has wisely chosen to hold hearings on this issue, which is of
great importance to airline travelers and the airline and travel agency
industries.
Because of the Internet's importance in airline distribution, my
office and the Office of the General Counsel have begun studying
whether the airlines' use of the Internet raises competition and
consumer deception issues that may require regulatory action. Since we
have not completed our studies, I do not know what we will conclude.
The Inspector General's Office is conducting its own study of airline
distribution issues and Orbitz, and will be providing the Committee
with its conclusions.
In my testimony I wish to do three things--provide a general
description of the airlines' use of the Internet and the development of
airline distribution since deregulation, outline the legal and policy
principles applicable to the airlines' use of the Internet, and
describe the studies we are undertaking to examine the questions
presented by the airlines' plans for using the Internet.
The Internet offers many benefits for its users, as anyone who has
surfed the web knows well. The Internet provides all kinds of
information on travel services and destinations. Consumers who are
comfortable using the Internet can easily research travel destinations,
conveniently find out what travel services are available, and plan
trips. Many consumers like to use the Internet for travel planning and
booking--it is quick and convenient--and the Internet is capturing a
growing share of travel bookings.
The Internet gives travel destinations, especially smaller ones, an
efficient and economical way to market themselves. For example, Megan
Ward, the spokeswoman for the Texas Travel Industry Association, stated
that small rural Texas communities can obtain websites relatively
cheaply and can attract families and other leisure travelers with
information not available through other channels: ``Definitely the
winners are the smaller communities across the country, especially in
Texas, who may not have had the funds necessary for marketing. This
gives them a massive amount of exposure.'' Similarly, a tourism
official for the Maldive Islands, a nation of 300,000 people, has
stated, ``Marketing is quite expensive and we are working on a very
small budget. Because of the Internet we are able to do a lot of
marketing with less expense.''
Travel suppliers--airlines, hotels, and cruise companies, for
example--have recognized how the Internet provides a means of
conveniently and economically providing information and booking
services to consumers. The Internet enables travel suppliers to reach
new customers who otherwise would be unlikely to use that supplier--or
even travel at all.
The Internet also provides airlines and other travel suppliers a
less expensive method for obtaining bookings. According to a 1999 study
cited by a recent General Accounting Office (GAO) report, for example,
each booking made through traditional travel agencies cost America West
$23, a booking made through an electronic travel agency cost $20, a
booking made through the airline's reservations agents cost $13, and a
booking made through the airline's website cost $6.
Because airlines save money when consumers make bookings through an
airline website, individual airlines are encouraging customers to use
their websites for bookings. Southwest and AirTran, two airlines with a
low-fare operating strategy, now obtain at least a quarter of their
total bookings from the airline's website. Ryanair, a European low-fare
airline, is obtaining a third of its bookings from its own website. The
efforts of these airlines to encourage travelers to book through the
airline website are consistent with their overall strategy of keeping
their costs low, a strategy which requires them to reduce their
distribution costs along with their other costs.
Airlines have been offering limited types of discount fares through
their individual websites that are not obtainable through other
distribution channels, including the airline's own reservations agents.
The airlines generally use these Internet fares to sell ``distressed
inventory''--seats that otherwise would likely go unsold--to travelers
willing to travel on short notice in exchange for a low fare. The GAO
has found that this practice is common in the travel industry--Amtrak,
rental car companies, hotels, and cruise lines also offer some low
prices through their websites that cannot be obtained from any other
source. The airlines' use of the Internet to sell ``distressed
inventory'' by offering special low fares is comparable to practices
followed in earlier years, when airlines used a small number of travel
agencies as consolidators to sell seats that would otherwise not be
sold. Offering special fares over the Internet may make them available
to more consumers.
The Internet's advantages for consumers who are willing to research
and buy travel online have caused a rapidly growing number of consumers
to use the Internet to book travel. In 1999 just over four percent of
all airline bookings were done online. In 2003 online airline bookings
are expected to account for eleven percent of all airline bookings.
Not every consumer will be willing to buy travel on the Internet,
for a large number of travelers prefer to use travel agents. Many
travelers value the personal relationship they have with their travel
agent, and a key part of that relationship is the travel agent's
ability to solve problems if something goes wrong. Some studies have
shown, moreover, that consumers are more likely to find the lowest
available fare when they use a travel agency than when they use other
sources of travel information. Aside from that, many consumers place
more trust in the advice given them by a travel agent than in the
information given them by airlines.
As a result, we do not believe that the Internet will cause travel
agencies to disappear. A Sabre official has predicted, for example,
that travel agencies will account for 65 percent of all airline
bookings in 2005 (45 percent by traditional travel agencies and 20
percent by travel agency websites). Many travel agencies have taken
advantage of the Internet by creating their own websites. They seek to
support and enhance their traditional services and to reach new
customers. Most airline tickets are still sold by traditional travel
agencies.
The Internet, moreover, has made possible the growth of online
travel agencies, particularly Travelocity and Expedia. Last year online
travel agencies captured just over half of all airline bookings made
through the Internet. Between 1998 and 2001 the annual growth rate in
the online agencies' bookings is expected to be almost 100 percent. The
Internet also enables Priceline to offer consumers a new method of
buying airline tickets, a reverse auction giving consumers the
opportunity to try naming their own price for tickets.
Online travel agencies operate in a different environment from
traditional travel agencies and so must use new methods of attracting
customers, such as creating links with web portals like Yahoo! Online
agencies have also begun to buy blocks of airline seats and hotel rooms
at negotiated prices substantially below the supplier's published
rates, which they then resell to their customers. The online agencies
also recognize the need to hire agents to help online customers with
problems and special questions. Many observers see the ``click and
mortar'' model as the travel agency of the future.
We expect that many consumers will continue to value the services
provided by travel agencies, whether brick and mortar agencies or
online agencies (or click and mortar agencies) and that the travel
agency industry will continue to remain an important distribution
channel for travel services due to these consumer preferences.
The airlines' experimentation with the Internet reflects their
search for new distribution methods since the airline industry's
deregulation. Since deregulation, the airlines have chosen to use a
wide variety of methods for distributing their services. Southwest, for
example, has established a strategy of relying on low-fare service that
includes downplaying the importance of travel agencies in distributing
its services. Southwest thereby avoids the cost of computer
reservations system booking fees and travel agency commissions. Many of
the newer low-fare airlines rely more on travel agency sales but still
try to sell a larger share of their tickets directly to travelers than
do the more established network airlines, which depend on travel
agencies for as much as eighty percent of their total sales. Airlines
generally want to sell their services through as many channels as
possible in order to reach as many travelers as possible.
Individual airlines also treat different firms within each channel
differently when doing so seems likely to increase the airline's sales.
Airlines, for example, use consolidators to sell seats at low fares not
made directly available from travel agencies and airline reservations
agents. Airlines also commonly give favored travel agencies access to
discount fares and marketing benefits not made available to other
agencies and enable favored agencies to waive some restrictions on
discount fares and to book customers on oversold flights. Those travel
agencies having a preferred supplier relationship with an airline or
other travel supplier commonly obtain override commissions, incentive
commissions that encourage the agency to book a larger share of its
customers with the preferred airline.
Like airlines, travel agencies have responded to market demands by
developing different operating strategies--some primarily handle
corporate travel while others primarily handle leisure travel. Some
hold themselves out as generalists while others specialize, for
example, on travel to a particular destination or particular types of
travel, such as adventure travel. Travel agencies generally are
addressing the shifting nature of the airline distribution system by
focusing on the sale of travel services that are more remunerative,
like cruises, and by providing their customers with advice and insight
that travelers cannot obtain from other sources.
Airline distribution costs, which include commissions, credit card
fees, computer reservations system fees, and the costs of the airline's
own reservations and sales personnel, have made up almost twenty
percent of the airlines' total costs. Throughout the 1980's and 1990's,
the airlines worked on cutting all of their other controllable costs.
They recently began tackling their distribution costs.
The airlines' efforts to cut their distribution costs have harmed
many travel agencies. The major airlines have cut their travel agency
commission rates and imposed caps on the amount of commission payable
on individual tickets. Airlines have also sought ways to sell tickets
directly to consumers or through channels less costly than the travel
agency channel. These actions have significantly reduced travel agency
revenues. As a result, most travel agencies have begun requiring their
customers to pay fees for at least some agency services.
Last year the GAO investigated whether consumers have been affected
by changes in the airlines' methods of selling tickets, among other
issues. The GAO concluded that the airlines' use of the Internet gave
consumers new ways to purchase tickets while still allowing consumers
to use travel agents if they wished. The evidence available to the GAO,
however, did not enable that agency to calculate the overall advantages
and disadvantages to consumers of recent changes in airline
distribution.
As with many developments that promise to benefit many consumers,
however, the use of the Internet in airline distribution might in some
ways present potential threats to consumers and competition. Online
firms selling travel may engage in practices that could create a risk
of consumer deception. The airlines could use the Internet in ways that
may reduce the availability of impartial and comprehensive travel
information to consumers. And the development by five major airlines of
a joint website--Orbitz (originally called T2)--for the sale of travel
services raises questions on whether their operation of Orbitz may
involve some potentially anticompetitive behavior.
Let me now outline the legal and policy principles applicable to
the Internet's use in airline distribution. First, online firms are
subject to the same consumer protection provisions as other travel
firms. And, like firms in any other unregulated industry, airlines and
travel agencies are subject to the antitrust laws enforced by the
Justice Department. In general, the antitrust laws prohibit (i) conduct
by a single firm which involves monopolization or attempted
monopolization and (ii) collective action involving two or more firms
that unreasonably restrains trade.
While conduct by a single firm seldom raises antitrust questions,
collective action by competitors often presents serious antitrust
issues. Nonetheless, the antitrust laws allow competitors to create a
joint venture when doing so provides efficiency benefits without
unreasonably or unnecessarily restricting competition between the
participants. For example, the airlines have long operated programs
providing for the accreditation of travel agency firms and a joint
clearinghouse for the settlement of the travel agencies' payment for
airline services booked by their customers.
This Department has the authority under 49 U.S.C. 41712, commonly
referred to as section 411 of the Federal Aviation Act, to prohibit
airline practices as unfair methods of competition if they violate
antitrust principles, even if they do not violate the letter of the
antitrust laws, and to prohibit unfair and deceptive practices.
The Department, as you know, is committed to ensuring that the
airline industry remains competitive. In exercising our authority under
section 411, we will bear in mind Congress' decision to deregulate the
airline industry. Congress did so because it determined that each
airline should be free to determine what routes it will serve and what
fares it will charge. As part of deregulation, airlines became free to
determine how best to distribute their services. The Department no
longer has the authority to regulate the airlines' relations with
travel agencies unless necessary to prevent unfair methods of
competition and unfair and deceptive practices.
As I stated, however, airlines would violate the antitrust laws and
commit unfair methods of competition in violation of our statute if
they acted collectively in ways that illegally reduce competition. The
Department is investigating questions that have been raised by both
travel agencies and smaller airlines about Orbitz' potential adoption
of restrictions on the airlines' participation in Orbitz that could
undermine the competitive position of smaller airlines and other
distribution channels. We are also investigating whether Orbitz'
operation may also create opportunities for its owners to collude on
pricing and service. We appreciate the concerns expressed by many
travel agencies and consumers over changes in airline distribution
practices that may deny consumers the ability to obtain impartial and
complete advice on airline services and fares from travel agencies.
Travel agents provide the public with valuable information and
strengthen the ability of airlines to compete on the basis of service
and fares.
The Department is examining these issues in order to carry out our
responsibility to see whether airlines are engaged in practices that
may violate section 411. We have therefore requested Orbitz to answer a
series of questions on its organizational and operating plans and to
provide documents relevant to our inquiry. If Orbitz' organization and
operational plans seem to involve practices that would violate section
411's prohibition against unfair methods of competition, we will take
action redressing those problems. As a separate matter we are reviewing
the enforcement complaint filed by the Association of Retail Travel
Agents against the major airlines that created Orbitz. We will be
considering whether that complaint warrants the institution of an
enforcement proceeding.
The Justice Department is conducting its own investigation into
Orbitz, and, as Ken Mead has told you, the Inspector General's Office
is examining Orbitz and the airlines' use of the Internet.
In addition to our study of Orbitz, we are informally studying
recent developments in airline distribution. The primary purpose of
this study is to educate ourselves on distribution matters, so we may
exercise our regulatory authority intelligently when questions under
section 411 do arise on airline marketing.
We are also asking all interested persons in our pending rulemaking
on computer reservations systems (CRSs) to submit comments on whether
our existing CRS rules should be extended to cover in some respects the
use of the Internet for airline distribution.
Finally, AIR-21 calls for the creation of a National Commission to
Ensure Consumer Information and Choice in the Airline Industry, which
will study recent developments in airline distribution and make
recommendations on whether changes are needed. The Secretary has asked
the Congressional leadership for their proposed nominations to the
Commission and has asked the major airline and travel agency trade
associations for suggestions on who he should nominate.
We will remain mindful of what the Transportation Research Board
said last year in its report: ``In general, however, changes in the
distribution system should be viewed as opportunities to enhance the
system's overall benefits to consumers, and should not be dissuaded
unless the neutrality and completeness of the distribution system is
fundamentally threatened. DOT should remain alert to the possibility of
such erosion.''
Thank you Mr. Chairman. This completes my prepared statement, and I
would be pleased to respond to your questions and those of the
Committee.
Senator Stevens. The Chairman has been called to the phone.
Mr. Mead.
STATEMENT OF THE HON. KENNETH M. MEAD, INSPECTOR GENERAL, U.S.
DEPARTMENT OF TRANSPORTATION
Mr. Mead. Thank you, Mr. Stevens.
Last month we provided the Congress an interim report on
airlines' progress in meeting a voluntary set of consumer
service commitments.
One of those commitments was to provide consumers with the
lowest fare available through the airlines' telephone
reservation system. The commitment the airlines made did not
extend to providing fares available over the Internet. I'd like
to discuss four subjects today that are directly related to
Internet sales of airlines tickets.
The first subject will deal with the growth of travel sales
over the Internet. I think if I share with you some numbers and
some charts that you have in front of you, that they're really
the best testimony for why this is an important area for
congressional and executive branch oversight.
The second subject is e-fares. E-fares are the deeply
discounted, distressed inventory that are offered a few days
before flight departure, usually available only on the
Internet. Those fares are at the heart of the controversy over
Orbitz.
The third subject I'd like to cover is Orbitz, which is an
airline-owned travel agency, and it's scheduled to launch this
fall. As I'll overview, we see some benefits to consumers from
Orbitz, but also some competitive red flags that we think
should be dealt with first before launching it; particularly as
Senator McCain was pointing out earlier. This Committee has a
long history with Computer Reservation Systems. And once these
things are launched, they're very difficult to unscramble or
deal with. So that's why I think this hearing is particularly
timely.
The final subject I'd like to speak about are the Computer
Reservation System rules, which were established in 1984. I
think they're being rapidly eclipsed by marketplace changes and
technological innovation. Their relevance is beginning to wane.
So first, travel sales over the Internet. They are growing
at a rapid pace. There are charts in front of you with some
figures I'd like to refer to.
In 1996, as Figure 1 shows, less than \1/2\ of 1 percent of
airline tickets were sold online. Today it's at 6 percent. This
share is likely to grow to at least 11 percent by 2003. To
encourage that shift to the Internet, the airlines offer
special deals such as discounted fares, available only on the
Internet, usually on the airline's own website.
Figure 2 shows that travel will continue to account for a
significant portion of all sales made online on the Internet.
We're at about $14 billion this year. By 2003, estimates
project we'll be at about $29 billion. So this is a growth
area.
Figure 3, on the next page, shows that not only will more
households be connected to the Internet, but those households
are going to be buying more. 67 million households had online
capability in 1998. That had grown to 114 million in just 2
years. By 2003, we think that number will be in the
neighborhood of 180 million households.
I think it's important to recognize also that while the
Internet benefits people by giving them a broad range of
information 24 hours a day, 7 days a week, access to the
Internet is still problematic for a portion of our population;
for some senior citizens, the blind, individuals with certain
other types of disabilities, and the economically disadvantaged
who cannot afford a computer.
Figure 4 shows why the airlines want you to make
reservations on the Internet. Selling tickets on an airline's
own website, as this chart shows, can result in sale and
distribution cost savings of 75 percent or more. That means no
commission, no Computer Reservation System booking fee, no
reservation agent cost; a savings of as much as $35 to $40 a
ticket. When you multiple that millions of times over, you're
dealing with a great deal of money.
I'd like to move to my second topic, which is e-fares.
Senator Stevens. That chart, can you explain that last one
a little bit.
Mr. Mead. Figure 4, Mr. Stevens?
Senator Stevens. 1008 percent. Are those figures right? On
Table 1 and 2.
Mr. Mead. Yes. I'm just about to explain those.
These charts deal with e-fares, which are the deeply
discounted fares that are available usually only over the
Internet. We found in tests, as shown in Table 1, that when you
click on the regular fare search engine for fare quotes just 3
days before flight departures, the results, in some instances,
were more than 1000 percent higher than the e-fare that was
simultaneously being offered on the same website.
I'll give you an example: A flight between Newark and New
Orleans. If you look at Table 2, it's the first item on Table
2. Two weeks ago, one airline offered a last minute e-fare of
$140 for round-trip travel between Newark and New Orleans.
When we searched the identical itinerary through the same
airline's normal website fare search procedure, we were quoted
a fare of $1,791, a difference of over 1100 percent. A consumer
who did not know to check the e-fares first and click the
appropriate place on the website, would have paid $1500 more
for their ticket that weekend.
We found that this disparity does not need to exist,
because we found four airlines where it did not. The airline
telephone reservation agents also could not or would not inform
us that an e-fare was being offered on the Internet that could
save us hundreds of dollars.
The disparities between the Internet e-fares and the fare
quoted over the phone is displayed in Table 2. And on average,
the lowest fare available over the phone was more than 500
percent higher than the e-fare available on the airline's
website. The range, Mr. Chairman, was 64 percent to 1100
percent higher, for the same trip, same date, same everything.
I'd like to move to Orbitz. The primary concern with
Orbitz, which will be jointly owned by five airlines, is the
possibility that the airlines will choose not to make their
lowest fares, such as the e-fares I just mentioned, these
deeply discounted fares, available anywhere but on Orbitz. If
that happens, other online agencies fear that they won't be
able to compete.
Why is that? That's because Orbitz will then be the only
Internet site with the most offerings in one place at the
lowest prices.
In the short term, preventive actions can be taken. For
example, you could establish an interim provision that would
require airlines to make available any fares they provide
Orbitz to any of its competitors willing to offer the same
financial terms concerning booking fee rebates.
But those agencies should also be expected to agree to not
bias their fares and flight displays in favor of any one
airline; a quid pro quo.
In the long term, we do see some positive aspects to
Orbitz. If its software performs as it promises and if it
adheres to its charter, there will be no bias in displays; no
one airline will be promoted over another, or unfair preference
given to one airline over another.
Now that is, if it adheres to its charter and the software
performs as promised.
For airlines that agree to provide Orbitz with their lowest
fares, Orbitz will rebate the CRS booking fee by about one-
third. That amounts to a lot of money, because the average
round trip flight incurs CRS booking fees of between $10 to
$16. So you knock off a third of that, and that's a lot of
savings.
We do have some concerns about the impacts on smaller
airlines and consumers. Here's what they are: If Orbitz is
extremely successful and it eliminates its on-line competitors,
Orbitz could develop the power to charge premiums to the
airlines to participate, which would in turn be passed on to
consumers.
Now that would benefit the airlines that are the equity
owners of Orbitz, but it would not benefit those airlines that
were not equity owners. And in any case, it would eventually
have to be passed on to the consumer. We think our suggestion
would greatly ameliorate the possibility of that happening.
We also think that, as Mr. Mims was indicating, the
Departments of Justice and Transportation need to move
expeditiously on this. Orbitz plans to launch operations this
fall. It will be in a couple months, possibly by October; and
there's nothing in the present law that would prevent them from
moving to operations.
Finally, Mr. Chairman, just a word about the CRS rules.
They're being rapidly eclipsed, some would say into
irrelevance, by marketplace changes and technological
innovations. The Internet is potentially replacing many of the
functions that were performed by the CRSs, so questions have
been raised over whether these regulations ought to apply to
the Internet.
Even current owners of the CRSs do not know whether the CRS
rules apply to them. And that's because when the rules were
first established, they were applied to airline-owned CRSs.
However SABRE, which used to be owned by American Airlines, is
no longer owned by American Airlines.
In addition to that, the CRSs are forming alliances or
allegiances to certain travel agencies, particularly on-line
travel agencies. So there's questions about, ``Well, should the
CRS rules against biased displays also apply to travel agencies
if they're going to have that type of relationship?''
You should know that the Department of Transportation has
responsibility for updating these rules and that update has
been delayed three times since 1997. As the market continues to
change rapidly, the Department ought to proceed with these
updates without further delay.
I'd like to close by saying that history has shown how
very, very difficult it is to fix problems in this area after
they occur. So we have an opportunity here to be proactive, and
I hope we are.
That concludes my statement.
[The prepared statement of Mr. Mead follows:]
Prepared Statement of Hon. Kenneth M. Mead, Inspector General,
U.S. Department of Transportation
Mr. Chairman and Members of the Committee:
We appreciate the opportunity to testify on issues related to sales
of airline tickets over the Internet. Last month we provided you with
an interim report on the airlines' progress toward instituting a
voluntary Airline Customer Service Commitment. The Commitment
incorporated a variety of promises including a provision to provide
consumers with information on their lowest fares. However, this
provision was limited to information provided through the airlines'
telephone reservation systems.
The Internet is growing rapidly as an avenue for consumers to
research and purchase travel. In fact, this growth is fundamentally
changing the airline distribution network. Concerns about what impact
the Internet will have on consumers' continued ability to access lowest
fares, along with other changes taking place in the ticket distribution
network, led to a provision in the DOT's Fiscal Year (FY) 2000
Appropriations Act to review these issues. We have also undertaken an
effort to identify the impact of Orbitz, the proposed jointly owned
airline website. Our initial work is nearing completion. Today, I would
like to make four points directly related to Internet sales of airline
tickets.
LTravel sales over the Internet are growing at a rapid pace.
Airlines have embraced the Internet as a means of significantly
reducing ticket distribution costs. In 1996, less than \1/2\ of 1
percent of airline tickets were sold online through airline websites or
online travel agencies such as Travelocity or Expedia. Today, online
purchases account for an estimated 5.9 percent. By 2003, industry
analysts project that percentage to reach over 11 percent. The airlines
have facilitated the shift from traditional channels to their websites
through special offers such as bonus frequent flyer points and fare
specials that are available only by purchasing travel on their
websites.
By 2003, analysts project that over $29 billion will be spent on
all travel products over the Internet and that this will account
for more than one-third of all product purchases made online. The
Internet benefits consumers by giving them the ability to access a
broad range of information 24 hours a day, 7 days a week, although
for a certain part of the population--some senior citizens,
individuals with certain types of disabilities, and the
economically disadvantaged--access to the Internet is still
problematic.
LWide disparities exist between distressed inventory ``E-
fares'' and fares quoted simultaneously for identical itineraries in
other areas of the airlines' same websites.
In a test of 20 published E-fares offered this summer, we found
that ``clicking'' on separate areas within an airline website can
result in fare quotes that differ by more than 1000 percent. For
example, one airline offered a last minute E-fare of $140 for
round-trip travel between Newark, New Jersey and New Orleans,
Louisiana for the week of July 8, 2000. Requesting the same
itinerary simultaneously through the airlines' normal website fare-
search procedure turned up a round-trip fare of $1,791, a
difference of 1,179 percent. The airline's search engine did return
a lower price option of $1,200 for a different itinerary, but that
was still higher than the E-fare by more than 750 percent.
In almost all 20 of our test cases, airline telephone reservation
agents could not or would not inform us that an E-fare was being
offered on the Internet that could save us hundreds or even
thousands of dollars. The technology exists to make this
information available and consistent throughout these channels, and
consumers would be best served if airlines pursued such a policy.
While these fares are estimated to represent less than 3 percent of
all online ticket sales, these fares also have been at the heart of
the controversy over whether Orbitz participants will make their
lowest fares available exclusively on Orbitz.
LOrbitz could potentially benefit consumers and airlines by
providing a wider range of fare options, bias-free displays, and
reduced booking fees, but red flags raised by competitive issues, such
as airlines potentially restricting their lowest fares exclusively to
Orbitz, must first be resolved.
Orbitz is an online travel agency set to launch this fall that is
jointly owned by five airlines: Delta, United, Northwest,
Continental, and American Airlines. The site will offer comparative
information on all airlines' fares and services, in much the same
model as its competitors Travelocity and Expedia. Although Orbitz
is currently wholly owned by the five airlines, it is soliciting
investors and owners from outside the airline industry and may
eventually consider a public offering.
In exchange for airlines making their lowest published fares
available on Orbitz, Orbitz will offer participating airlines a
rebate that will offset as much as one third of Computer
Reservations System (CRS) fees incurred for travel booked on the
Orbitz site. With the average round-trip flight incurring CRS
booking fees of $10 to $16, this rebate could result in substantial
savings. If Orbitz' software functions as it has promised and
Orbitz abides by its charter, consumers could benefit from having
access to a wider pool of options displayed free of bias. However,
concerns about the airlines restricting their lowest fares--
including the deeply discounted E-fares--exclusively to Orbitz or
engaging in other anticompetitive practices will need to be
resolved first by the Departments of Justice and Transportation.
In the short term, actions could be taken to protect against the
potential for anticompetitive practices. For example, interim
provisions could be established requiring airlines to make
available any fares they provide Orbitz to any other entity willing
to offer the same financial terms concerning booking fee rebates as
Orbitz. Such a provision should be predicated on agreement by these
entities to abide by the non-bias regulations that apply to CRSs.
In the long term, barring any anti-competitive behavior, Orbitz
could generate competitive pressure on other online agencies to
eliminate bias and upgrade search capabilities. It could also put
competitive pressure on CRSs to lower booking costs and improve
services. If airlines are successful in drawing consumers to
distribution channels that incur lower booking fees--such as
Orbitz--the CRSs that provide services for the higher cost
distribution channels will lose business. If the CRSs want to keep
this business, reducing their fees would give airlines more of an
incentive to provide them with their lowest fares.
But there is the potential for harmful impacts on the travel
marketplace. If Orbitz is extremely successful and eliminates its
online competitors, Orbitz could develop the power to charge
premiums to airlines to participate, benefiting its equity owners
to the detriment of other airlines and resulting in higher fares to
consumers. The Departments of Justice and Transportation need to
evaluate the likelihood of these and other scenarios playing out in
determining whether prior intervention is needed to protect
competition and consumers.
LCRS rules \1\ are being rapidly eclipsed by marketplace
changes and technological innovation. CRSs are the vehicle through
which travel agents receive information about and book airline tickets.
The existing regulations were implemented in large part to protect
consumers and competitors from the biasing of information by the
airline-owners of these systems. The airline-owners were biasing
displays of data to ensure their own flights got top billing on a
travel agent's screen, even if the flights were not the best travel
options.
---------------------------------------------------------------------------
\1\ CRS rules were established in 1984 and amended in 1992.
---------------------------------------------------------------------------
With the Internet potentially replacing many of the functions
performed by the CRSs, questions have been raised over whether
these regulations should apply to the new distribution channels,
and if they did, whether they would have any meaningful impact. The
regulations apply to airline-owned CRSs but with recent airline
divestitures of CRSs, even CRSs are unsure about whether they must
still comply with the regulations.
Furthermore, travel agencies have never been subject to the anti-
bias rules of the CRS regulations. But given the long history of
airlines' anti-competitive CRS practices, the expansion of airlines
and CRSs into ownership of online travel agencies raises questions
about what regulatory protection may be needed. History has shown
how difficult it is to fix problems with airline competition after
they occur. If protections against abuses can be instituted early
in the game, mistakes of the past can be avoided.
Technology is proceeding quickly to a point where travel agents and
consumers may be able to bypass CRSs entirely to access fare and
service information from the airlines. Such potential underscores
the waning relevance of the CRS regulations.
The Department has responsibility for updating existing CRS
regulations and has delayed this process three times since the 1997
sunset date. As the market continues to change rapidly, it is
imperative that issues such as those just described, be addressed
without further delay.
Travel sales over the Internet are growing at a rapid pace.
The past 4 years have seen dramatic changes in how airline tickets
are sold, in large part a reflection of the growing commercial
importance of the Internet. Analysts project that by 2003, more than 11
percent of all airline tickets will be sold through the Internet,
nearly triple the 4.3 percent of online ticket sales in 1999 (see
Figure 1). While this is an industry-wide average, some airlines have
experienced much greater results. One start-up airline reported selling
almost 73 percent of its seats online for the week ending July 9, 2000.
Figure 1. Growth in Percentage of Airline Tickets Sold Online
Sales of all travel sold online will almost quadruple. In 1999, online
travel sales totaled nearly $8 billion, but industry analysts project
that online travel sales will reach $29.4 billion by 2003. This will
represent over one third of all purchases of all commodities made
online (see Figure 2).
Figure 2. Growth of Online Sales and Total Travel Sales.
Growth reflects preferences of consumers and airlines. Consumers have
embraced the Internet for convenience and the depth of information
available through electronic channels, although for some sectors of the
public--senior citizens, persons with some disabilities, and the
economically disadvantaged--access to the Internet is still
problematic. The number of households online worldwide is expected to
grow at an average annual rate of 17 percent in the next 3 years, but
as consumers become more comfortable making purchases over the
Internet, total online travel sales are expected to more than double
over this period (see Figure 3).
Figure 3. Growth in Online Households and Online Travel Sales
Internet reduces distribution costs. Airlines and other travel
providers realize that the Internet allows them to quickly reach a
widely dispersed base of potential consumers while reducing
distribution costs by 75 percent or more. Sales on an airline's own
website are by far the least expensive avenue for airlines since the
electronic search and booking capabilities allow airlines to avoid
commissions, CRS booking fees, and reservation agent labor costs.
Figure 4 illustrates the costs that two airlines estimate they incur
through each of the identified outlets. Airlines' commission policies,
labor costs, communications costs, and other factors can vary widely,
resulting in wide variances in the costs incurred by each distribution
channel.
Figure 4. Per Ticket Distribution Costs by Channel for 2 Major Airlines
Some Internet airfares vary substantially from fares for identical
travel
offered simultaneously through the same or other channels.
Our tests of last minute Internet specials (E-Fares) showed that
these fares were in some cases over 1000 percent lower than fares for
identical travel offered simultaneously on the airline's same
website.\2\ Additionally, the E-fares were, on average, 560 percent
lower than airline ticket reservation agents quoted as their lowest
available fares.\3\ When asked, nearly all of the 20 agents we
contacted for fare information were either unable or unwilling to
provide information about the possibility or existence of lower fares
on their Internet sites.
---------------------------------------------------------------------------
\2\ Our original test consisted of 20 E-fares (offered by 8
airlines) that we compared to quotes from 7 other distribution sources
including the normal fare search procedure on the airlines' websites.
We subsequently performed additional tests (100 total from 20 airlines)
that compared E-fares and fares offered through the websites' normal
fare search procedure. We did not seek fare quotes for these 100 tests
from other travel agents or airline ticket reservation agents.
\3\ Results represent findings from the 20 original tests that
included comparisons between E-fares and quotes from airline ticket
reservation agents.
---------------------------------------------------------------------------
While these fares are estimated to represent less than 3 percent of
all online ticket sales, these fares have been at the heart of the
controversy over whether Orbitz participants will make their lowest
fares available exclusively on Orbitz.
E-fares currently represent a small portion of Internet airline sales.
E-fares are the deeply discounted fares that airlines have begun to
make available 2 to 3 days prior to departure as a way of filling seats
that would otherwise have flown empty. Comparisons that we performed
with sample 3-week advance purchase fares indicated that the E-fares
were about one-third less than the airlines' 3-week advance purchase
price for similar travel. E-fares may be called different names by the
airlines--``dot.com specials,'' ``web-fares,'' ``cyber-savers,'' etc.--
but all refer to last-minute deeply discounted fares that are only
available over the Internet.
In 1999, the airline industry as a whole reported Internet ticket
sales of about 4 percent. Most of these represented regular fares sold
at a limited discount (i.e., 5 to 10 percent off) or at undiscounted
rates over the airlines' own websites or through online travel agencies
such as Travelocity. Industry analysts estimate that last minute E-fare
specials represent less than 1/10th of 1 percent of total airline
sales.
E-fares are far more restrictive than regular fares sold on an
airline's website. Although deeply discounted, E-fares with their many
restrictions are only suitable choices for a small percentage of
travelers. The E-fares are often not announced until Tuesday or
Wednesday for travel only on and over the approaching weekend. Airlines
do not offer these fares every weekend and only do so in a limited
number of varying markets. In some cases, travel is directional (i.e.,
E-fare from Miami to Detroit on Friday is not valid for travel from
Detroit to Miami on Friday.) Dates, times, and seat availability are
often severely restricted, with outbound travel required on specific
days (often Friday or Saturday) with a return usually on Sunday,
Monday, or Tuesday.
Test comparison between last minute E-fares and last minute walk-up
fares. As a means of gauging the potential degree of variation in fare
quotes from different ticket distribution channels, we tested a sample
of 20 E-fares offered between June 17 and July 8, 2000. We selected E-
fares from specials posted by eight carriers for the approaching
weekend, and simultaneously solicited fare quotes from seven other
sources, including airline websites, reservation agents, online travel
agencies, and brick and mortar travel agents. Because these E-fares are
only available 2 or 3 days before departure, the comparable fare quotes
we received from other sources represented full coach fares that are
often the only fares that airlines make available within 3 days of
departure.
Test Results:
``Clicking'' on different parts of an airline's website can result
in fare disparities of over 1000 percent. Our testing showed that in
some cases it is possible for a consumer to simultaneously get two
different--and widely variant--fare quotes for the exact same itinerary
just by ``clicking'' on different areas of an airline's website. For
example, on one carrier's website, clicking on the ``dot.com specials''
section of the website turned up an E-fare between Newark and New
Orleans of $140. Entering the identical itinerary (same dates, same
flight numbers) through the regular fare-search engine on the website
resulted in a fare quote of $1,791, a difference of over 1,100 percent.
Table 1 provides examples of simultaneous round-trip fare quotes
received for identical itineraries on the same travel dates by
searching different areas of four airlines' websites.
Table 1. Variations in Fare Quotes from Different Areas of an Airline's Website
----------------------------------------------------------------------------------------------------------------
Regular
City Pair E-Fare Fare on Difference
Web
----------------------------------------------------------------------------------------------------------------
Boston--Los Angeles $273.50 $2,223.50 713%
----------------------------------------------------------------------------------------------------------------
Detroit--Nagoya, Japan $449.00 $2,826.90 530%
----------------------------------------------------------------------------------------------------------------
Boston--Salt Lake City $178.00 $1,971.50 1008%
----------------------------------------------------------------------------------------------------------------
St. Louis--Toronto $159.00 $1,325.39 734%
----------------------------------------------------------------------------------------------------------------
Detroit--Buffalo $119.00 $719.00 504%
----------------------------------------------------------------------------------------------------------------
San Jose--Portland $191.00 $342.00 79%
----------------------------------------------------------------------------------------------------------------
San Francisco--Los Angeles $138.00 $276.00 100%
----------------------------------------------------------------------------------------------------------------
St. Louis--Boston $192.00 $1,541.00 703%
----------------------------------------------------------------------------------------------------------------
Houston--Washington, D.C. $157.00 $1,726.00 999%
----------------------------------------------------------------------------------------------------------------
LAirlines should consider disclosing existence of E-fares when
an itinerary is requested through the website's normal fare-search
procedure. Airlines understandably offer a variety of fares through
different distribution channels as a means of maximizing revenues, but
we found some airlines' practices of simultaneously quoting widely
disparate fares for the same product within the same channel somewhat
disturbing.\4\ The E-fare tickets have more restrictive policies on
exchanges and cancellations, but a strong case could be made for giving
consumers the option to choose between an $819 ticket with no penalty
for changes and a $147 ticket with a $75 change fee.
---------------------------------------------------------------------------
\4\ Four of the eight carriers included in our original test have
established mechanisms that recognize an itinerary entered into the
regular fare search engine as one being offered as an E-fare and will
provide the E-Fare quote.
LAirline reservation agents are unable or unwilling to assist
consumers with finding lower Internet fares. Our testing also revealed
substantial disparities between the E-fares found on the airlines'
websites and the lowest available fares quoted simultaneously over the
telephone by the airlines' ticket reservation agents. In nearly every
case, the lowest fare quoted by the reservation agent, the full coach
fare, was substantially higher than the E-fare. The differences ranged
from 64 percent to over 1,100 percent. On average, the fares offered
through airline ticket reservation agents for identical itineraries
(same flight numbers on same travel dates), were more than 560 percent
higher than available E-fares. The tests were conducted simultaneously
to limit the possibility that the differences were due to changes in
---------------------------------------------------------------------------
seat availability.
Table 2 highlights examples of fare differences found between
airline website E-Fares and airline ticket reservation agents over the
telephone. It also shows the fares being offered simultaneously through
the normal search procedure on the website.
Table 2. Variations in Fare Quotes Between E-Fares, Regular Web Fares, and Airline Reservation Agents
----------------------------------------------------------------------------------------------------------------
Difference
Airline Difference from
City Pair E-Fare Regular Reservation from Airline
Web Fare Agent Regular Reservation
Web Fare Agent
----------------------------------------------------------------------------------------------------------------
Newark--New Orleans $140.00 $1,791.00 $1,791.00 1,179% 1179%
----------------------------------------------------------------------------------------------------------------
St. Louis--New York City (LGA) $169.00 $1,593.00 $1,593.00 843% 843%
----------------------------------------------------------------------------------------------------------------
Dallas (DFW)-- $160.00 $160.00 \1\ $1,330.50 0% 732%
Minneapolis
----------------------------------------------------------------------------------------------------------------
Las Vegas--Los Angeles $80.00 $80.00 \1\ $179.00 0% 124%
----------------------------------------------------------------------------------------------------------------
Minneapolis--Austin $189.00 $1,469.00 $1,469.00 677% 677%
----------------------------------------------------------------------------------------------------------------
Cincinnati--New Orleans $139.00 $139.00 \1\ $1,095.00 0% 688%
----------------------------------------------------------------------------------------------------------------
Denver--Philadelphia $252.00 $1,716.50 $1,869.00 581% 642%
----------------------------------------------------------------------------------------------------------------
Pittsburgh--Indianapolis $127.00 $127.00 \1\ $816.00 0% 543%
----------------------------------------------------------------------------------------------------------------
\1\ Four airlines' regular website search procedures returned the E-fare specials with their associated
restrictions. Unlike the full coach fares returned by other airlines, these fares are non-refundable and have
the same heavy restrictions as the E-fares.
When asked, none of the airline reservation agents we spoke to
could or would tell us whether an E-fare was being offered that weekend
for travel we were purchasing, even when our request was for an
itinerary that we knew was being offered as a low-cost E-fare. All
indicated that even if one were available, it could not be sold at that
price over the telephone.
One carrier indicates on its website that the E-fares listed on the
website can also be purchased through a telephone reservation for an
additional $20. During our testing, however, we found that this
carrier's reservation agents were still not able to provide information
about whether these fares were being offered.
We believe the consumer would be best served if information were
available about the possibility of alternate fares being available
through other channels. This does not mean that every fare should be
accessible through every channel, but that airline reservation agents
disclose such possibility when it exists. The technology exists to
support such a policy.
Orbitz could potentially benefit consumers and airlines by providing a
wider range of fare options, bias-free displays, and reduced booking
fees, but red flags raised by competitive issues, such as airlines
potentially restricting their lowest fares exclusively to Orbitz, must
first be resolved.
In exchange for airlines making their lowest published fares
available on Orbitz, Orbitz will offer participating airlines a rebate
that will offset as much as one third of any CRS fees incurred for
travel booked on the Orbitz site (rebate equivalent to approximately
$3.00 to $5.00 per ticket booked). If Orbitz' software functions as it
promises and Orbitz abides by its charter, consumers could benefit from
having access to a wider pool of options displayed free of bias.
However, concerns about the airlines' restricting their lowest fares,
including the deeply discounted E-fares, exclusively to Orbitz or
engaging in other anti-competitive practices--such as charging airlines
to participate in Orbitz if it becomes the dominant online ticket
source--should not be dismissed and need to be resolved first by the
Departments of Transportation and Justice.
Orbitz is an airline-owned online travel agency. Last fall, Delta,
United, Northwest, and Continental Airlines announced their intent to
jointly launch an online travel agency that would compete with
established travel websites such as Travelocity and Expedia. American
Airlines signed on this spring after Sabre, the CRS that owns
Travelocity--a future Orbitz competitor--was spun off as an independent
entity. Although Orbitz is currently wholly owned by the five airlines,
it is actively soliciting private investors and owners outside of the
airline industry. Orbitz may eventually consider a public offering.
Each of these five airlines, and most other commercial airlines,
have established their own individual websites to sell their own
tickets and services over the Internet. While these websites provide
the least expensive way to distribute tickets, the airlines know that
many consumers prefer the multi-carrier travel agencies where they can
compare the fares and services of competing airlines to get the best
prices.
On Orbitz, consumers will be able to enter desired travel
destinations, dates, and other criteria and the search engine will
evaluate the spectrum of possible schedule options and then display a
menu of travel options and fares. Orbitz intends to provide links to
hotels, car rentals, and other traveler services.
Orbitz is an attempt by the airlines to lower ticket distribution
costs, and most pointedly, to reduce what they believe to be excessive
and growing CRS booking fees. Between 1990 and 2000, fees for direct
access (the highest level of participation available at that time) on
one large CRS have increased from $2.10 to $3.54 per segment booked, a
growth of almost 70 percent (most round-trip flights have between two
and four segments per ticket). While CRSs maintain that the increases
reflect improvements to the systems, critics have pointed out that the
fee growth has far outpaced cost savings achieved during this time from
improvements in technology.
Orbitz has attempted to extend an invitation to every airline to
become charter associates. Charter associates would be required to
provide Orbitz with any fare they have made publicly available anywhere
else, and to contribute in-kind marketing support.\5\ In return, Orbitz
will rebate to the airlines a percentage of CRS booking fees incurred
for all tickets booked through Orbitz. Orbitz anticipates that these
rebates will effectively reduce airlines' booking fees through Orbitz
by about one third. This rebate is possible because Orbitz has
negotiated a volume booking incentive agreement with Worldspan, the CRS
that will handle the booking functions for Orbitz. Eventually Orbitz
hopes to establish direct links with the airlines' internal reservation
centers which would allow Orbitz to bypass the CRS and avoid its fees
entirely. The technology to do this is not far in the future.
---------------------------------------------------------------------------
\5\ In-kind marketing refers to advertising, marketing and
promotions for the Orbitz website sponsored by the charter associates.
These may include print, television, or Internet advertising; name/logo
included on inflight magazines or videos, Affinity program supplements
such as free or discounted upgrades, or other mutually agreed upon
ventures.
---------------------------------------------------------------------------
To date, over 30 airlines have signed letters of intent expressing
their desire to become charter associates. Airlines that do not choose
to participate as charter associates will still be listed in an
unbiased way on the Orbitz site. These airlines will not be required to
provide their lowest fares to Orbitz, but they also will not benefit
from the rebates on CRS booking fees.
Orbitz is not subject to CRS Regulations. Orbitz views itself as an
online travel agency, similar to Travelocity or Expedia, and contends
that, like those agencies, it is not subject to the CRS rules. The CRS
rules were intended to cover airline-owned CRSs, and did not extend to
travel agencies, regardless of their ownership. As such, travel
agencies are permitted to bias in favor of a particular airline the
information they receive from their CRSs and report to their customers
or even to exclude information from some airlines if they choose. The
airlines also may negotiate selective and exclusive deals, such as
commission override agreements, special fare sales, and marketing
promotions, with individual agencies. The airlines are not required to
make these deals universally available.
Potential Contributions to the Marketplace. If Orbitz abides by its
charter and presents an unbiased display, the site has the potential to
provide a valuable tool for consumers to compare fares and services as
well as provide smaller airlines a platform to compete on an equal
basis with the major carriers.
LOrbitz may offer more low-fare options. Orbitz contends that
one of its greatest strengths is not its access to airlines' last
minute E-fares, but its search engine that can search millions of
possible flight combinations to identify lowest fares. Orbitz'
competitors have criticized its claims in this area, citing the
restrictions and caveats associated with the lower-fare travel that
Orbitz software identified in sample comparisons. For example, one trip
option required travel to an alternate airport 50 miles away from the
destination city. We agree that this option may not appeal to many
consumers regardless of any cost savings, but believe that consumers
are best served if presented with the choice and permitted to evaluate
the trade-offs for themselves.
Other online travel agencies are skeptical about the ability of
Orbitz' software to perform as seamlessly as Orbitz predicts. We
plan to evaluate Orbitz' performance when the site is operational.
LUnbiased displays provide consumers with more accurate and
comparable information. Orbitz believes its other strength in the
marketplace is its commitment to provide unbiased information on all
carriers, regardless of the level of participation by each carrier. The
fact that Orbitz is jointly owned by competing airlines creates a
unique operating constraint. Orbitz' charter specifically states that
all information on Orbitz will be displayed without bias, with priority
display based exclusively on lowest airfare. Given Orbitz' joint
ownership, a decision to allow display advantages to be purchased
(i.e., ``selling bias'' to a particular airline) would have to be made
by the owner airlines who would stand to be harmed by such purchase.
If Orbitz abides by its charter and provides unbiased information
to the consumer, it will become quickly apparent to consumers that
other outlets may not truly be working in their best interest.
These channels may be pressured to reduce or eliminate bias in
their own displays.
LOrbitz' claims of benefits for small airlines are met with
skepticism. Orbitz contends that smaller airlines will benefit most
from its non-bias commitment. Larger airlines that have marketing
budgets sufficient to purchase display preferences from travel agencies
often do so to the detriment of smaller airlines that do not have these
budgets. As a result, even if the small airline has a better fare, it
may not get top billing on these agencies' displays. In websites that
restrict participation, it may get no billing at all. Still, small
airlines have expressed skepticism about the intentions of a
distribution outlet controlled by the major airlines. Other airlines,
including Southwest, believe that the venture proposed by Orbitz does
not fit their business strategy.
Red flags have been raised about Airlines restricting lowest fares
exclusively to Orbitz. The most vocal concerns have been expressed by
Orbitz competitors who fear that the airlines will restrict their
lowest fares exclusively to Orbitz, which will impede their ability to
compete. They view this as an anti-competitive act by the airline
owners of Orbitz, aimed at putting their competitors out of business.
The critics fear that if the airlines are successful in eliminating
their competition, consumers will no longer have choices about where to
purchase travel online. This, in turn, could have the effect of raising
costs to consumers if Orbitz began to charge airlines premiums for
participating in Orbitz once its online competitors were eliminated.
Orbitz counters that its charter agreement does not contain any
provisions barring any airline from making any fare available through
any channel, and adds that it actually contains an ``affirmative non-
exclusivity provision'' that explicitly states that no airline is
prevented from making any fare it chooses available through any channel
it chooses. Orbitz contends that in an unregulated environment,
airlines are free to set their own prices and decide where to offer
their products for sale, and if airlines acting individually choose to
make certain fares only available on Orbitz, that is within the
airline's legal rights. In statements made publicly, Orbitz has
indicated that it agrees that it would be legally problematic if its
charter required exclusivity. A recent statement noted, ``if [Orbitz]
agreements did collectively require that certain fares not be sold
through other channels, that would be an illegal boycott.''
We have reviewed Orbitz' charter and its agreement with
participating airlines, and we agree that Orbitz' characterization of
its non-exclusivity provision is accurate. This provision, however, is
not sufficient reason to dismiss the concerns that have been raised.
Airlines acting individually could refuse to participate in other
distribution outlets with their lowest, Internet fares, with the intent
to maintain Orbitz as the premier supplier of online airline services.
The airlines have stated their intent to continue to participate in
a wide range of distribution channels after the start of Orbitz, citing
the need to ``be on every shelf.'' Several airlines have indicated that
if other sites can provide financial incentives comparable to the
Orbitz rebate on CRS booking fees, they are willing to make the low
fares they provide Orbitz available to other outlets. It will be
important to ensure that the airlines actually follow through on this
intent if such offers are presented.
In the short term, actions could be taken to protect against the
potential for anti-competitive practices. For example, interim
provisions could be established requiring airlines to make available
any fares they provide Orbitz to any other entity willing to offer the
same financial terms concerning reduced booking costs, as Orbitz. Such
a provision should be predicated on an agreement by these entities to
abide by the non-bias regulations that apply to CRSs.
Long-term impacts need to be evaluated. In the long term, barring any
anticompetitive behavior, Orbitz could pressure other online agencies
to eliminate bias and upgrade search capabilities. It could also
pressure CRSs to begin competing through lower booking costs and
improved services. But there is the potential for harmful impacts on
the travel marketplace. If the airline equity owners of Orbitz refuse
to make their lowest Internet fares available to online competitors,
Orbitz would have a significant marketing advantage that could allow it
to achieve a dominant online market share or even to eliminate its
online competitors. In either case, airlines would likely feel
compelled to be listed on the Orbitz system or risk foregoing
significant business to their competitors.
At such a point, with its market power over the airlines
established, Orbitz might choose to charge premiums to airlines to
participate (i.e., raise costs) rather than offering reduced costs
through lower booking fees. Such an outcome would benefit Orbitz'
equity owners to the detriment of other participating airlines. The
Departments of Justice and Transportation need to evaluate the
likelihood of these and other scenarios playing out in determining
whether prior intervention is needed to protect competition and
consumers.
Marketplace changes and technological innovation are rapidly eclipsing
CRS rules established in 1984.
The existing CRS regulations were implemented to protect consumers
and competitors from the biasing of information by the airline owners
of computer reservation systems. With the Internet potentially
replacing many of the functions performed by the original systems,
questions have been raised over whether these regulations should apply
to the new distribution channels, and if they did, whether they would
have any meaningful impact. The regulations apply to airline-owned
CRSs, but with recent airline divestitures of CRSs, even the CRSs are
unclear whether the current regulations still apply.
The changing environment of travel distribution demands a near-term
reevaluation of the applicability and sufficiency of existing
regulations to protect consumer interests. The Department has already
delayed a reevaluation and readoption of the existing CRS regulations
three times from their 1997 sunset date. As the market continues to
change rapidly, it is imperative that these issues be addressed without
further delay.
Regulations were developed to protect against airline abuses of CRSs.
Following the deregulation of the airline industry, airlines relied on
CRSs to provide travel agents access to the complex and extensive fare
and service information that developed as a result of new competition
between carriers. In the early 1980s, CRS regulations were introduced
to protect consumers from the airline owners biasing information in
their CRSs to favor their own carriers.
The airlines' biasing practices harmed consumers by denying them
access to unbiased information, and also harmed non-owner airlines that
were victims of this bias. The regulations applied to airline-owned
CRSs that provided information to travel agents. They prevented CRSs
from improving the position of particular flights on integrated CRS
display screens based on the identity of the carrier and also required
airline-owners of CRSs to participate equally in every other CRS.
The regulations were thought necessary because the travel agents
that used these systems were locked into contractual relationships with
the CRSs. If the travel agents were receiving biased information, so
were their clients. The regulations stopped short of requiring travel
agents to present unbiased information to consumers. The rationale was
that consumers are free to choose where they get their information
since they do not have contractual relationships with travel agents.
Changing marketplace and technological developments raise serious
concerns about the sufficiency and relevance of current CRS
regulations. The current regulations are designed to promote
competition and to protect the consumer from unfair and deceptive
practices, but the new state of information accessibility poses some
difficult questions concerning what protections are needed in the
modern marketplace. Confusion exists over whether these regulations
apply in the current market, to whom they apply, and how. The issues
are complex and we do not have all the answers to these questions
today. We can, however, give some context to the controversy.
LAirlines have begun to divest themselves of CRS ownership
raising the question of whether non-airline owned CRSs are covered
under existing regulations. One large CRS has recently become
independent and some have contended that it is no longer subject to CRS
regulations because it is no longer airline-owned. The Department of
Transportation, however, has indicated that it does not agree with this
interpretation. This issue needs to be clarified. As airlines divest
ownership in CRSs, protections are no longer needed to prevent the
airline-owners from biasing data to benefit themselves. However, an
independent CRS may have an incentive to solicit participating carriers
interested in purchasing preferential display.
LExisting CRS regulations do not prevent travel agents from
biasing information they provide to consumers. Neither online agencies
nor brick and mortar travel agencies are covered by existing bias
regulations. Online travel agents such as Expedia or Travelocity may
appear to be different entities than brick and mortar travel agencies
with retail locations, but from a regulatory standpoint, they are
identical. Both act as intermediaries between the airlines and
consumers, albeit one has a human interface and the other relies upon a
computer program. Both rely upon CRSs to provide information on
schedules, fares, and availability, and use the CRS to book travel
reservations. Neither is subject to CRS regulations and is not legally
bound to provide information in an unbiased manner.
LViews differ on whether Orbitz should be covered by the CRS
Regulations. Critics have suggested that because Orbitz is airline-
owned and providing information on airline fares and services to
consumers, it is essentially functioning as a CRS and should be
regulated as such. Orbitz contends that it is a travel agency, albeit
airline-owned, and should not face different regulations than other
online or brick and mortar agencies. Like these agencies, Orbitz will
provide information directly to the public. When the original CRS
regulations were developed, the determination was made that travel
agents did not need to be regulated because consumers were free agents
and could make choices about the quality of information they received
from various sources.
The critics who believe Orbitz should be regulated as an airline-
owned CRS contend that the owner-airlines are violating the CRS
regulations if they do not post the same fares they post on Orbitz
on all CRSs. These regulations were developed to prevent CRS
airline-owners from limiting their participation in other CRSs as
leverage to force travel agents to contract with their own CRSs.
For example, absent the regulations, if a travel agent wanted to
sell a particular airline's tickets, it might have to use that
airline's CRS because the airline would not be listed on any other
CRS.
If Orbitz were subject to the CRS regulations, the five airlines
with equity ownership in Orbitz would have to make any fares they
make available to consumers through Orbitz also available to every
travel agent using another CRS system, even in the absence of
equivalent financial considerations such as reduced booking costs.
However, it is important to recognize that these other travel
agents would not be subject to a similar requirement, even if they
were in partnership with a CRS or had commission override
agreements with airlines that led them to bias their information
displays toward a particular airline.
LAirline and CRS entry into the travel agency business and
technological advancements raises questions about the need for
regulatory protections. Travel agencies have never been subject to the
anti-bias rules of the CRS regulations. But given the long history of
airlines and anti-competitive CRS practices, the expansion of airlines
and CRSs into ownership of online travel agencies raises questions
about what regulatory protection may be needed. History has shown how
difficult it is to fix problems after they occur. To the extent that
protections against abuses can be instituted early, mistakes of the
past can be avoided.
Some parties have suggested that all travel sales over the Internet
should be subject to the CRS regulations. Since online travel
agencies are virtually identical in structure to brick and mortar
agencies, and in some cases represent actual extensions of them, it
would be difficult to apply regulations to online agencies without
extending them to all travel agencies.
Orbitz and other entities are nearing a point where direct links
can be established with carriers' internal reservation systems to
access fare, schedule, and seat availability data, making it
possible to bypass CRSs entirely. When this occurs, a determination
will need to be made as to whether any protections need to be
instituted to safeguard consumer interests, and if so, what these
should be.
This concludes our statement. I would be pleased to answer any
questions.
The Chairman. I thank you, Mr. Mead.
Mr. Mims, as Mr. Mead just pointed out, there's been a
significant delay in rulemaking on the CRS system rules. When
does the Department plan to conclude this rulemaking?
Mr. Mims. Well, we wish to do that very soon. However, Mr.
Chairman, as Mr. Mead has indicated, this industry and the
things that are going on with the Internet are very dynamic at
this particular time; and we are planning today to post a
supplemental notice requesting comments on what's going on with
the Internet. We would close that out within a 60-day period
and, working with my colleague, the General Counsel, move this
rule along. I would like to see this concluded by the end of
this calendar year.
The Chairman. Mr. Mead, in your opinion, why is it that the
low fare carriers oppose the creation of Orbitz?
Mr. Mead. I think there are several reasons. One is that
they know the history here; they see the big airlines getting
together and I think they are suspicious and they have history
to back up their suspicions. I think there's also some
suspicion that Orbitz will not adhere to their charter and that
over time as Orbitz is successful, Orbitz will have the power
to establish big premiums that they charge the airlines for
making bookings through Orbitz.
I also think there is a concern on the part of some
airlines that all of their fare information and flight
information will be available to everybody. And that one of the
major airlines can tell at a glance exactly what is happening
inside this smaller airline.
And right now, that's not so in the case of e-fares, which
are the lowest fares. If a big airline has that information, it
can be a potent tool.
The Chairman. In order to qualify for the discounted CRS
booking fee, participating air carriers in Orbitz must enter
into a so-called ``most favored nation'' clause. An airline
sells a low fare elsewhere, the MFN clause requires it to offer
that fare on Orbitz as well.
Would such a provision inhibit carriers from offering their
most cut rate web fares, since it would be uneconomical to sell
those fares through the most costly Orbitz travel agent?
Mr. Mead. No, sir. In fact, as you point out, the charter
for Orbitz says that in order to qualify for that rebate, you
must provide your lowest fares on Orbitz. That would include
those e-fares.
The charter does not prohibit the airlines from giving
their e-fares to other distribution outlets on the Internet.
The fear is that the individual airlines will see it as in
their best interest not to do so. That's the fear.
I don't think the concern is really that people will sit in
the back of cigar smoke-filled rooms and agree not give these
fares to other Internet distributors. But I think there is a
concern that each airline will just see it in its best interest
to put them on a website that it owns. Consumers must go nuts
having to look at all these different websites to find a
different fare; and this website, if it can advertise that it
has the largest number of offerings and the lowest fares, the
consumers would flock to it. And then they could basically
control the market. I think that's the basic concern here.
Senator Stevens. Senator Rockefeller.
STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
Senator Rockefeller. Just a follow-up on that question, Mr.
Chairman.
The airlines obviously want to do this. And ordinarily in
the Internet business, competition is competition and it's
brutal, and a lot of people get forced out of business. Happens
every day.
Tell me why you think it is natural behavior that when a
company has control of the air fares and the distribution of
the information about those air fares that it would, as you
suggested, perhaps increase the prices, and use Orbitz as an
opportunity to increase prices rather than to simply make
cheaper fares available.
Mr. Mead. I don't think it would happen immediately. I
think it would take several years, if it were to----
Senator Rockefeller.--actually, that's not what I was
asking you. I was asking, what is it philosophically, or what
is the inevitabilty in your mind that leads you to the
conclusion that allowed you to make the statement that you did,
that they would probably increase fares, whether it's sooner or
later.
Mr. Mead. Because if the phenomena I describe were to
occur, and I'm not saying that it would; but if it were to
occur, the result would be an inclination to establish
premiums, just like it has been on the CRSs, because you have
the only game in town.
But that could only occur if the other Internet
distribution sites were no longer in business. If they were put
out of business, they would feel it was because they weren't
getting access to the lowest fares and word got around to all
the consumers that the lowest fares were only available on
Orbitz. That's where the consumers flocked to; they no longer
went to outfits like Travelocity or Expedia.
Without those entities in existence, you only have one; and
that I think would explain why they could establish premiums to
airlines to participate.
Senator Rockefeller. So you're just saying it would be
natural, in a sense monopolistic behavior?
Mr. Mead. Yes, sir. The suggestion we've made to Mr. Mims'
office is that you simply require the airlines to make their
lowest available fares available to other Internet providers,
provided those other Internet providers are willing to pay on
the same financial terms, and also that these other Internet
providers agree not to bias their flight and fare displays.
Senator Rockefeller. And if that were the case, then you
think it would not be a problem?
Mr. Mead. I think that would greatly ameliorate the risk,
sir.
Senator Rockefeller. Thank you.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
The Chairman. Senator Stevens.
Senator Stevens. Does Orbitz have any contractual
arrangements with major mass purchasers of airline tickets?
Mr. Mims. Not that I know of at this point, Mr. Stevens.
Senator Stevens. Like the government, for instance, the
federal government. Do they have any special arrangements, any
special fares for those who purchase enormous amounts of
airline tickets?
Mr. Dayton. I don't believe they do at this point; they're
mostly focusing on getting up and running and establishing the
software and website.
Senator Stevens. They're aimed totally at the individual
purchaser, is that what you're saying?
Mr. Dayton. It's my understanding at this point.
Senator Stevens. What's the effect of Orbitz on rural
consumers? Have you made up your mind on that, Mr. Mead?
Mr. Mead. It would seem to me that Orbitz would likely have
the same effect on rural consumers as it would on urban
consumers. It would provide rural consumers, I think, ready
access to a very broad range of information, much broader
than----
Senator Stevens. That was my opinion, too, because they
would not normally have large travel agencies in their
communities.
Mr. Mead. I think you're quite right, I think there are
pluses and negatives to this. And I think we have to maximize
the positives and try to control the negatives.
Senator Stevens. Are you suggesting that the agreement
they've entered into prior to Orbitz, that we should mandate
that it apply to Orbitz?
Mr. Mead. Are you referring to the suggestion I was making?
Senator Stevens. Yes.
Mr. Mead. Yes, I am. I think it is a----
Senator Stevens. Can that be done administratively?
Mr. Mead. We believe it can be.
Senator Stevens. Thank you.
Mr. Mead. Mr. Stevens, what I'm concerned about is, you're
going to hear later some very vocal views of concern that the
lowest fares that are now available on an airline's own
websites will be made available only to Orbitz and not to these
other vendors.
And I don't think you can just dismiss those concerns when
Orbitz says, ``Gee, our charter says that the airlines can make
them available to these other vendors if they want to.'' I
don't think that goes far enough, in my opinion.
Senator Stevens. Thank you.
The Chairman. Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman. And I will make it
very clear at the outset that I'm very, very skeptical about
this entire Orbitz effort. I want to spell out for a moment why
I'm so skeptical, and I want to go into particularly this
question of safeguards, Mr. Mead, and I think that's the bottom
line.
With Orbitz, the airlines want the consumer to believe that
they're going to get the lowest fare in one place. And, of
course, the hitch is the airlines own the website and they can
provide exclusive fares to it; and I guess if Orbitz is
successful, they can eliminate on-line competition as well as a
lot of travel agents.
And the people who are bringing this to us are the people
that you found in July not doing much of a job with respect to
following through on their voluntary pledges. We still have
wide disparities in fares; you found just recently that
clicking on different parts of an airline's website can result
in fare disparities of over 1000 percent.
These are the people who sold us on one anticonsumer
proposition after another, and I guess what I would like you to
tell us is, what are the minimum safeguards, specifically, that
would be needed to protect the public here, and what happens if
those safeguards aren't put in place?
Mr. Mead. Let me deal first with these e-fares. I know you
came in the room after I displayed this chart; the e-fares are
basically the cheap fares. They are currently available only on
the Internet.
I think a minimum safeguard here is if you're going to have
e-fares and other fares on the web for the same flight, that
you ought to have to disclose to consumers that you're engaging
in that practice. We know that that is possible to do because
we found four airlines that do it, and we found others that
didn't. And if you aren't quite fluent with the Internet, you
can easily buy a $1,900 fare for a flight that you could have
gotten for $178. And not even be aware that there's a $178
offering.
I also think that it would be quite appropriate for the
airlines to advise consumers that there may be cheaper fares
available via the Internet.
The Chairman. Senator Wyden, I've been informed that
there's been an objection lodged to the hearing, so we're going
to have to conclude at 11:30. And also, we're going to have a
vote in a few minutes; so obviously we have another panel, and
I'd appreciate it. I don't know why we're going through this
arcane exercise, but clearly we want to hear from the next
panel as well, and I appreciate your brevity.
Senator Wyden. I wasn't going to ask any other questions. I
was just going to say, I think that this is part of a pattern
of anticonsumer activity that we've seen from the airlines, and
I hope we'll be able to spell out when we have the time to, Mr.
Chairman, what the safeguards ought to be here. I think without
them, the consumer is going to get fleeced once again.
Mr. Mead. I wanted to complete the answer for the record,
because the record will look very incomplete if I don't.
The other safeguard that ought to be in place is, the
airlines should be directed to make their fares available to
other Internet distributors if they're willing to pay the same
fee that Orbitz is going to be paying, same financial terms;
and second, that they agree not to bias their fares or displays
on the Internet sites.
I think those will be some pretty meaningful protections.
The Chairman. Senator Bryan.
I thank you, Senator Wyden.
Senator Bryan.
STATEMENT OF HON. RICHARD H. BRYAN,
U.S. SENATOR FROM NEVADA
Senator Bryan. Thank you very much, Mr. Chairman. I'll just
ask a single question.
Not all carriers are part of this Orbitz system, as I
understand it. In the State of Nevada, Southwest has a very
substantial presence; they're not part of this proposal.
How does this system work with carriers who are not part of
the system, and what are the implications for the consumer?
Mr. Mead. Southwest Airlines, it's fair to use them as an
example. They would not, as I understand it, be participating.
Senator Bryan. That's my understanding, too.
Mr. Mead. But they would be displayed, and they would be
displayed along with all the other airlines, and according to
the charter of Orbitz, in an unbiased way.
But Southwest Airlines would not get a rebate of the
booking fee. I think the concern of Southwest Airlines and
others is a deep-rooted suspicion that when the major carriers
get together, there may be some mischief afoot. They are
probably looking to the history of the Computer Reservation
Systems, which if you'll recall the early days of those, a
couple of the airlines owned them--you'd look up at the display
and lo and behold, even though there may be other fares
available through other airlines, you see a display that favors
the airline that owns the website, even though the fare is
higher.
Senator Bryan. It took a Stanley to find Dr. Livingston in
that system of display, as I recall.
Mr. Mead. Yes. So I think those are a set of concerns.
Mark, would you want to add to that?
Mr. Dayton. I would agree with that. Southwest will be
displayed but you won't be able to book the ticket through the
system; what happens is you'd have to call Southwest or get on
their website.
One thing for Southwest is that they're very cost efficient
in both their website and their travel reservation system. They
may believe that, in fact, this new site would actually raise
their costs, because as a full member they would be paying
booking fees that to date they've avoided.
Senator Bryan. Thank you very much.
Mr. Mead. You know, I think what's interesting about this,
there clearly are some positive features of this, but I think
there's some resentment that ``Gee, in order to really market
my product I have to be a member of this club or this
organization in order to effectively market. And if it's widely
successful 2 or 3 years down the road, the owner is going to
jack up the fees much greater than they were when I initially
joined.''
Senator Bryan. Well, and as you observed, Mr. Mead at your
initial response, there is certainly some skepticism that there
may be some mischief afoot here, and I think that's the concern
many of us have.
Mr. Chairman, I'll refrain from further questions in
deference to the time constraints that we face. Thank you very
much.
The Chairman. Thank you very much, Senator Bryan.
Senator Cleland.
STATEMENT OF HON. MAX CLELAND,
U.S. SENATOR FROM GEORGIA
Senator Cleland. Mr. Mead, it seems to me that one of the
values of the technology we have at hand, the concept of a web
or a network and the ability for a lot of people to communicate
in a web or in a network relatively instantaneously.
That technology lends itself to the spread of information
rather than the limitation of information; and that if one were
to apply the advances in technology to most any information
system, it would, in effect, break down barriers and really
create a web of information that all people on the web were
tied into.
It seems to me that if one major web dominates all the
information and does not share it with a smaller web or other
webs, then it kind of conflicts with the whole philosophy of
this proper spread of information, especially to consumers, so
they have additional information in order to make good, healthy
choices. And it seems to me this can apply to the airline
industry or any other type of consumption or sales of any kind,
or marketing of any kind.
Do you feel that Orbitz is a limiting kind of web or is an
expansionist kind of web? Are we better off with it or are we
worse off with it, in terms of the consumer getting information
and being able to make choices?
Mr. Mead. It's really both. A very positive feature is the
comprehensive set of fares and flights it will have. It will
have more offerings.
Second, it will offer the lowest fares in one place, which
I think a lot of consumers want; they get frustrated having to
go to all these different sites to find them, and they may not
even know how to find them.
On the other hand, the airlines that will be owning Orbitz
aren't required to give their lowest fares, whatever that ends
up meaning, to distributors on the Internet other than Orbitz.
I think that's a problem area. I think the fix for that is to
say that they have to give it to other online agencies, for
almost the very reason that you suggest.
Except that in return for getting this information, these
agencies have to offer a rebate of the booking fee just like
Orbitz will do, and second they have to agree that once they
get this information, they can't bias flight displays and fare
displays toward one airline. If you didn't require that, you'd
create an uneven playing field because you would have Orbitz
playing by one set of rules, where they can't bias their
displays by their own corporate charter, but you have these
other Internet agencies who get the information and then are
free, under the current rules and regulations, to bias the
information.
Senator Cleland. Correct me if I'm wrong, you would allow
other, shall we say, networks or webs to enter this larger
playing field, but if they played on that field, they'd have to
play by those rules?
Mr. Mead. Yes, sir. In brief, that's exactly what we're
saying.
Senator Cleland. That's fascinating.
I understand that rules were put in place in 1984 to
challenge the CRSs to be more competitive since there were some
complaints about them by a number of federal agencies. But some
three years later DOT put out a study showing that the rules
had had relatively little effect in limiting the
anticompetitive practices of the CRSs. Is that true?
Mr. Mead. I think if you look over time, the CRS rules,
which legally apply to airline-owned Computer Reservation
Systems, did have a good effect in eliminating bias. Back in
the beginning these Computer Reservation Systems would actually
display in a favorable position on the agent's screen the fares
and flight information for the airline that owned the CRS. I
guess you might say that's natural behavior. If you own it, why
not favor yourself?
But these systems became so powerful, so potent, that the
regulators had to intervene, largely in response to pressure
provided by this very Committee and the Congress, and said
``You can't do that.''
I'm not representing that all bias has been eliminated, but
a lot has. The problem now is that some of the CRSs, the most
powerful CRSs, aren't owned by the airlines. So there's a
question, do the rules even apply to them?
The rules have not kept pace, sir, with the Internet. In
fact, they were established when I don't think it was possible
to make a reservation on the Internet. So we're dealing with a
playing field that has changed so dramatically that the whole
issue needs to be revisited.
Senator Cleland. Mr. Mims, you're nodding your head over
there. Give us your insight here.
Mr. Mims. Well, I was going to add to that, Senator
Cleland, that at this particular point the Department--let me
initially say we have been tardy in issuing the rules on CRS--
we have put out a new notice requesting comment on CRS rules,
and especially we want to focus on the Internet.
Again, what I want to let everybody know is, we want to get
that information within the next 60 days and once we've
gathered that information, we will move with some dispatch to
issue the rules.
Senator Cleland. Mr. Mead, I do have the sense that we're
playing a little catch-up ball here, and I get this feeling
about a lot of these issues involving the web, the Internet,
and the technology.
That reminds me of a statement that I saw on a barracks
wall when I was a young lieutenant, that ``There go the troops,
and I must hurry, for I am their leader.''
In many ways, we on this Committee struggle with who should
adopt the rules, what the rules should be, and if there should
be any rules at all, particularly in the world of the Internet.
And I think this just presents to us one more challenge.
In conclusion, do you have any recommendation you'd like to
leave with us, other than what you've already said, in terms of
Orbitz in particular?
Mr. Mead. I mentioned the one we have for Orbitz. The
airlines ought to be making these fares available to others on
the same financial terms as they're going to make it available
to Orbitz and the people they give it to, those entities ought
to agree to display it in a bias-free manner.
A second thing I think is quite important, we found
variations within an airline's own website of fares from one
location to another that had a 1000 percent difference between
the fares. We think the airlines either ought to construct
their websites in such a way that that phenomenon doesn't
happen, or if they want it to happen, they at least disclose to
people that there's a cheaper fare. Because in some of these
instances, you could be paying $1500 for a fare when the same
location, same itinerary is available for say $190, same
airliner.
I don't think that's too intrusive to ask the airlines to
do that.
Senator Cleland. Thank you very much, and thank the members
of the panel.
Thank you, Mr. Chairman.
The Chairman. I thank the members of the panel, and I
appreciate you being here, and we look forward to seeing you
again soon.
Our next panel will be Mr. Terry B. Jones, President of
Travelocity; Mr. Jeffrey Katz, Chairman and CEO of Orbitz; Mr.
Mark Silbergeld, Co-Director of the Consumers Union; and Mr.
Paul Ruden, Senior Vice President for Legal and Industry
Affairs, American Society of Travel Agents.
Mr. Katz, we'll begin with you, sir. Welcome to the panel.
STATEMENT OF JEFFREY G. KATZ, CHAIRMAN, PRESIDENT AND CEO,
ORBITZ
Mr. Katz. Thank you. My name is Jeff Katz and I'm President
and the Chairman of the Board of Orbitz, and I know that some
have portrayed us as Internet big boys----
The Chairman. Pull the microphone a little closer, Mr.
Katz. Thank you.
Mr. Katz. I know that some have portrayed us as Internet
big boys backed by airline bad boys, and I can understand the
viewpoint, but Orbitz is an Internet startup company. We
represent new competition using new technology in an effort to
present Internet consumers with what we think they really want;
comprehensive and unbiased travel information.
It is certainly a bit ironic for me to be sitting here as a
former head of Sabre's CRS division on behalf of Orbitz, but
I'd like to take a moment to discuss why Orbitz exists and why
I am here.
Travel is at the heart of e-commerce. More travel is sold
on the Internet than any other category of product, and on-line
travel will probably hit $20 billion in revenues in the coming
year, not counting Orbitz.
What we have today in this marketplace is a situation where
two extremely strong, dominant companies have moved in and
established a very potent duopoly in Internet travel, and both
have done so with what we call CRS-based Internet sites.
First is Sabre's Travelocity. It is the largest CRS in the
world and by itself controls nearly 50 percent of all CRS
bookings; the other is Microsoft's Expedia. Between them they
have wrapped up through exclusive deals, mergers and their own
good initiative, 70 percent of the business of offering
multiple airlines to consumers over the net. And they have
nailed down in addition long-term distribution deals with the
likes of AOL, Yahoo, and Microsoft Network, giving them
exclusive distribution to nearly 90 percent of all portal
visitors to the World Wide Web.
These sites now sit on a marketplace that they dominate
that is expected to quadruple over the next 4 years; and the
fact is that they have more lobbyists and lawyers than we have
employees.
We think consumers deserve to have more choice and more
competition than two major players in such a huge market. We
attempt to be part of the solution, not part of the problem. We
attempt to bring competition. I think there's clearly room for
three.
I'd like to summarize the facts about Orbitz. We believe we
have to provide consumers with absolutely comprehensive,
unbiased searches and displays of airlines' flights and
schedules. In response to a consumer query, we will show more
airlines, more flights and more fares than any existing CRS-
based site, and we will do that for all airlines big or small,
new or old, investors or not, associates or not. And unlike any
CRS-based website we will search all airlines, all flights and
all fares.
And when I say we will be unbiased, I do not mean simply
that we will comply with the existing CRS rules on display
bias; we go beyond that. We have to do a better job of giving
consumers what they want or they will never use our website;
it's that simple. So we have a written guarantee that we will
provide unbiased displays into our contracts, and no CRS-based
website we know of has taken that obligation to date.
Second and importantly, we provide that comprehensive and
unbiased capability by building an all-new technology. Rather
than using the old CRS technology which started about a quarter
of a century ago, we use the newest generation of processors,
independently developed search software, and greatly improved
seat availability data.
As you know, the search software we use was developed by a
group of M.I.T. grad students beginning some 8 years ago at the
M.I.T. Artificial Intelligence Lab, and the founder behind
that, Jeremy Wertheimer, is here with us today and available
for questions.
Anybody could have introduced the new technology, but until
Orbitz came along, nobody chose to do, and I think the reason
why not is because competition was not there.
With the efficiencies of this new technology, we are
offering something else that is new, revolutionary; and that is
a form of price competition on the CRS booking fees. These fees
have clearly been found to be excessive; they burden small and
low fare airlines in particular, they burden consumers, and
they raise the cost of selling through travel agents.
We offer to offset part of that excessive fee to exactly
the same degree for any airline, whether an investor in Orbitz
or not, and we are the only website that has chosen to do so.
If we were denied the ability to do that, what would be lost is
the only opportunity in many years to use competition to
relieve consumers, airlines and travel agents of the burden of
these CRS costs.
Now, much has been made of the fact that airlines have
invested in Orbitz. And the fact is, in the view of the
financial markets, we are attempting something very, very new
here and very, very technologically risky. We are trying to
provide the consumer comprehensive and unbiased information by
applying totally new technology to a very complex problem. It
is hard for most investors other than airlines to even evaluate
the risk inherent in such an undertaking.
To take on such an entrenched duopoly is very difficult in
today's financial markets, and nobody has as much know-how and
in fact incentive to try and bring price competition to CRS
booking fees as airline investors do.
But having obtained that initial investment, I am now
seeking and expect additional investment from non-airlines, and
we expect that new investment to substantially dilute, by more
than 50 percent, the interests of the airline investors, and I
will do so as quickly as I can.
A second issue has been raised about Orbitz: the idea that
we have an agreement with airlines that they will provide fares
to us that no one else will have. Let me be very clear: there
is no agreement by which airlines are obligated to make any
fare available to Orbitz that they do not make available
elsewhere, period.
In fact, our contracts not only do not give Orbitz any
exclusive right to any fare, they go beyond that; they
expressly guarantee that there is no right of exclusivity and
that each airline individually has the right to determine what
fares it sells and where it sells them. Orbitz does not and
cannot prevent any airline from making any fare available
through any channel.
Here's the simple fact that most of our CRS-based Internet
competitors do not want to face up to, and perhaps something
that's difficult to see in the details. At least 99 percent of
the time that Orbitz shows the consumer a lower fare than other
sites do, it will not be because Orbitz had access to a fare
that they did not have access to. It will be because Orbitz did
a better, more thorough and unbiased search of the fares that
were available to everybody.
Forester Research projects that on-line bookings will grow
from 4 percent to 12 percent of all bookings over the next 4
years. We expect Orbitz, if successful, to account for one to 2
percent, and there is no way our less than 2 percent of
bookings is going to put anybody out of business, let alone the
existing sites or travel agents.
In conclusion, Senators and Chairman, we are a new
competitor entering a business, on-line agency websites, that
is dominated by competitors numbering two. We cannot be just as
good as they are and hope to succeed, to gain ground in this
arena that they dominate; we have to be far better than they at
offering consumers what they want.
We ask for nothing more than a chance to compete. We
believe we will enhance competition in the distribution of air
travel. We will give consumers better, more complete
information about airlines, flights and fares. We will advance
the technology used to bring that information to consumers. We
will bring price competition to the computer costs of
distribution where it has been sorely lacking, and we have by
contract provided that we have no right of exclusivity to any
fare whatsoever.
We are more than willing to be judged by consumers, and we
believe it should be the consumers who decide which site best
meets their needs. Orbitz is the story of new competition. We
are the underdog, not the big bad guy, with huge obstacles to
overcome to even become number three in on-line travel.
We're willing to take the risk of trying to do that, and I
would urge you to please be aware of regulatory proposals from
those who might not welcome the competition we bring to on-line
travel.
One final comment, Mr. Chairman, if I may: I can tell you
that the Europeans fully understand what can be done with this
new technology, and they are well along in creating a European-
based website that would use exactly the technology we are
building at Orbitz. If we do not build this technology in the
U.S., it will be built by others, and it will be used by
consumers in the U.S., because there is nothing more
international than the Internet.
Thank you for the opportunity to testify, and I would be
pleased to try and answer any questions the Committee might
have.
The Chairman. Thank you, Mr. Katz.
[The prepared statement of Mr. Katz follows:]
Prepared Statement of Jeffrey G. Katz, Chairman,
President and CEO, Orbitz
My name is Jeff Katz, and I am President, and CEO of Orbitz, and
Chairman of its Board.
Orbitz is an Internet start-up company. We represent new
competition, using new technology, in a new effort to present Internet
consumers what they want: comprehensive and unbiased travel
information. In that effort we will compete against one of the most
dominant and entrenched companies in the American economy: Sabre, the
largest Computer Reservation System in the world, and Sabre's Internet
arm, Travelocity. They have more lobbyists than we have total
employees.
We have found ourselves in recent weeks the victims of a
misinformation campaign, and we simply have not always had the
resources both to build our new service and to respond to every attack.
We therefore thank you for this opportunity to put the facts on the
table.
It is a bit ironic for me to be sitting here, as a former head of
Sabre's CRS division, on behalf of Orbitz. Let me take a moment to
discuss why Orbitz exists, and why I am here.
Travel is at the heart of what e-commerce is all about. More travel
is sold on the Internet than any other category of product. Online
travel will probably hit $20 billion in revenues this year, not
counting Orbitz. Whether consumers will use the Internet to buy travel
is not a question to be decided--it has already happened. The question
is simply how much choice consumers should have when they use the
Internet to buy travel, and how much competition should there be for
their business?
Internet travel should be very open to competitive entry. The CRS
industry is not, because it has its users, the travel agents, under
highly restrictive, long-term contracts that effectively deny most of
them any possibility of switching to another CRS or using an additional
CRS. But the Internet is not like that. No user is under contract. Any
user can switch to any other site at the click of a mouse.
What we have today, however, is an unfortunate situation where two
extremely dominating companies have moved in and established a very
potent duopoly in Internet travel, and both have done so with CRS-based
Internet sites.
One is Sabre/Travelocity. Sabre is the largest CRS in the world. By
itself it controls 46% of CRS bookings. It takes the position that the
CRS rules do not even apply to Sabre. The other is Microsoft/Expedia.
Neither Sabre nor Microsoft has a record of being shy about
establishing market dominance and exercising that dominance
aggressively. Between them they have wrapped up, through exclusive
deals and mergers, 70% of the business of offering multiple airline
schedules to consumers over the Internet. And they have nailed down
long-term deals with AOL, Yahoo, and MSN giving them exclusive
distribution to 90% of all portal visitors to the World Wide Web.
Having purchased their largest competitors and locked up the major
portals, these two dominant sites are now sitting on a marketplace that
is expected to quadruple over the next four years.
It is this very powerful duopoly to which we are attempting to
provide some new competition. We think consumers deserve to have more
choice and more competition than just two major players in Internet
travel. If you think there is an anti-competitive problem in Internet
travel, you are absolutely right. And Orbitz is part of the solution to
that lack of competition.
We absolutely understand how difficult it will be for us to break
into a business so dominated by two CRS-based Goliaths. What we find
hard to grasp is how Sabre/Travelocity in particular can look down on
us from their lofty and entrenched position and claim that we are
bullying them! They recently bought one of their largest on-line
competitors in order to further consolidate their power and reduce
competition. We think it is clear that they are simply trying to use
any device available, including government, to block any new
competition.
What we have to do to break into this highly dominated business is
clear:
we have to provide consumers with the complete and unbiased
flight and fare information they want and are not getting
today,
we have to break with the old technology of the CRS era and
be the first to use today's best technology to solve this
problem for consumers,
and we have to bring some long-missing price competition to
the CRS booking fees which have burdened so much of the ticket
distribution system.
Let me review each of those points.
First, we believe we absolutely have to provide consumers with
absolutely comprehensive, absolutely unbiased searches and displays of
airlines, flights, and schedules. In response to a consumer request we
will show more airlines, more flights, and more fares than any existing
CRS-based Internet site. And unlike any CRS-based website, we will
search all airlines, all flights, and all fares before displaying any.
When I say we will be unbiased, I do not mean simply that we will
comply with the existing CRS rules on display bias--we will go well
beyond that.
Our objective is to provide absolutely unbiased display of every
airline's flights and fares, whether they are investors in Orbitz or
not, and whether they are associates of Orbitz or not. We want every
airline to be fully and equally displayed in Orbitz, and we want Orbitz
to treat every airline the same.
We do this not simply because we have to provide that level of
quality information if we are to have any chance of winning consumers
away from these two dominant websites that have exclusive positions on
the portals most consumers use. We have to do a better job of giving
consumers what they want, or they will never make the extra step it
takes to use our website. It's that simple. And so we have written the
guarantee that we will provide absolutely unbiased displays, exactly
the same for all airlines, big or small, new or old, into our contracts
with each airline, whether they are investors or not. We are now
absolutely obligated to be unbiased. Travelocity is not. No CRS-based
website we know of has that obligation.
Second, we are providing that comprehensive and unbiased display by
building an all-new technology for searching and displaying airlines,
flights, and fares. Rather than using old legacy technology from a
quarter of a century ago, we are using the new generation of
processors; new, independently developed, unbiased search software
designed to search all possible airlines, flights, and fares: and
greatly improved seat availability data. These old legacy systems still
rely extensively on the old Cobol programming language; we will use
today's Java. We are the only site demonstrating that Internet sites
need not be based on the old CRS technology. And I believe that if we
succeed, others will follow. We will have the competitive entry that
has been completely lacking in computerized distribution in the CRS-
dominated era.
Let me explain more fully what I mean by using new technology to
create the kind of truly comprehensive and unbiased displays consumers
have been wanting and the large CRS-based Internet sites have not been
providing them.
Distributing complete and accurate information about every flight
and every fare, every day, is an enormous technological challenge. A
quarter of a century ago CRSs began being placed in travel agencies--
usually under a contract that made it impossible for that agent to use
or switch to any other CRS.
The CRSs were marvels of their day. But think for a moment what the
world of computers was like 25 years ago. Computers can do things for
people today that no one could have imagined possible 25 years ago.
When you want to travel in the U.S. from City A to City B and back,
and you ask one of these CRSs what your airline, schedule, and fare
options are, it can search about 5,000 to 10,000 possible combinations
for you, and it does that in about one second.
The problem is that from City A to City B and back there are
typically somewhere between half a billion and a billion possible
combinations of airlines, schedules, and fares. (That is a hard number
to believe, but it is true. By the time you take all the possible
airlines, over all the possible routings including all possible
connections, and all possible fares on each of those flights, and add
in all the possible combinations with the return flights and fares,
there are that many total possibilities in a typical domestic round
trip.) So that CRS is only searching about one one-hundred-thousandth
of the options you really have in the marketplace. Despite all those
rows and rows of huge mainframe computers and huge disc data storage
units, that's the limit of the old CRS's ability to process
information.
So what the CRS does is narrow the options it will look at by
prescreening out 99.99999% of your options before it begins to evaluate
them for you based on price and time. Connecting flights over points
not on the system's predetermined list of connecting hubs? Doesn't even
consider them. Flights offered by an airline with very few frequencies
in that market? Doesn't even consider them. Most of the options it
throws out are not good choices for you--they're inefficient routings,
inconvenient departure times, and the like. But buried in that pile of
over half a billion possibilities that the CRS throws out before it
evaluates are usually some great options--an alternative city to
connect over, a competing airline, a few fares that are lower.
What Orbitz is all about is that we will search absolutely every
airline, schedule, and fare possibility in response to your request to
go from City A to City B and back--all half a billion to a billion
possibilities--and we will do it in one second. In response to your
request, we will search through approximately 100,000 times more
options than the CRS will, or than the Internet site that uses a CRS
for its searches will, in order to be sure we are showing you the best
flight options at the lowest fares.
We can do that because computers have changed enormously in the
past quarter of a century. Let's take a quick look at how today's
technology can do a better job of getting the consumer what he or she
wants:
Data storage. The old systems use large disc data storage
systems, and still have severe limitations on the amount of
data they can hold. Today's technology can hold vastly more
data at a small fraction of the cost. Today a one inch-by-one
inch disk, such as the ones used in ordinary digital cameras,
can hold every published airline fare in the U.S.
Computing power. Rows and rows of mainframe computers are
impressive to look at, but their actual computing power is
limited by today's standards. By assembling modem server
processors in parallel, instead of using mainframes, Orbitz
will have over 1,000 times the computing power of Sabre, the
largest CRS, and at only a small fraction of the cost.
Search software. The search software of the CRS's is
inherently limited--designed to search only the limited pool of
options that the CRS can handle in response to your request.
Orbitz will use a new search software that was independently
developed beginning 8 years ago by a group of grad students at
the MIT Artificial Intelligence Lab. It is the first software
designed to search literally every airline, schedule, and fare
in response to your request to go from City A to City B and
back, anywhere in the U.S. or Canada. Having searched and
genuinely evaluated all half a billion to a billion
possibilities, it will present to you lowest fare first, the
best several hundred possibilities--without regard to which
airline provides the service. And it will do it in a format
that is readily understandable to the consumer and allows the
consumer to quickly judge for him- or herself which options are
best. This independently developed software is the product of
that team of now former grad students led by Dr. Jeremy
Wertheimer, who is in the audience today and is available for
questions. You, or anyone in the general public, can try out
this software today at a test site (www.itasoftware.com), but
because it is only a test site it does not yet have the
powerful Orbitz hardware behind it, and it cannot actually make
a booking. Nevertheless, even just as a test site, it has
become very popular with consumers and travel agents seeking
better information than they can get through CRS's or through
CRS-based Internet sites today. Jeremy and his group have
received thousands of e-mails from users, both travel agents
and consumers, praising the system, and wanting to know when
they can begin actually booking through it. I have provided
some of those comments at Exhibit A to my testimony.
Seat Availability. Internet sites only show flights and
fares to consumers for which seats are available. Yet each of
these sites operates using imperfect and outdated seat
availability data, typically checking up-to-date data only
after eliminating most flight and fare options from
consideration. The result often is that flights and fares for
which seats actually are available are not shown to the
consumer because the system mistakenly believes, based on stale
data, that no seats are available. Thus, the consumer too often
does not see the lowest fares or the best schedules. The remedy
is to obtain fresher seat availability data and to use it
earlier in the search process. Orbitz has designed a new
system, using expanded telecommunications and data storage, to
do exactly that.
Anybody could introduce these new technologies. The processors are
readily available. The data storage is readily available. Jeremy's
unbiased and comprehensive search and display software is readily
available. Any of these CRS-based Internet sites could choose at any
time to expand the telecommunications networks and data systems
necessary to improve seat availability. But until Orbitz came along,
nobody chose to do all these things.
Why not? Because there was no competition pushing them to make
their systems as good as they possibly could be. It was, and still is,
in the interest of the old CRS's, and the CRS-based Internet sites, to
keep using their existing technology as long as possible. They will
only update their existing systems when competitively pushed to do so.
We are that new competition.
The CRS's have not needed to worry about competition because they
each had a hold on each of the agents the CRS had under contract, such
that it was virtually impossible, or prohibitively expensive, for most
agents to ever leave their CRS and switch to another. In turn, that
means that since no airline can afford not to sell through the travel
agents under contract to any CRS, each airline has to pay whatever each
CRS charges to sell through those agents. Agents are denied a choice
among CRS's, CRS's do not have to compete with each other (either
technologically or financially) to win the business of travel agents,
and airlines (meaning ultimately passengers) are stuck with the burden
of paying excessive CRS fees.
This Committee has repeatedly expressed its concern over the anti-
competitive effects of CRS's. These anti-competitive effects for the
most part have never been remedied. For example, rules were put in
place prohibiting one kind of bias used in CRS's--carrier-specific
factors--yet they continued to allow most other forms of bias. And in
practice, most of those biases are rooted in the inherent limitations
of the CRS technology.
For two decades, the air travel distribution system has been
dominated by these CRS's. There are only four of them, and the largest,
Sabre, has 46% of CRS bookings. Nobody has been able to break their
grip.
The greatest promise of the Internet in the area of air travel
distribution should be that it would provide new competition for these
CRS's, and that the new technology would be what finally provided some
new competitive entry into computerized distribution.
Instead, so far the opposite has been the case. The CRS's, mainly
Sabre, the dominant CRS, have moved to duplicate the CRS oligopoly in
the Internet world.
We believe the Internet, in combination with the new technologies I
have mentioned, can still be a force for new competition, and that is
what Orbitz is all about. And that, of course, is also what much of the
opposition to Orbitz is all about, as well. Some people don't like new
competition.
Third, we are offering something else that is genuinely new, and
that is a form of price competition on the CRS booking fees. These fees
are clearly excessive, they burden small and low-fare airlines in
particular, they burden consumers, and they raise the cost of selling
through travel agents without providing any benefits to most travel
agents. We are offering to offset part of that excessive CRS booking
fee, to exactly the same degree for any airline, whether an investor in
Orbitz or not. We are the only website that has chosen to offer to
partially offset excessive CRS booking fees. We understand that at
least one of our established online competitors, and the CRS behind it,
do not welcome that price competition, but we are here to provide it
anyway.
Since 1983, when the Department of Justice and others first
asserted that CRS booking fees were excessive, these fees have gone up
approximately 1400%, while computing costs generally in our economy
have gone down by over 99% in the same time period. Clearly the problem
of excessive CRS booking fees has only gotten worse since Justice first
raised its concerns. Excessive CRS booking fees add to consumer costs,
disproportionately burden smaller airlines and low-fare airlines, and
have unreasonably raised the costs of distributing tickets through
travel agents, to the disadvantage of most travel agents and most
consumers.
The simple fact is, CRS's can engage in anti-competitive pricing
because they have an effective lock on the agents they have under
contract. Airlines have to pay those fees, no matter how unreasonable,
in order to reach the customers of those agents. And the passengers of
those airlines end up paying those excessive costs. This Committee has
justifiably been very concerned over the years about the anti-
competitive effects of excessive CRS booking fees.
Orbitz will indirectly provide the first price competition that has
ever existed in CRS booking fees. We are not a CRS. We will use one of
the smaller CRS's to make the actual booking after a consumer has
selected a flight and a fare, and that CRS will charge the airline the
normal booking fee. That CRS will in turn pay to us, as CRS's typically
do to the largest travel agencies, both online and traditional, a
market segment incentive. But we will then share part of that amount
with the airline on which the booking was made, in effect offsetting
part of that excessive CRS booking fee. No CRS has ever been willing to
do that. No CRS-based website has ever been willing to do that. We are
willing to do that for any airline, in exactly the same amount, no
matter whether the airline is big or small, new or old, a low fare
airline or not, an investor in Orbitz or not. Every airline has the
same shot at the same offset to the CRS booking fees on exactly the
same terms.
What all this means is that Orbitz will challenge the choke hold
that CRS's have on airlines and on the costs of distributing airline
tickets to consumers through travel agents. If Orbitz is blocked in
this effort, by cleverly disguised regulatory proposals or by other
anticompetitive obstacles, this extraordinary opportunity to finally
bring some price competition to CRS booking fees will have been lost,
and so will the only chance to relieve consumers, airlines, and travel
agents of the effects of these burdensome and excessive costs.
Sabre, as the largest CRS, has been particularly unhappy about this
new price competition we are introducing in the CRS arena. They have
never experienced price competition in CRS booking fees before, and
they do not welcome it. We have discovered in the past couple of months
that there is very little they and their Internet arm, Travelocity,
will not do or say to try to prevent that new price competition from
occurring.
Let me turn to some of the specific issues that have been raised
about Orbitz.
First, much has been made of the fact that airlines have invested
in Orbitz.
We think we should be judged by what we plan to do, and by what we
actually do, not by who we are, or who our investors are.
The fact is, we are attempting something very new here. We are
trying to provide the consumer absolutely comprehensive and unbiased
travel information, by applying a number of new technologies to the
very complex universe of airline schedules and fares. It was hard for
most potential investors to evaluate the risks inherent in such an
undertaking. As it turned out, the initial investors in this area were
airlines, because they had the expertise to understand what we
proposed, to evaluate its risks, to conclude that it would work and
would offer consumers better information.
And frankly no other set of investors were initially willing to
take on such an entrenched duopoly. And no other set of investors had
as much incentive to try to bring some price competition to the area of
CRS booking fees.
But having obtained that initial investment, we are now seeking and
expecting additional investment from non-airlines, and we expect that
new investment to substantially dilute the interests of the existing
investors.
No single investor has ever had a majority interest in or control
of Orbitz. No single investor has as much as 30% of the equity in
Orbitz today. And we expect that within 18 months of launch, no single
investor would have as much as 15% of the equity. Furthermore, we
expect that, as a result of bringing in more investors and public
investment, all airlines together will be reduced below the 50% mark.
Since our mission and our business strategy are to provide
absolutely unbiased information to consumers, it was important to us
that we not find ourselves in a situation where only one or two
airlines were our only investors. The fact that we have five competing
airline investors means that they balance each other out--none of them
would allow us to do anything to advantage any other airline. The
result is that we have no choice but to be absolutely unbiased and
neutral, exactly what we want to be and need to be in order to attract
customers.
A legitimate question at this point is: Why would any of the major
airlines want to invest in something with the objectives of Orbitz? We
want to give every airline, big or small, the same unbiased displays--
why would the big airlines want to help make that happen? We want to
share with every airline, big or small, an offset to the excessive CRS
booking fees that weigh particularly heavy on the smaller airlines. Why
would the big airlines want to help make that happen?
Ultimately only the airlines can answer questions about their
decisions, but I have my own opinions based on my observations of the
industry in general. I do not believe the big airlines are helping
launch Orbitz because they want to help the smaller airlines, and I
doubt this Committee believes that either. But I do believe the big
airlines have some very legitimate and compelling reasons to want to
help make Orbitz happen, and if helping the smaller airlines is a
byproduct, so be it.
The first of those reasons is that the Internet is not going to go
away. Even if only a minority of all passengers want to book on the
Internet, it will be a sizable enough minority that no airline can
afford to ignore it. And the airlines have come to recognize that their
own websites, as good as they are for some passengers, will never meet
the needs of all consumers who want to use the Internet. They have to
have a device that gives consumers who want to use the Internet and who
want to search all airlines, flights, and fares for the best options,
what they want. And the CRS-based Internet sites out there currently
don't do that.
The second reason is that airlines have to control their costs, and
one of the costs they have been least able to control is these
excessive CRS booking fees. There are individual airlines that pay
nearly a third of a billion dollars a year in CRS booking fees, and
those costs are passed along to their passengers. They have to find a
way to bring normal market pressures to bear on these excessive costs.
If smaller airlines benefit disproportionately in the process, so be
it.
The third reason is that airlines see the biggest Internet sites
increasingly acting in ways that disadvantage their customers. For
example, the largest Internet sites, such as Sabre/Travelocity, go to
the airlines and offer to increase that airline's market share in
return for payment. In other words they will do what they have to do to
their system to direct some passengers who would have booked on one
airline to another airline, for a price. Some in the industry call this
``swinging market share'' and some call it ``selling bias". But with
Internet travel sales increasingly dominated by the two biggest sites,
the view increasingly is that this practice is getting out of hand and
is contrary to the interests of consumers. A site like Orbitz that
competes specifically on being comprehensive, neutral, and unbiased in
its displays will moderate this practice by competitive pressure. We
believe that will be a benefit even to consumers who do not choose to
use Orbitz.
And the fourth reason is, in a deregulated environment, airlines
increasingly find that they offer a discounted fare, or open up more
seats at an existing low fare, to attract more customers, and yet it
uncertain whether those more attractive offerings are ever shown by the
largest CRS-based Internet sites to the consumers. This is a
disadvantage not only for the consumer, but for the airline, who now is
not sure whether consumers did not respond as expected to the discount
because the discount did not meet their needs, or because consumers
never saw the discount on their Internet display.
Attached to my testimony as Exhibit B * are a series of examples of
instances where an airline offered a low fare and it did not show up on
Sabre/Travelocity. Sometimes it may have been because Sabre/Travelocity
was using stale seat availability data, but other times that does not
seem to explain the problem. In one case, Sabre/Travelocity said the
airline did not offer any flights to a community, when it did! It is
hard to understand how these kinds of problems can occur. Consumers are
not always seeing the best flights and fares. And airlines are losing
customers they should be getting, and wondering why. Is it because the
Internet site has sold the ``featured airline'' status to another
airline in that market? Are displays being intentionally manipulated in
order to ``swing market share''? Whatever the reason, airlines are left
to operate in the competitive marketplace half blind, not sure whether
the consumer reaction to their fare discount is because it was the
wrong discount, or because some of their customers never saw it. Their
customers who use the Internet don't like it, and neither do the
airlines. They finally got to the point of wanting to do something
about it. That something is Orbitz.
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* The information referred to has been retained in the Committee
files.
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A second issue has been raised about Orbitz: much has been made
about the idea that we will have fares nobody else will have, and that
we have an agreement with airlines that they will provide fares to us
that no one else will have.
Let me be very clear about this: there is no agreement by which
airlines are obligated to make any fare available to Orbitz that they
do not make available elsewhere. Period.
In fact, our contracts not only do not give Orbitz any exclusive
right to any fare, they go a step beyond that. They expressly guarantee
that there is no exclusivity, and that each airline individually has
the right to determine what fares it sells and where it sells them, as
they have had that right throughout the entire history of deregulation.
Orbitz does not and cannot prevent any airline from making any fare
available through any retail channel.
And we go even another step beyond that. We have in our contracts a
non-discrimination provision by which an airline that chooses to share
in the offset we offer on the CRS booking fee, in return agrees that
any fare it makes available to the general public through some other
retail channel, it will also make available to the general public
through Orbitz.
Here is the simple fact that some of our CRS-based Internet
competitors do not want to face up to: at least 99% of the time--and
maybe every time--that Orbitz shows the consumer a lower fare than they
do, it will not be because Orbitz had access to a fare that they did
not have access to. It will be because Orbitz did a better, absolutely
thorough and unbiased search of the fares that were available to
everybody.
Third, much has been made about the threat that the Internet in
general, and Orbitz, in particular, supposedly present to traditional
travel agents.
In fact, the opposite is true. The Internet in general, and quite
possibly Orbitz in particular, are likely to significantly improve the
lot of most travel agents.
Much of the travel agent concern has been focussed on the idea that
Orbitz will not charge a commission, and will therefore further erode
travel agent commissions. That is simply not true. Orbitz, like
Travelocity, Expedia and many others, is an online travel agency. We
expect to receive, and so far are getting agreements to receive, a base
commission similar to what each airline pays every other online travel
agent. We expect commissions to be our largest source of revenues. Like
any travel agent, we have an interest in base commissions being higher,
not lower.
At present, about 80% of all bookings are made through traditional
travel agents, and only about 4% are made through online agents, such
as Travelocity, Expedia, and, soon, Orbitz. Our market research tells
us that consumers who use travel agents typically do so because they
want the person-to-person advice and expertise they get from travel
agents, and we don't see much reason why those consumers would want to
switch to the Internet. Where we do find dissatisfaction is among the
4% that use the Internet, particularly those customers who want an
Internet site that will show them all the airlines and all the best
schedule and fare options. Many of those consumers complain that, to be
sure they are getting all the airlines and the best schedule and fare
options, they have to go to many different sites, because no site gives
them all of what they want. We find in our consumer research that
consumers are very clear on this point. 92% of consumers of Internet
travel site services tell us they are not satisfied with their ability
to get all the flight and fare information they want and need at any
single existing site. We think the Internet should be able to serve
travel consumers better than that. We think consumers have been very
clear about what they want and that they are not now getting it. Our
plan is simply to give consumers what they tell us they want--
comprehensive and unbiased information about flights and fares.
Orbitz is designed to remedy the dissatisfaction of that group of
consumers. We see our customers coming primarily from other websites,
not from traditional travel agents, because we will not provide what
the customers of travel agents want, which is person-to-person service.
On the other hand, we will provide what the dissatisfied consumers of
other websites are looking for, which is the comprehensive and unbiased
information they want to book their travel.
Forrester Research projects that online bookings will grow from 4%
to 12% of all bookings over the next four years. But that is expected
to be less than the growth for air travel in general, meaning that in
that time period bookings through travel agents are actually expected
to increase slightly. Half of the 12% are expected to be airline
website sales, leaving only 6% of all bookings for all online agencies.
We expect Orbitz, if successful, to account for one to two percent out
of that 6%. There is no way our less than 2% of bookings is going to
put anybody out of business.
More importantly, Orbitz, and the technology it is pioneering, are
likely to provide important benefits to travel agents.
First, Orbitz will bring competition to the issue of CRS search
limitations. We expect that the result will not only be that our
customers will get better displays and better information, but that the
CRS's and their Internet sites will respond to that new competition--
once they get tired of trying to block it--by upgrading their searches
and displays. There is no reason they cannot quickly make the
investment in upgrading their seat availability system for Internet
display, for example. And the day will come when they expand their
computing power to search much more broadly, and obtain software that
does that broader search. And when that happens, not only consumers,
but also travel agents, will benefit. Travel agents have to use
considerable skill and energy to work around the technological
limitations of the CRS's--better, more user-friendly displays would
make the tough job of a travel agent a bit easier.
Second, travel agents have been getting squeezed by higher and
higher CRS booking fees. The airlines' costs of selling a ticket
through a travel agent consist mainly of the travel agent commission
(paid to the agent) and the CRS booking fee (paid to the CRS). The CRS
booking fee has been going up steadily, with the result that a higher
and higher percentage of the cost of selling through a travel agent has
been going to the CRS, not to the average travel agent. To put it
bluntly, the CRS is eating more and more of the travel agent's lunch.
Orbitz is bringing for the first time some degree of price competition
to the world of CRS booking fees. To the extent that new competition
can drive down CRS booking fees, or at least limit their growth, travel
agents should get a larger share of the value of selling through the
travel agent channel.
And third, the key problem for travel agents is that they are tied
by contract to one CRS. A combination of restrictive contracts imposed
on agents by CRS's, and the practical difficulty of switching CRS's,
means that most travel agents have virtually no ability to switch to
another CRS. As a practical matter they are typically denied the market
choices most businesses have. That means the CRS that has them under
contract can largely take them for granted.
The unfortunate result for travel agents is that CRS's use their
contractual hold on their travel agents to take for themselves a
disproportion of the value of selling a ticket through a travel agent.
It is the agent that generates the booking for the CRS, but the CRS
often shares very little of the value of that booking with the agent.
If the travel agent could switch CRS's, the agents would soon find
that the CRS's were willing to share more of the CRS's revenues with
the agents. And that would be even more true if the travel agent didn't
even need to switch CRS's. Let's suppose the travel agent would keep
its CRS, but could decide for each booking whether to make that booking
on its CRS or on a website designed for agent use--or one of several
websites designed for travel agent use. Then the CRS could no longer
take the agent for granted. That CRS would suddenly be willing to share
significant revenue with the agent, in order to get that next booking.
Suddenly the agent would find himself or herself in a free-market
relationship with the CRS--something that has rarely if ever happened--
and that agent would suddenly discover how valuable he or she really
is.
Orbitz at present is designed for use by Internet consumers, not by
travel agents (though travel agents are welcome to use it for free).
However, once Orbitz has developed and demonstrated this technology, it
would only take a different business model for Orbitz, or somebody
else, to offer a version of that new technology for travel agents.
And that is ultimately why Sabre/Travelocity is working so hard to
block Orbitz. They have lived for 2 decades off the power of having the
largest number of agents locked up under highly restrictive contracts.
If suddenly those agents could exercise some choice, then far more of
the value of selling through those agents would have to be shared with
the agents. For Sabre/Travelocity that is not a happy prospect.
In conclusion, we are a new competitor entering a business--online
agency websites--that is dominated by just two competitors. We cannot
be just as good as they are and hope to succeed. To gain ground in an
arena that they dominate, we have to be far better than they at
offering consumers what they want. Our only strategy for gaining a
toehold in this business is to offer absolutely comprehensive and
unbiased travel information that allows the consumer to pick the
airline, the flight, and the fare, that best meets their needs.
Everything we do is aimed at meeting that commitment to offering an
absolutely comprehensive and absolutely unbiased view of the choices in
travel.
We are not asking for anything but a chance to compete. We are not
asking in the slightest to be exempted from any of the nation's
antitrust laws. We expect to be held to those high standards, and we
expect to meet them. The Department of Justice is currently reviewing
our plans and agreements, so there will be no doubt about where we
stand under the law. We believe we will be found not only to meet the
requirements of the law, but to bring new competition to an arena that
government has rightly been concerned about for nearly two decades. We
believe we will enhance competition in the distribution of air travel.
All we would ask you is that if we in fact pass all the
requirements of existing law, let us compete. Let us offer what we
think is better information to Internet consumers of air travel. Let us
give absolutely equal and unbiased display to the services of every
airline that has published fares, whether they are affiliated in any
way with Orbitz or not. Let us bring some degree of price competition
to this long-standing problem of excessive CRS booking fees. Let us
give every airline, big and small, the opportunity to get neutral and
unbiased display for its products, equal to what every other airline
gets. Let us offer to every airline to share an equal offset to
excessive CRS booking fee costs. Let us and Travelocity and Expedia and
others compete on the basis of who can offer the most comprehensive and
least biased displays to consumers. And most importantly, let the
consumers decide who they think is doing the best job of providing
comprehensive and unbiased information. We are more than willing to be
judged by consumers, and we believe it should be consumers who decide
which Internet site best meets their needs.
Orbitz is the story of new competition. We are the underdog with
huge obstacles to overcome to even become number 3 in online travel. We
are willing to take the competitive risk of trying to do that. But we
urge you to beware of regulatory proposals from those who do not
welcome the competition we bring to online travel. Such proposals are
likely to be cleverly disguised attempts to block new competition and
to further entrench the dominant CRS's and their dominant Internet
sites.
One final comment, Mr. Chairman. The United States led the way in
developing CRS technology a quarter of a century ago. And whatever else
that technology has done, for good or for ill, over the past 25 years,
it has been a major factor in the ascendancy of U.S. aviation around
the world. I have just flown in last week from Europe, and I can tell
you the Europeans fully understand that the mainframe CRS technology is
now the technology of the past, and they are well along in creating a
European-based website that would use exactly the technology we are
building at Orbitz--modern processors wired in parallel, new software
capable of searching every single option, and vastly improved seat
availability data. If we do not build this technology in the U.S., it
will be built by others, and it will be used by consumers in the U.S.,
because there is nothing more international than the Internet. This
technology is coming to computers in our neighborhoods, whether Orbitz
exists or not. The only question is will it be brought by U.S.-based
companies, or only by others?
Thank you for the opportunity to testify. And I would be pleased to
try to answer any questions the Committee might have.
exhibit a
Consumer Comments About itasoftware.com
``I just wanted to say thank you for this site! I found it a couple
of days ago and have already booked a ticket. I called the airlines for
a reservation and was quoted $98 over what you had found. I then told
the agent the booking and fare codes and she found the cheaper fare.
The site is fast and easy to use! Thank you! I will definitely
recommend you to my friends and family and I will continue to use it as
my first source for flight information!''--Catherine
``This site is AWESOME, I have been able to check heaps of
variations of one way, return and multisector flight combinations. This
is one of the greatest sites I have seen to check flight information
and the speed is incredible, keep up the great work.''--Stephen
``I've used your software for two different trips and have been
very satisfied with your service, efficiency, and usability. Every time
I've chosen a flight and then checked with the airline to see if it was
available, all of the ITA data were correct and I then purchased my
chosen tickets. Thank you very much for a great service--airline
customers have too few resources to navigate the byzantine choices.
I've recommended you to my business associates and friends numerous
times. Keep up the good work!!''--Bill & Julia
``Congratulations on the wonderful job you have done with this
site! It is the most useful and informative of all the web pages I have
tried. You give alot of good information that the other sited don't,
such a close connections, etc. I'll continue to use your site from now
on when planning a trip.''--Sonja
``Just tried your site and I love it! It makes it very easy to get
information, in very little time. I hope you make it permanent and add
hotels, trains and cars!''--Barb
``This is by far the best site I've searched for airline ticket
prices! Much easier to use than expedia or travelocity.''--Tracy
``This is Great! Far better than anything else I have seen on the
web or otherwise. Power to the consumer--what a concept!''--Don
``You guys have made the best travel search engine I've ever seen.
I've used just about every one of them over the past 6 years and each
has always left me with much to be desired. I know all the tricks and
repricing that goes on in the airline industry so can really use a
service like yours to view every possible option to get the best
possible price. I can't wait to be able to book flights from this
site!''--Ken
``This is one fantastic website. For the first time I can compare
the prices on all airlines, including Southwest, at one time. This is a
major time-saver for me and all who use this site. Congratulations on
an outstanding product. I look forward to seeing the final version.''--
John
``I just wanted to drop a line to let you know how much I
appreciate your site. It has been extremely helpful in planning trips.
I have booked two trips using the information your site provided and it
was incredibly easy. I hope I will soon be able to book directly from
your site. The table is easy to read, and flights are easy to figure
out. I love the fact that you include duration of the entire trip--it
really helps when planning. Thank you for providing a really great
service.''--Christina
``First off, I'm not a `letter writing person,' so this is out of
the ordinary for me. Your website, even in Beta Version, is grrrrrreat!
I've been surfing the web for over a week now to try to get some good
prices AND get plenty of info as well. Your site hooked me up in less
than ten minutes. Unbelievable! Will I tell a friend? You bet. Thanks
for the incredible site and keep up the good work.''--Terry
The Chairman. Mr. Jones, welcome.
STATEMENT OF TERRELL B. JONES, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, TRAVELOCITY.COM
Mr. Jones. Thank you, Mr. Chairman.
Mr. Chairman and Members of the Committee, thanks for
inviting me here today. I am Terry Jones and I am President and
Chief Executive Officer of Travelocity.com.
Travelocity is the largest provider of on-line travel
services today. We offer consumers unbiased travel information
so they can shop and compare when making their travel
arrangements. We became the top travel site through hard work,
consumer service, innovation, and by rising to competitive
challenges, and most importantly by looking out for consumers.
As others have mentioned, on-line travel only represents a
small percentage today of total travel booked, it's already the
most shopped-for product in e-commerce. That's largely because
travel and the Internet are a perfect match.
Travel is a complex product. There are literally millions
of air fares, and the Internet enables the simplification and
delivery of information with unprecedented richness, speed and
scope.
Now the Internet is an arena of intense competition. Today
thousands of websites fight for business worldwide, and every
competitor is just a click away from Travelocity. We welcome
competition. It's making us all work harder to serve our
customers, to help them compare and find low fares, and it's
giving smaller and startup carriers opportunities to compete
they didn't have before.
However, no matter how innovative we may be, we and all
travel services rely on access to information. People shop on
line expecting access to all fares and one-stop shopping. In
fact, many people don't complete their reservations on-line
today because they are uncertain about whether they're getting
the lowest fare.
So without fair access to lowest fares, no one can compete
effectively. Before us today is the issue of Orbitz, a soon-to-
be started travel agency owned by the five largest suppliers of
air travel. It's not a normal competitor; it's owned by a group
of airlines that hold and can choose to withhold pricing
information.
Now as the Chairman remarked, we've been down this path
before, as the Committee knows well, because of past bias cases
involving suppliers that own Computer Reservation Systems, DOT
rules already ensure that information is not withheld from
travel agents who use these systems.
However, these rules were written before the Internet
matured, so they don't cover consumer direct channels like the
Internet.
We also have cause for concern because the supplier-owners
say they have planned to offer certain fares only to Orbitz.
Orbitz' chief technology officer recently said in Internet
World, ``We're getting the same stuff as everyone else except
the special fares that are on the website of particular
airlines we're pulling together in one place to book.'' In
other words, all travel sites will have equal access, but some
will have more equal access than others.
Recent public statements by some of the owners of Orbitz
have fueled suspicion they may have a tacit understanding that
Orbitz will be favored with exclusive access to certain fares.
In addition, the contract between Orbitz and its non-equity
partners is artfully drafted to say there is no exclusivity.
But what it gives with the one hand it takes away with the
other, because Orbitz requires the carriers to contribute
financially to market the site, and these carriers can meet
their financial obligation by agreeing to post their fares
exclusively to Orbitz, an easy economic choice to make.
Then there's the Boston Consulting Group which helped
organize Orbitz and continues to manage many of its operations.
Principals from the firm recently published a book called Blown
to Bits. A key suggestion of the book is that sellers should
collectively agree not to deal with entities they call ``new
navigators''; entities like Amazon, Yahoo, and Travelocity.com.
To quote, and I think the quote is here on the Board:
``Suppliers and retailers are the source of the information on
product features, price, and availability that the new
navigators need. So simply refuse to make that information
available.''
There is a solution; one that protects consumers, ensures
fair access to information, and one that's not very
complicated. It involves updating the existing rules for
systems used by consumers to match those for consumer
reservation systems used by travel agents. Those rules require
carrier-owners to provide complete access to information to
competing systems, ensuring unbiased equal access to
information.
The rules in Canada and the European Union, which were
adopted after the U.S. rules, already operate in this way. We
believe this solution will ensure continued competition, thus
inspiring more innovation and protecting consumer interests.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Jones follows:]
Prepared Statement of Terrell B. Jones, President and Chief Executive
Officer, Travelocity.com
I. Introduction
Chairman McCain, Senator Hollings, I am Terrell B. Jones, President
and Chief Executive Officer of Travelocity.com, the leading online
travel Web site. I appreciate the opportunity to appear before the
Committee this morning to discuss the critical issues relating to
travel distribution systems and the Internet.
Travelocity.com provides reservations capabilities for 95 percent
of all airline seats sold, more than 47,000 hotels, more than 50 car
rental companies and more than 5,000 vacation and cruise packages. This
reservations capability is paired with access to a vast database of
destination and interest information. To date, Travelocity.com has sold
more than 6 million airline tickets and has more than 20 million
members.
The online travel market in which Travelocity.com participates is
growing at an incredible pace and, according to PhoCusWright, ``is the
fastest growing e-commerce category, poised to surpass $20.2 billion by
2001.'' \1\ With the rise of the Internet, independent travel agents--
both brick and mortar and virtual storefronts--are increasingly seizing
this nascent distribution channel to expand the richness and reach of
their product and service offerings to the ultimate benefit of
consumers. I believe the role played by such agents--delivering rapid,
comprehensive travel information to consumers--is critical in
maintaining and enhancing effective competition in the commercial
airline transportation industry. As we are in the midst of what appears
to be an era of airline consolidation--through merger, via
``alliances'' in numerous forms, by hub consolidation and code-sharing
agreements--the role of independent consumer-centric agents--becomes
even more essential.
A key component to continued growth and consumer gains in the
Internet travel market is fair access to information from travel
suppliers and, in particular, access to travel suppliers' lowest fares,
corresponding inventory, and selling tools. We believe this issue of
fair and open access to information is appropriate for this Committee
to review, as it raises substantial commerce, transportation and
consumer public policy questions. Again, I very much appreciate the
Committee's attention to this issue and the opportunity to address the
Committee with my testimony.
II. Travelocity.com and the Online Travel Distribution Channel
Travelocity.com is a true pioneer of Internet commerce. Since our
initial launch in March 1996, our customer base has grown to more than
20 million members. We have built this successful business and a solid
brand by constantly innovating and creating new products that take
advantage of Internet technologies to bring benefits to consumers and
travel suppliers alike. We truly believe we are changing the way
consumers shop for and buy travel. Some of our new features and
services include: (i) Alternate Airports--which provides alternative
city fare information (often bypassing hub airports) in response to a
given fare request; \2\ (ii) ``Dream Maps''--which offers leisure
travelers on a limited budget the ability to view ``theme'' vacations
(i.e., beach, ski or national park packages) that compare and select
among the best fares for multiple destinations,\3\ and (iii) Best Fare
Finder--a revolutionary product that shows consumers calendar-based
fare offerings, so that they know precisely when advertised low fares
are really offered. While travel suppliers are singularly focused--as
they should be--on working to improve so-called ``yield management''
and maximizing the amount of revenue they receive with each sale of
inventory, at Travelocity.com we are equally focused on providing
consumers with what they want. We have invested heavily to improve the
speed and functionality of our site so as to benefit our users. As
noted by one airline industry analyst, ``the philosophy [of independent
travel websites] is to push the price lower--a complete reversal of the
aims of an airline's own yield management team.'' \4\
Travelocity.com creates a global storefront for consumers to see,
experience, research and buy their travel in one place. As such,
Travelocity is the ``front-end'' or user interface through which
consumers access a vast virtual warehouse of travel information, such
as supplier inventory, prices and schedules. Just like any other travel
agency in the world, Travelocity contracts with one of four computer
reservation systems or CRSs for access to this supplier information.
Travelocity's agreement for these ``back engine'' services is with
Sabre. As this Committee is well aware, CRSs are closely regulated by
the U.S. Department of Transportation (and also by DOT's counterparts
in Canada and the European Union) and are required, among other things,
to provide unaltered, unbiased airline information to travel agencies.
Currently, the CRS rules in the United States regarding so-called
``screen bias'' do not apply to the distribution of airline information
directly to consumers via the Internet. However, because we believe our
customers want neutral and unbiased airline information, Travelocity
does not re-order the information we receive from Sabre. Thus the
schedule, price, and availability displays you see in Travelocity
comply with DOT's rules. Travelocity simply takes the so-called
structured data streams and puts the identical information into a more
consumer-friendly format for consumers (similar in some ways to taking
the old DOS commands and changing those keystroke entries into
graphical ``point and click'' icons to enable consumers to easily
navigate the site and utilize the information.) \5\
We do, of course, accept advertising from suppliers as does every
other retail website (and, indeed, every media outlet) with which I am
familiar. On our home page we frequently run banner ads for particular
suppliers (such as airlines, hotel chains and car rental companies)
promoting their services. In addition, in several origin-destination
markets, we will display a banner ad in response to the consumer's
request, featuring a particular carrier or service. An example of such
an advertisement is attached to my testimony.\6\ We think it is quite
obvious to any consumer, particularly any Internet user, that what is
being displayed is an advertisement and not a display of flight
options.
Independent online travel agents also operate in consumer-centric
ways that encourage price discounting by suppliers and enhance market
penetration by small and startup airlines. Independent travel sites,
such as Travelocity.com, offer these carriers the ability to use our
technology to enhance their marketing efforts. For example, we can
provide our customers with e-mails containing special offers from the
carriers. We have done so frequently and have received a very favorable
response from our customers and supplier partners. Some of those
partners include Air Tran, ATA, Hawaiian Airlines and National
Airlines. Where other carriers have been willing to work with us, we
have done promotions with them as well.
III. Suppliers' Collective Efforts to Enter the Online Travel Channel
As I will discuss in greater detail below, in the last part of
1999, there was an apparent shift in the individual strategy and focus
of airline suppliers in the U.S. in distributing their products (seat
inventory and fares) via the Internet. Previously, these carriers had
competed quite vigorously with each other, and with us, through
improvements in the offerings of their separate websites. In November
1999, however, four of the five largest carriers in the U.S.--
Continental, Delta, Northwest and United--announced they had formed a
jointly owned, Internet-based sales/marketing agency. In January 2000,
apparently some twenty-four additional carriers joined the venture.\7\
In April 2000, American Airlines announced that it had joined the
venture as an equity owner. The still yet to be launched Internet
airline sales/marketing agency was originally dubbed ``T2'' and has
just formally announced its name as ``Orbitz.'' \8\
The apparent distinguishing element of T2/Orbitz is that it will
have ``unique'' access to the low fares and corresponding inventory of
the equity owning and non-equity owning participating carriers, and is
billed as creating ``one stop'' shopping and ``the only place to go''
for consumers who want to save money on airline travel. It is unclear
why the airline suppliers apparently shifted resources, investment
dollars and development away from their individual sites to
collectively focus on investing in and developing a joint Internet
sales and marketing agency. As reported in PhoCusWright's Online Travel
Investor Report in April 2000, one supplier said ``the only thing worse
than dealing with 33,000 travel agencies is dealing with two''
[evidently referencing Internet successes Travelocity.com and Expedia.]
Travelocity.com welcomes competition. Time and again over the last
four years we have faced new competitors and each time we have
redoubled our efforts to innovate and bring greater value to our
customers. Thus, if T2/Orbitz is simply another online travel site
preparing to compete on the merits of its products and services--and on
the same level playing field as Travelocity, Expedia, Trip.com,
Biztravel.com, Lowestfares.com and many others, then that challenge
should be encouraged. Competition will no doubt lead to continued
product innovations and gains for consumers and smaller carriers. If,
however, the business purpose and goal of this supplier owned sales
agency is to improperly tilt the competitive playing field--by
withholding certain fare and inventory information from competitors--I
believe that is an entirely different matter. If that is the case, and
public statements from T2/Orbitz's founders appear to support that
proposition, I believe T2/Orbitz raises significant policy issues
within the oversight of this Committee. As noted by Chairman McCain,
``[t]here are clear antitrust implications with the airlines . . .
running one Web site. . . . If each airline wanted to run one, then
that would be another matter, but I think it's a great danger that
could lead to higher airfares for average passengers.'' \9\
IV. T2/Orbitz: The Suppliers' Online Joint Sales/Marketing Agency
As policy makers debate ``fair access to fare and inventory
information,'' it is important to understand just what T2/Orbitz is and
what it is not. While much is unknown about the joint airline sales and
marketing site, by focusing on certain key questions, I believe that
this Committee will be in a much better position to evaluate the nature
of this collective effort by suppliers to establish a position in the
online travel channel.
A. How/Why was T2/Orbitz Formed?
Our experience was that suppliers were relatively slow to enter the
Internet travel distribution channel. The first airline websites did
not add significant functionality until 1997 (which is considered
relatively late in Internet terms), many months after Travelocity and
other online travel agencies had introduced their services to
consumers.\10\ At some point, the suppliers began to pay much closer
attention to this emerging channel of distribution and reportedly
developed ``fears'' that absent decisive action by suppliers, ``non-
airline entities can use [Internet] technology to interpose themselves
in [our] business.'' \11\ As one IATA official noted, airlines were
``less aggressive'' than other industry participants to adopt the
Internet, thus increasing the airlines fear of losing control over
distribution.\12\
Apparently, the airlines' collective response to the new Internet
distribution challenges posed by ``non-airline entities'' was the
November 1999 announcement of the formation of a jointly owned Internet
sales and marketing agency--T2/Orbitz. Public statements by the
founders of T2/Orbitz make it clear that the underlying purpose of the
effort was to respond to the increasing popularity of agents like
Travelocity.com and to such sites' growing role and consumer
affiliation in the distribution of air travel information.
B. What obligations are placed on participating suppliers?
Evidence of how T2/Orbitz intends to operate in the online travel
channel may be found in its non-equity ``Airline Charter Associate
Agreement.'' Based on a draft of this agreement I have seen, airline
participants may no longer have unique sales or run special promotions
with online competitors of T2/Orbitz. Rather, participating carriers
must give T2/Orbitz access to all ``published fares,'' which, under the
agreement, is broadly defined and includes virtually every fare in a
given airline's inventory. This includes: (1) any fares published in a
CRS (2) any fares, and corresponding inventory, published in the
carrier's internal reservation system, (3) ``Internet'' fares,
including those offered via e-mail to targeted consumers; (4)
promotional fares offered to the general public; and (5) fares offered
to travel consolidators.
In addition, the Agreement provides strong incentives for
participating carriers to provide their lowest fares--a major if not
the major attraction for consumers--exclusively to T2/Orbitz. Each
participating carrier is obligated to provide T2/Orbitz with
substantial ``In-Kind Promotions'' which can run into millions of
dollars \13\ for the first 12 months of the agreement. Among other
things, ``In-Kind Promotion'' obligations can be satisfied by offering
``exclusive promotions or fares available only on'' T2/Orbitz or the
participating airline's own Internet travel site.\14\ T2/Orbitz also
has the right to mutually develop the exact terms of the In-Kind
Promotional plan and to determine how such obligations will be
satisfied by the smaller carriers, and can withhold certain rebates if
the carrier and T2/Orbitz fail to develop a mutually acceptable
promotional plan and/or if the carrier fails to adhere to the terms of
that plan.\15\
Moreover, T2/Orbitz's requirement that all participants immediately
provide to T2/Orbitz all promotions and fares that are offered using
alternative distribution methods will insure that T2/Orbitz lacks any
incentive to innovate to attract special promotions from suppliers. As
the Department of Justice has recognized in somewhat analogous
circumstances, such a requirement will insulate T2/Orbitz from any
competitive pressure because a participating carrier cannot force T2/
Orbitz to improve its services by threatening to take its promotional
offerings elsewhere. DOJ successfully urged DOT to remove such ``most
favored nations'' provisions or ``parity provisions''--clauses that
require carriers to participate in all CRSs at the same level--for
carriers that do not own interests in CRSs.\16\ In so urging, the DOJ
noted that such a provision ``removes an airline's ability to obtain
better service by credibly threatening to downgrade its participation
level. With the most favored nations or parity provision, the downgrade
threat is unrealistic because the CRS knows that the airline would also
have to lower its participation level in every other CRS.'' \17\ As
with the parity provisions at issue in that matter, participating
carriers in T2/Orbitz cannot simply divert their promotional efforts to
other, more responsive, Internet travel sites without similarly
offering those promotions to T2/Orbitz. T2/Orbitz's requirement that
any fares and seats offered to other outlets also be offered to T2/
Orbitz, will, under DOJ's and DOT's prior reasoning, render T2/Orbitz
``unresponsive to consumer preferences'' and ``anticompetitive.'' \18\
We think it would raise serious public policy questions if major
suppliers use their collective control over inventory and pricing
information (and their ability to deny such information to competitors)
to tilt the playing field in favor of their joint sales agency and
against sites more aligned with consumer interests, such as
Travelocity.com.\19\ At least in the early stages after T2/Orbitz's
announcement, some industry analysts appeared to endorse the joint
supplier site: ``Due to its size and backing, T2 will eventually take
its place among the top three travel sites for both traffic and
sales.'' \20\ But, as an Internet industry publication recently noted,
``[w]hen the world's oldest and largest corporations announce they are
cooperating to confront the future, the rest of the business world
should be suspicious.''\21\
C. Assuming T2/Orbitz does not plan to withhold low fares and inventory
from competing online travel sites, what is unique about this
site?
It would be difficult to expect that T2/Orbitz will have the same
competition-enhancing features as those that will, and have been,
developed by independent sites. As Alex Zoghlin, T2/Orbitz's Chief
Technology Officer pointed out: ``Not every airline is interested in
full and complete disclosure to the consumer.'' \22\ Industry analysts
have noted as much: ``The weak link in T2, analysts agreed, is that
airlines would have to bring potential customers to a site where they
could compare the fares of the different airline rivals--hardly a wise
marketing strategy.'' \23\
The creation of a joint sales agency through T2/Orbitz does not
offer a new technological breakthrough or create some new efficiency in
the distribution of supplier inventory, fares or schedules to
consumers. For many years such information has been available to travel
agents and consumers via automated means, through computerized-
reservation systems which collect and disseminate low fares for nearly
all airlines. Moreover, airline-sponsored websites are hardly unique
nor do they require collective action. Each of the carriers who formed
T2/Orbitz already maintains successful independent Internet sites for
ticket purchases, and some of these sites already offer comparative
flight search and booking capabilities.\24\ All of this essentially
begs the question of just what is T2/Orbitz.
D. What lessons can be applied from the history of travel distribution
to better evaluate this collective supplier effort?
Our best guide to determining what T2/Orbitz is may be history. In
the 1960's and 1970's, the airline industry developed the first
networked industry infrastructure for electronic commerce--the
computerized reservation system or ``CRS''. Interestingly, there was an
initial joint supplier effort to create a single CRS from 1974 to 1976.
While that effort ultimately failed, it is important to note that the
airline suppliers sought the formal approval of the federal government
(through a grant of antitrust immunity) before they engaged in those
discussions and the DOJ, while granting approval, did so subject to a
number of conditions. It is my understanding that in regard to T2/
Orbitz--which the suppliers have indicated is their attempt to create
essentially a new distribution channel to bypass all CRSs--the
suppliers have not sought pre-approval (though they say they have
informally briefed Justice Department officials prior to issuance of
subpoenas). Individual airlines or groups of airlines ultimately
established carrier-affiliated CRSs--and not unexpectedly--the owning
airlines utilized the best displays in their affiliated system to sell
their inventory of airline seats. This Committee is familiar with the
ensuing debate and study that occurred in the industry in the early
1980's that led to clear regulations in the distribution of airline
information in the United States. These rules continue to exist today,
and have even been exported to Canada and the European Union, where
they were expanded to cover the distribution of airline information
directly to consumers.
In circumstances roughly analogous to that presented by T2/Orbitz,
in 1992, the DOT adopted rules requiring ``mandatory participation'' by
airline owners of CRSs in competing systems, partly at the behest of
the DOJ (the DOJ supported that proposition in the original rule-making
in 1984.) Essentially, DOJ and others were concerned that suppliers
were withholding information and desirable consumer amenities, such as
pre-reserved seats, boarding passes, etc. from competing CRSs--
providing those items only through their affiliated CRS. As you might
expect, it was believed that this conduct substantially undermined the
utility and value of the competing CRSs. To ensure fair access to such
information, the DOT required an airline supplier that owned a portion
of a CRS to post the same information in competing CRSs that is posted
in the carrier-owner's CRS.
DOT noted that many industry participants were alleging that
carrier-owners had ``reduced the level of their participation in other
[CRS] systems in order to handicap the ability of other systems to
compete for subscribers.'' \25\ In requiring that owner-carriers
participate in CRSs on equal terms, DOT noted that ``[t]his requirement
appears justified on competitive grounds, since it would prevent a CRS
owner from using its dominance of a regional airline market as a tool
for obtaining dominance in the area's CRS market.'' \26\ The rise of
the Internet and the ability of travel suppliers to distribute products
directly to consumers arguably creates similar concerns.
E. What is T2/Orbitz's Business Model and does it reveal anything about
the joint supplier site's underlying purpose?
While we do not have access to all of the e-mails, agreements, or
other documents that might conclusively demonstrate the business plan
and actual intent, the business model set out by their primary
consultant raises a number of issues. As set forth in Blown to Bits,
recently published by Boston Consulting Group, the operator of T2/
Orbitz under contract with the founding suppliers, BCG openly embraces
and counsels conduct that appears to raise serious issues for those BCG
clients that might choose to follow this advice.
In essence, BCG warns that independent Internet sites like Yahoo!
and Travelocity.com have ``tilted'' the balance of power from sellers
towards buyers. BCG outlines various features, such as unbiased
comparison features and identification of alternative sources of
supply, which they describe as the ``consumer's gain'' and the
``seller's loss.'' In describing how incumbents ``have a lot to lose''
by the growth of consumer-affiliated (i.e., independent) Internet
sites, BCG suggests that product suppliers and traditional retailers
``alike fear the rise of the agent navigator who facilitates broad-
reaching comparisons without even being party to the transaction.''
In order to counter that threat, BCG suggests that independent
sites must be ``denied critical mass''--or, in the words of the
authors, ``[i]f enough suppliers refuse to sell through the e-retailer,
or enough retailers refuse to provide information to the dispassionate
agent, neither the e-retailer nor the agent can achieve critical
mass.'' \27\ Of course, BCG implicitly recognizes that achieving such
concerted agreement is difficult in the absence of an agreement among
competitors to boycott independent sites:
Obviously, the seller can ultimately stop this game, if only by
refusing to operate a Web site. But herein lies the second and
more fundamental issue: it is not obvious that it is in any one
seller's interests to do so. The most rigorously customer-
affiliated navigator with the broadest reach is still a source
of incremental business to a seller. . . . Therefore, while it
is undoubtedly in the interests of all sellers collectively, it
is not in the interest of any one seller individually to deny
its own data to the navigator. But if everyone reasons that
way, the navigator will achieve critical mass.\28\
In order to overcome this difficulty, BCG suggests that suppliers
can stunt independent sites by ``emulating the way the insurgent
defines his business.'' \29\ At the heart of this strategy are
horizontal agreements among competitors. In this regard, BCG urges
suppliers to create their own supplier-initiated sites that will, in
essence, mislead consumers and disadvantage non-competing suppliers.
Such supplier-initiated sites can ``succeed,'' according to BCG, by
using their sites to:
``provide comprehensive but not necessarily comparable data on
one's own products and those of direct competitors, and
slightly bias the presentation through the ordering of
alternatives and the occasional emphasis or omission.'' \30\
If T2/Orbitz is indeed predicated on its consultant's model,
consumers will be the primary losers.
V. Conclusion
The rise of Internet commerce has initiated a true revolution in
the travel distribution industry, and holds the promise of greater
efficiency and enhanced competition at all levels. As a policy matter,
and perhaps as a legal matter, I do not think suppliers should be able
to engage in collective action to withhold information from so-called
neutral navigators. Notwithstanding the limited information available
about T2/Orbitz, based on industry information and T2/Orbitz's public
statements, further investigation into this joint supplier sales and
marketing site is warranted.
ENDNOTES
\1\ PhoCusWright Online Travel Investor Report, p.1, Vol 2, Number
3, April 2000.
\2\ See Ex. 1.*
---------------------------------------------------------------------------
* The information referred to has been retained in the Committee
files.
---------------------------------------------------------------------------
\3\ See Ex. 2.*
\4\ Reuters Finance (Feb. 23, 2000) at .
\5\ An example of this is attached as Ex. 3.* As you can see, the
information on the ``green screen'' provided by the CRS to the brick
and mortar travel agencies is unaltered from the information in
Travelocity.
\6\ See Ex. 4.*
\7\ According to the press release at the time, the following
carriers agreed to participate: Aeromexico, Air Canada, Air France, Air
Jamaica, Air New Zealand, Alitalia, All Nippon Airways, Aloha, American
Airlines, American Trans Air, Ansett Australia, Air Tran Holdings,
Asiana, Austrian Airlines, British Midland, COPA Airlines, CSA Czech
Airlines, Hawaiian Airlines, Iberia, KLM Royal Dutch Airlines, Korean
Air, LTU Intl, Mexicana, Midwest Express, Midway Airlines, Sabena,
Spirit, Swissair, Singapore Airlines, Vanguard Airlines, and Varig.
``Two Dozen Airlines Join Web Site Led by Four U.S. Majors,'' Aviation
Daily (Jan. 14, 2000). Among the carriers absent from the group are
Alaska, America West, Southwest and TWA.
\8\ At least some industry analysts opined that ``T2'' stood for
``Terminate Travelocity,'' a contention T2 spokespeople deny. See
``Southwest Airline's Success With On-Line Bookings,'' New York Times
(Mar. 1, 2000). Others have suggested that T2 is a reference to Arnold
Schwarzenegger's movie about a killer robot. ``If the commission cuts
were Terminator 1 for many agents, this new airline-owned Web site will
be Terminator 2 for those still barely hanging on.'' See ``T2 Creators
Dismiss Trade's Anticompetitive Fears,'' Travel Weekly (May 29, 2000).
\9\ ``Travel-Proposed Ticketing Service Draws Scrutiny,'' CNN.com
(June 9, 2000).
\10\ Jupiter Online Travel Report at 9 (June 1999).
\11\ ``IATA Legal Symposium on eCommerce,'' (presentation by
Michael Feldman, February 2000).
\12\ Id.
\13\ The exact total is calculated by the carrier's ``Market Share
multiplied by ___ million U.S. dollars''.
\14\ The value of these exclusive fares is calculated by the
difference between the exclusive fare and the next-highest fare offered
elsewhere, times the number of tickets. If the fare is made available
on T2/Orbitz and not on the offering carrier's own website, a 100%
credit is applied toward the in-kind requirements; if the carrier
determines to offer the fare independently, the credit is lowered to
75%. The ``value'' as calculated under this formula is capped up to $1
million dollars for any 12-month time period.
\15\ The non-equity owning carriers can also apparently satisfy
these requirements by providing T2/Orbitz with ``passenger database
information'' and ``competitive purchaser names'' (e.g. e-mail
addresses of passengers who booked travel through another online
agency).
\16\ Comments of Department of Justice, Docket OST-96-1145 (Sept.
19, 1996).
\17\ Id. at 7.
\18\ Id. at 8 (citing NCAA v. Board of Regents, 468 U.S. 85
(1984)).
\19\ Although I am not a lawyer, this situation seems strikingly
similar to a supplier joint venture formed by the major movie picture
studios to ``compete'' against the then new premium pay-TV channel--
Home Box Office. As I understand it, the major studios essentially
agree to create a competitor to HBO (called Premiere) that would have
exclusive access to certain of the studios' major releases for a
certain time period--while such access would be denied to the
increasingly popular HBO. United States v. Columbia Pictures Indus.,
Inc., 507 F. Supp. 412 (S.D.N.Y. 1980). In rejecting the movie studios
contention that this restriction was needed to ``differentiate'' their
new service, the Court quickly noted that there were ``a number of ways
of achieving product differentiation without cornering the market'' on
Hollywood ``hit'' movies. Id., 507 F. Supp. at 425. This appears
entirely consistent with what the founders of T2/Orbitz have publicly
stated--that the formation of T2/Orbitz is ``one of the strategies that
the airlines have used in response'' to the ``danger'' of electronic
travel agents ``completely dominating this space, to the detriment of
the travel providers themselves.''
\20\ ``Top Airlines' New Travel Site Will Succeed,'' The Forrester
Brief (Jan. 24, 2000).
\21\ ``Oligopolists of the world, unite!'', The Red Herring, p. 37,
August 2000.
\22\ ``Airline Web Site Defended Against Critics,'' Electronic
Commerce and Law Report (June 14, 2000).
\23\ ``Travel Sites Hope for Seasonal Boost,'' CNET News (June 8,
2000).
\24\ As described above, several carriers have established websites
that offer virtually a full slate of competing fares offered by other
major carriers. In addition, virtually all carriers maintain
interlining agreements with other carriers that allow the airlines to
sell connecting flights offered by competing carriers. Through these
agreements therefore, virtually all major carriers are authorized to
sell tickets of competing carriers.
\25\ DOT Notice of Proposed Rulemaking, 56 Federal Register 12586
(Mar. 26, 1991).
\26\ Id.
\27\ Blown to Bits at p. 115.
\28\ Id. at 139-140 (emphasis in original).
\29\ Id. at 119.
\30\ Id. at 142.
The Chairman. Mr. Ruden.
STATEMENT OF PAUL M. RUDEN, ESQ., SENIOR VICE
PRESIDENT, LEGAL & INDUSTRY AFFAIRS, AMERICAN
SOCIETY OF TRAVEL AGENTS INC.
Mr. Ruden. Thank you, Mr. Chairman.
I would like to open my remarks also with a brief
quotation, and I quote now: ``The consumer travel window will
slam shut. It's over. With the entry of this new heavy hitter,
there is no more room for new entrants into the consumer-facing
on-line travel space in the U.S., and the small sites like
BizTravel.com and Trip.com will feel even more pressure to give
up ambitions of becoming travel leaders.'' That quotation
appears in Forrester Research's brief dated January 24, 2000.
And it sums up as well as anything, Mr. Chairman, the nature of
the dispute that is the centerpiece of your invitation to
address the Committee today, which we much appreciate.
The airlines say that they must be able to sell everywhere
that consumers want to buy, and that the Internet is where the
demand is going. They can save some money, they say, and offer
consumers one-stop shopping on the Internet with low fares
available nowhere else.
Well, what's wrong with that? First, the data set out in
exhibits 1 to 3 in our full written testimony show that while
the American public continues to rely upon the independent
distribution system to buy most of its air travel, the annual
growth in sales is going to the Internet selling space. To
foreclose travel agent adaptation to changing buyer preferences
through this airline collaboration will deny consumers, both
on-line and off-line, the full array of choices and other
services they've come to expect, including the choice of
channel through which to buy.
In an open and freely functioning marketplace, consumer
choices of this nature would prevail.
The Orbitz project is an attempt to collectively interfere
with the marketplace by trying to dictate the choice of
channel, and to collectively determine channel content.
Second, the Orbitz collaboration appears, by the airlines'
own admissions, to involve preferential and exclusive access to
the lowest fares the partners offer. It requires the
participating carriers to relinquish their normal freedom to
experiment with different distribution devices for low fares,
by assuring that Orbitz will always get the lowest fares
offered anywhere. And there are now suggestions that the
airlines are going to give preferential redemption privileges
for frequent flier miles to Orbitz, a privilege they have
denied to independent travel agents and their consumers for
years.
So much for Orbitz being just another travel agency.
Third, the Orbitz agreements contemplate the sharing of
client information generated by agencies competing with Orbitz
as yet another of the devices by which the airlines pay off
their promotional obligations to the joint venture.
Fourth, the Orbitz collaboration takes place in an industry
which has a long and relentless history of preference for
collaboration and collusion over competition, as is documented
in our written statement.
The extraordinary results of this process is graphically
illustrated by the chart on my right. And the future is
suggested by the chart on my left which includes not just
Orbitz, which was known as T2, but T3, T4, T5, and the B2B
among the airlines, the details of which are all provided in
our written testimony.
This illustrates, Mr. Chairman, the movement toward a
global network of jointly operated and preferentially treated
websites by the world's airlines. The competitive marketplace
would not produce this kind of outcome if the airlines operated
independently as contemplated by this country's transportation
and competition policies.
Fifth, Orbitz has made much of its claim to innovation, but
make no mistake, this fight is not about technology. There's no
real new technology here; it's just another piece of software
creating yet another search engine, which is likely to be
supplanted by someone else's software at the next turn in the
road.
This conflict is about the right of consumers to the full
package of options for them to consider in a research and
buying environment of their choosing. More than half of ASTA
members have websites today and more are going on-line every
day. They're not as large in scale and sophistication as
Travelocity or Expedia, but they represent travel agents'
recognition that many consumers are going to the Web, at least
for now, and they must go there, too.
At the same time, millions of Americans do not have
practical access to the Internet, do not have the ability to
successfully use Internet search tools, no matter how simple
they may seem, or they simply prefer to deal with a more
traditional retail business. Whether this is called the digital
divide or something else, it should not in our view be left to
a group of large businesses in an industry vested with a public
interest to dictate that the best deals be available only where
they collectively choose to put them. Nothing in the way of
technological innovation warrants such a collusive intrusion
into the market by dominant firms.
Even if the Orbitz arrangements do not violate the
antitrust laws--and we think that they do--they are contrary to
the public interest in the competitive and fair delivery of air
transportation, and should be stopped.
Thank you very much.
The Chairman. Thank you very much.
[The prepared statement of Mr. Ruden follows:]
Prepared Statement of Paul M. Ruden, Esq., Senior Vice President, Legal
& Industry Affairs, American Society of Travel Agents, Inc.
The American Society of Travel Agents (``ASTA'') is pleased to
provide the Committee with the perspective of its travel agency members
on the nature and extent of competition in the airline industry as it
relates to the distribution system and on the impact of the Internet
and, more specifically, the issues raised by the airlines' development
of a joint Web-site to sell discounted fares to consumers.
ASTA was established in 1931 and is today the leading professional
travel trade organization in the world. Its travel agency members
account for more than half of the staffed, agency locations serving the
public throughout the United States. ASTA's corporate purposes
specifically include promoting and representing the views and interests
of travel agents to all levels of government and industry, promoting
professional and ethical conduct in the travel agency industry
worldwide, and promoting consumer protection for the traveling public.
ASTA has provided testimony to numerous legislative committees and fact
finding bodies and has appeared in various legal proceedings; it is
widely recognized as responsibly representing the interests of its
members and the travel agency industry.\1\
ASTA counts among its travel agency members about half of the so-
called ``traditional'' or ``brick and mortar'' travel agencies in the
United States, along with many of the pure on-line Internet agencies
and hybrids, who together account for most of the sales of air travel,
on and off the Internet, to the 230 million annual United States
consumers of air transportation.\2\
Consumer Access to Information Issues: The Orbitz Cartel
When ASTA last appeared before this Committee, the focus of the
hearing was on passenger rights, or the lack of them. Many bills were
before the Committee, and other bills pending in the House of
Representatives, dealing with airline competition in areas such as
airline predation against new entrant competitors, slot allocations,
perimeter rules at restricted airports, hub competition and other
similar issues. Some of those issues have been resolved for the time
being and others continue to deserve attention by the Congress and
other federal authorities.
We told the Committee then, and believe even more strongly now,
that failure to attend to the issues arising from the airlines'
attempts to subvert the retail travel distribution system will make
restoration and sustenance of meaningful airline competition
impossible. We were then referring to the pattern of policies and
practices adopted by most of the large airlines that are designed, and
are having the effect, of making it more difficult for consumers to
continue accessing the services of the only source of neutral,
comparative price and service information, expertise and personal
advice that exists--the travel agency distribution system in all of its
forms. Those practices continue unabated and have been supplemented
with actions of the International Air Transport Association and the
Airlines Reporting Corporation.
What we did not know then was that the airlines were preparing an
``end game'' maneuver designed to cut off the adaptation of the travel
agency distribution system to the Internet while continuing to strangle
the independent distributor with cost-increasing and business-
interfering practices. We refer to the Internet Web-site known
originally as T-2 and now officially named Orbitz. In its current form,
based on the very small amount of information publicly available about
it, Orbitz will be owned by five of the largest United States airlines,
accounting for roughly 80 percent of all domestic air travel revenues.
It boasts of providing ``last minute web fares from the websites of
more than thirty airlines'' on a ``website like no other.'' \3\
In its earliest announcements, the founders claimed they would
offer ``the most comprehensive selection of on-line airfares and other
travel information available anywhere on the World Wide Web,'' a site
``superior to all travel sites,'' a site with ``the best of
everything.'' \4\
The airlines' use of the phrase ``on-line airfares'' does not refer
merely to the publication on the Internet of otherwise generally
available airfares. It refers instead to the publication of fares not
available anywhere but the Internet, and thus leads to the additional
claim that ``for the first time, on-line travel consumers will be able
to compare and purchase the Internet fares offered by several airlines
. . . by visiting just one site.'' \5\ ``It would support our business
model if they supplied special Internet-only capacity.'' \6\
In reality we believe the airline partners in Orbitz have agreed to
arrangements for sharing fares and promotions that are designed to
favor Orbitz over all other distribution outlets, on-line and off-line.
Whatever might be said about a fare-aggregation service by a
neutral party in an industry with a clean antitrust record, there is
reason to believe that the Orbitz project is in reality a collusive
attempt by the major airlines to dominate the Internet space, and
ultimately to displace the entire independent distribution system for
the sale of air travel, through special arrangements to favor the
Orbitz Web-site over all other independent Web-sites as regards the
sale of ``low fare'' services.
Orbitz representatives have publicly conceded that the founding
agreements for the Web joint venture provide that any carrier
publishing a ``lowest Internet-only fare'' on its own Web-site must
also provide that fare to Orbitz and may withhold it from all other
distributors. In addition, we understand that the founding carriers and
all of the so-called ``charter associates,'' comprising more than 30
airlines at this time, have agreed to provide various levels of in-kind
promotional services for the site and that these commitments may be
paid off by providing Orbitz with exclusive access to lowest Internet
fare offerings. Total marketing support figures of $50 and $100 million
have been mentioned. We're not certain of these details, of course, but
if this is even remotely accurate, the inter-carrier arrangements for
Orbitz are, in our view, unlawful as price fixing and as an exclusive
dealing/horizontal group boycott of other distributors.
These arrangements, and likely others of which we are unaware at
this time, give the lie to the position that Orbitz is ``just another
travel agency'' scratching out a living in the dust, earning the same
commissions and bearing the same costs as all other travel agencies.
Orbitz says it is just a little agency with better technology, but this
dispute is not about technology. It's about exclusive dealing reached
through collusion designed to achieve market domination.
There are two alternative models of how the development of travel
retailing on the Internet could proceed from this point forward. One is
driven by consumer choices about how to research and buy travel.
Airlines and other retail sellers would respond to those consumer
demands by providing not only competitive air transportation services
but competitive, efficient and innovative distribution services. In
this model consumer preferences would dictate which retailer and which
airline gets the business.
In the other model, airline decisions about how travel information
should be parceled out would drive the outcome. The airlines would
collectively dictate the channel choices for consumers.
As we said to the Department of Justice in our February complaint,
the Orbitz arrangement appears to contravene the Department of Justice/
Federal Trade Commission Antitrust Guidelines for Collaborations Among
Competitors, in that it constitutes a marketing collaboration that
involve[s] agreements on price, output or other competitively
significant variables, or on the use of competitively
significant assets, such as an extensive distribution network,
that can result in anticompetitive harm. Such agreements can
create or increase market power or facilitate its exercise by
limiting independent decision making; by combining in the
collaboration, or in certain participants, control over
competitively significant assets or decisions about
competitively significant variables that otherwise would be
controlled independently; or by combining financial interests
in ways that undermine incentives to compete independently.\7\
While the airline founders and other airline collaborators have pooled
their money, there is no other apparent efficiency-enhancing asset
integration involved that could overcome the anti-competitive
implications of the ``most favored agency'' scheme that is the apparent
heart of the deal. Moreover, as the Guidelines state:
if the participants could achieve an equivalent or comparable
efficiency-enhancing integration through practical,
significantly less restrictive means, then the Agencies
conclude that the agreement is not reasonably necessary [to
achieve pro-competitive benefits].\8\
Why did United Airlines or one of the other founders not simply buy the
software that Orbitz touts as the most significant innovation in travel
since the jet engine and use it to compete against the other airlines?
Why are the airlines once again approaching the marketplace as a unit
rather than as the individual competitors that the Airline Deregulation
Act envisioned? Why won't the airlines compete?
Orbitz is not alone. As the charts accompanying this testimony
illustrate graphically, the world's airlines have been swift to copy
the idea of the regionally based airline joint venture. Recent reports
confirm that representatives of Orbitz have been in discussion with
these nascent ventures regarding possible consolidation of operations
into what would then be a global consortium of airlines jointly
managing the dispersal and display of low-fare services to consumers
worldwide. The charts show an industry with an overwhelming multitude
of complex commercial relationships. See Exhibits 6-11.
Between the marketing alliances with antitrust immunity, the code
sharing deals, the Internet joint ventures and cross-ownership
arrangements involving airlines and Internet retailers, there is little
left in which the airline owners of Orbitz are not involved in some
kind of joint operation with the airlines that are supposed to be their
arch-rivals. The Internet selling space is widely recognized as a
growing long-term marketplace that can achieve for its participants
unprecedented increases in efficiency, reach and content. If consumers
want to go there, and many will, then all retailers should have a fair
opportunity to reach them there with fully competitive offerings. The
Orbitz plan is plainly designed to foreclose that possibility.
If successful in this effort, the airlines will enjoy an enormous
economic windfall at the expense of the traveling public. Deprived of
easy access to neutral, comparative information, the traveling public
will, inevitably, make mistakes in air travel purchases, paying higher
than necessary fares when there were cheaper alternatives and getting
less optimum service for the travel dollars they spend. The ability of
consumers to make optimal choices depends upon their having access to
good information about the full array of choices available to them.
That is the service that travel agencies have been providing so
effectively since airline deregulation and which has led about 80
percent of the air traveling public to prefer agents as their source of
information and travel documents. The Congress and other appropriate
government agencies must act to prevent the airlines from monopolizing
the distribution function.
For those reasons, ASTA urges immediate enactment of the portions
of HR 2200, and the companion Senate bill introduced by Sen. Reid
yesterday, that would make it unlawful for the airlines to offer
differential fares to those persons favored with access to certain
technology and would stop the airlines from continuing to operate free
of the constraints of state consumer protection and tort laws. We also
urge this Committee to communicate to the Department of Transportation
that the review of the Computer Reservations System regulations, now
years overdue, be given the highest priority. The anti-bias regulations
should be applied to integrated Internet fare displays, and the rule
allowing airlines to buy transaction information disclosing travel
agency sales on competing airlines should be abolished.
It is not just against other Internet sites that the effects of the
airlines' collaborative Orbitz effort must be judged. Orbitz is the
intended coup de grace against traditional travel agents seeking a
place in the Internet selling space. If successful in this strategy,
the airlines would have Orbitz as the sole interface between the
consumer and the carriers. The history of the airlines' treatment of
travel agents, of all sorts, must be understood to appreciate the full
potential consequences of the Orbitz venture, and how it serves as the
final act in the airlines' script to deprive consumers of all other
distribution system choices whether they are ``bricks'' or ``clicks''
or some combination.
As Alfred Kahn, the acknowledged ``father'' of airline
deregulation, has observed, deregulation can continue ``only in the
presence of effective competition as the protector of consumers.'' Both
economic theory and practice within the air transportation industry
support the conclusion that the availability of comparative information
about air transportation services is essential to vigorous competition
among the airlines and necessary to the maintenance of affordable fares
and responsive services throughout the country. Since 1978, the stated
policy of the United States, as manifested in the Federal Aviation Act
of 1958, amended by the Airline Deregulation Act of 1978, has been to
promote aggressively conditions of competition between and among the
airlines.
Travel agents provide two crucial services essential to assuring
the competitive environment necessary for the public to benefit from,
rather than be victimized by, airline deregulation.
First, they facilitate entry, exit and price and service
competition among existing and new entrant airlines. Agents provide
every carrier, in every market, an instant professional distribution
system ready and able to inform the public of service and price options
and to sell all of the inventory available at any moment, with no
additional investment required by the airlines.
Second, travel agents promote the use of air transportation
services by the public by serving as the only one-stop, neutral source
of comprehensive information and counseling about a complex, constantly
changing array of fares and services.
Indeed, the unsurpassed efficiency and effectiveness of travel
agents at the daunting task of gathering, sorting, analyzing, and
providing advice with respect to the bewildering array of alternatives
that make up today's air transportation options has been repeatedly
demonstrated.
On its 9:00 p.m. e.s.t, January 19, 1998 broadcast of its ``20/20''
television news magazine program, ABC-TV presented a segment in which a
travel agent was shown to consistently quote a lower fare for given
city pairs, under identical conditions, than a reporter could obtain by
calling the airlines. Co-host Hugh Downs summed up: ``But a good rule
of thumb is that a good travel agent can do better than you can.''
The ``20/20'' segment confirmed the findings of an earlier,
November, 1997, independent study from the U.S. Public Interest
Research Group (``PIRG''), which, in turn, confirmed PIRG's previous
1996 study. In the PIRG study, on October 9 and 10, 1997, PIRG staff,
students and volunteers telephoned 8 to 10 travel agents and as many as
5 airlines in each of 28 cities, to obtain quotes for the ``lowest''
airfares for specific round trips originating in that city. Full fares,
1-week advance and 3-week advance fares were obtained for the
departure/return dates of: (1) Thursday, October 16/19, 1997 and (2)
Thursday, November 6/9, 1997. All quotes included a Saturday night
stay. Departures were requested around 5 p.m. and returns around 6 p.m.
on both dates.
The PIRG callers expressed flexibility to depart from any airport
serving a multiple airport city, and the willingness to make one
stopover. Tickets were not booked, since booking tickets would have
changed the pricing structure of that particular flight. The study
found that the lowest fares were obtained more often from travel agents
than from the airlines.
According to ``The 1998 ASTA Consumer Travel Purchase Report,'' a
study conducted for ASTA by Plog Research, Inc., air travelers place
greater trust in travel agents than any other travel information
source, and technology makes no comparable improvement in credibility
for the most experienced travelers. Given the credibility achieved by
travel agents, the Plog study concluded, it follows that travelers
believe that the best way to insure that they get the travel products
and services they desire is to use a travel agent when making air
travel purchases.
Because they are already the public's overwhelming choice as a
source for travel information and arrangement expertise, there is every
reason to believe that travel agents can also deliver air
transportation services more efficiently over the Internet and through
other electronic systems than can major airlines. Nonetheless, major
airlines appear determined to reduce or eliminate the role of travel
agents and other independent distributors' in the information, sales
and distribution process regardless of the medium.
During the early years of deregulation these functions of the
professional full-service travel agency served the needs of the
airlines very well. Once the airlines' ability to fix commissions by
agreement was ended by the Civil Aeronautics Board, competitive forces
led to the expected and inevitable rise in agency compensation to the
level of 10 percent of the fare sold as a ``base commission'' for all
transactions. Travel agencies made rapid competitive maneuvering
possible in an environment where the race went to the swiftest. As the
airlines adapted to the new competitive marketplace, they earned
considerable profits during the 1980's. Deregulation thus produced
benefits for the major airlines as well as the traveling public.
Travel agencies also benefitted. The public liked what travel
agencies did for them, and they flocked to agencies for help with the
morass of fares and schedule changes that deregulation produced as the
necessary corollary to a free market. The market share of travel
agencies for air transportation rose from a pre-deregulation level in
the low 40 percent range to about 80 percent for domestic sales and
over 90 percent for international business. Travel agencies account for
more than $120 billion in travel sales annually, some seventy percent
of which is air transportation.
Travel agencies continued to do well even when the fortunes of the
airlines turned down in the early 1990's.\9\ The airlines lost billions
a year while agency sales continued to rise (save only for the Gulf War
year of 1991).
More recently, with the consolidation of the industry into a
handful of giant carriers, and with various other types of alliances
being almost routinely approved by the government, these large airlines
began to recognize new fundamentals of the competitive market that had
evolved. First, they saw that travel agents were a potential obstacle
to their long-term objectives: agents made sure that consumers fully
understood all of the fare and service options open to them. Second,
the airlines came to understand that consolidation of the airline
industry, combined with the success of passenger loyalty programs, had
yielded genuine market power for them as against the travel agencies
and other independent distributors. Third, for the first time, an
apparent alternative to distribution through travel agencies had
emerged: the Internet, by which the airlines believed they could
control directly the information provided to the public without
meddlesome interference by travel agents telling a somewhat different,
and unbiased, story.
The Airlines' Strategy
The airlines' determination to dominate the retail distribution of
air travel has a long history:
Prior to the development of a domestic industry travel agent
program, the airlines individually used many methods of
distributing their tickets to the general public. Tickets were
given with almost no restrictions or controls to hotel porters,
bell captains, bootblacks, taxidrivers, barbershop proprietors,
and virtually anyone else the airlines felt had a chance to
sell their product. The use of such non-professionals had the
potential to, and did in fact, cause great disservice to the
traveling public and the airlines. The [Civil Aeronautics]
Board found that the situation ``was unsatisfactory and often
resulted in abuses and mistreatment of the traveling public.''
ATC Agency Resolution Investigation, 29 CAB 258, 288 (1959). .
. .\10\
The solution developed was joint airline control of the entry and
operating standards of travel agencies, accompanied by immunization of
the airline agreements from application of the antitrust laws pursuant
to special provisions of the Federal Aviation Act. The airlines agreed
to share the distributors, making the distributors agents at law and
giving the airlines joint control over entry and joint power to
terminate. The airlines proceeded with Draconian efficiency:
A disapproved applicant . . . receives no notice of the grounds
for his rejection. Indeed, no record of the grounds for
disapproval is made by the [ATC Agency] committee. . . . Agents
who have been accredited may be removed from the agency list. .
. . No formal notice of review is sent to the agent, who is
granted no opportunity to present a defense to charges against
him. If the vote is adverse to the agent, his name is deleted
from the approved list and his agency agreement is
terminated.\11\
The airlines also jointly set commissions for travel agencies, the
agreements for which also received antitrust immunity until shortly
before the deregulation of the airlines. When deregulation became
national policy, the Civil Aeronautics Board withdrew antitrust
immunity from commission setting and that practice stopped. The
competitive market quickly led to an increase in commissions from the
1977 average of 8 percent to the 10 percent level that would persist
until 1995. In the process of deregulating the airlines, however, the
Congress conferred upon the airlines a privilege almost as valuable as
antitrust immunity: the preemption of state laws ``relating to''
routes, rates and services of the airlines.
In the time between enactment of the Airline Deregulation Act and
the official expiration of the Civil Aeronautics Board, the CAB re-
examined the agency programs of both the domestic and foreign airlines.
Here too, on the promise of ``new forms of distribution'' emerging in a
more open market, the CAB withdrew antitrust immunity from the agency
programs. In the market chaos that followed airline deregulation, the
travel agents' share of the air travel business increased to about 80
percent.
Despite many predictions to the contrary, ``new forms of
distribution'' did not arise. Instead the airlines embraced a new
method of controlling the agency distribution system that was now
serving most of the industry's customers with information and
transaction services. In the late 1970's the opposition of the
Department of Justice, and other factors, had led to the collapse of
industry plans to build a single computer system to provide fare and
service information to the agency system. Instead, some airlines, led
by United and American, started leasing their own ``CRS'' systems to
travel agents. The flights and fares of non-owning airlines were
included, to make the systems more attractive to travel agents each of
whom continued to represent all airlines through blanket agency
appointments conferred through the Airlines Reporting Corporation and
the International Airlines Travel Agency Network.\12\ Some airlines
became ``co-hosts'' with the system owners, and it soon became apparent
that the airline owners who controlled the information were biasing the
computer displays to favor themselves at the expense of non-owner
airlines. The Civil Aeronautics Board was forced to adopt comprehensive
regulations to control the airline CRS-owners' desire to prejudice
downstream air transportation and subordinate the agency distributors
trying to provide unbiased information to the public.
Those regulations remain in place and yet another five-year review
of them is currently pending at the Department of Transportation.
In the early 1990's a new development occurred that heralded things
to come. A number of major airlines were sued in a class action in
Atlanta, alleging, among other things, that the airlines were using
their CRS systems to signal each other regarding plans to increase
prices. These signals, it was claimed, were used to reach consensus on
price increases and to threaten or discipline carriers that stepped out
of line. The case was eventually settled through the provision of
coupons to class members, which coupons were good for a discount on
future transportation on the defendant airlines.
The settlement agreement, hammered out behind closed doors,
provided that the coupons could not be redeemed by travel agents. If
allowed to proceed, this deal would have deprived travel agents of
revenue on some $450 million in business and forced their clients to
deal directly with the airlines to ``benefit'' from the coupons. When
ASTA complained to the court that the settlement agreement had been
used to produce a brand new antitrust violation, namely a horizontal
group boycott of travel agents by the defendant airlines, the airlines
withdrew that portion of the settlement. When the Department of Justice
brought the same allegations against the airlines in Washington, they
settled that case too.
As Internet technology emerged in the early 1990's the airlines
were relatively slow to move. Independent firms entered this new arena
first and most aggressively. Firms such as Travelocity, Expedia and
others established name recognition nationally. Having seen a new tool
that attracted considerable public attention and patronage in a short
period of time, the airlines began a program of reducing travel agency
compensation, as reflected in Exhibits 4 and 5 to this statement. While
telling travel agencies that they could make up some of the revenue
loss by charging the public fees for the agencies' services, the
airlines refused to consider changes to ticket documents that would
facilitate agents' doing that in the most efficient and customer-
friendly way.
At the same time traditional travel agencies also saw that the
future of travel retailing was, in part at least, going to be a Web-
based process and that they needed to move to that space as well. In
the late 1970's CRS systems had made it possible for the smallest
travel agency to replicate the inventory available to even the largest
retailers and thereby give consumers a full set of choices as well as
expert advice. Now in the 1990's the Internet offered the smallest
agency the opportunity to expand its market reach across the country,
and even across the globe, while achieving new efficiencies in
communication and research.
While most of the attention is paid the largest on-line agencies,
ASTA's members, most of which are dwarfed by firms like Travelocity and
Expedia, are moving rapidly to the Web. Our most recent survey data
shows that fully half have their own Web-sites. These do not begin to
rival those of the major players in scope and sophistication, but they
represent a crucially important presence in this marketplace and,
absent interference from the airlines, they will continue to grow in
number and complexity. Most of these Web-sites represent the
integration or ``convergence'' of Internet technology with more
traditional methods of retailing and are the model of business most
typically to be followed by smaller firms seeking niche positions in
the Web-based market rather than trying to go head-to-head with larger
firms who entered the market earlier.
Agency on-line air sales are estimated to reach 5 percent of total
U.S. airline sales in the year 2000 (see Exhibits 1, 2 & 3), slightly
ahead of the airlines' aggregate performance in the absence of Orbitz.
Most importantly, the current annual growth in retail sales of air
travel, driven by a strong economy and high employment, is going to the
Internet. Firms not participating in ``Internet sales,'' are both fewer
in number and living on a shrinking volume of business despite growth
in the overall market.
The airlines were swift to react to agency incursion into the
Internet selling space. To name but a few steps taken, the airlines
imposed differential commission levels on Internet-originating
transactions and, working jointly through the Airlines Reporting
Corporation, imposed new identification requirements on Internet-
originating tickets to identify those transactions to which the lower
commission levels would be applied. They have jointly posted a list of
recommended and actual practices that discriminate against on-line
transactions.
Here we must emphasize that while some people, including those at
Orbitz, have argued that the current dispute about the joint airline
Web-site is really a fight by the two dominant on-line agency firms,
Travelocity and Expedia, to protect themselves from competition, the
reality is that there are thousands of smaller travel agencies that
want to use the technology of the Internet to expand and grow their
businesses. More importantly, millions of consumers prefer the
``traditional'' travel agency as the source of information, advice and
travel documents either alone or in combination with Internet
capabilities. And, of course, there are millions of Americans who do
not have realistic and practical access to the Internet and who, if
they are to take advantage of travel, must be able to find and access a
so-called ``traditional'' travel agency.
The story is not over. When the airlines were called to account for
rising customer dissatisfaction with the way they are treated, the
airlines, under threat of action by this Committee and others in
Congress, sought the equivalent of a ``plea bargain.'' They produced
the ``voluntary'' service commitment program which was the subject of
interim review by this Committee just a few weeks ago. Again, given the
opportunity to collude and get an agreed-upon price advantage over the
retail distribution system, they did so, this time by providing that
the lowest fare guarantee in their service commitment applied only to
customers choosing to deal directly with their reservations centers.
Customers using travel agents, on-line or off-line, were excluded from
this benefit. The same was true for the grace periods provided for
holding fare quotes for 24 hours while searching for a better fare
elsewhere. It was Atlanta all over again.
The repetitive nature of this joint conduct by the airlines
establishes a clear pattern. They now intend to block agent access to
the lowest fares and raise agents' costs of doing business while
continuing to lower their compensation and interfere with their
customer relationships.
Armed with motive and opportunity, the airlines have now embarked
on a campaign to reshape the market in their own image. If successfully
consummated, this strategy will make it much harder for the public to
learn about all of the fare and service options available to them and
thus increase the likelihood that they will, on the whole, spend more
for air travel than they otherwise would. By restricting access to
unbiased and comprehensive information from independent sources, the
airlines expect, rightfully, that they will be able to increase the
average price consumers pay for air travel.
Travel agency sales of air travel alone exceed $80 billion
annually. If the airlines can divert any meaningful amount of this
business to themselves, the potential gain to them is enormous, not
merely in commissions avoided, but in the higher overall prices that
consumers will pay for air travel. Deprived of easy access to
independent sources of comparative price and service information,
consumers inevitably will end up paying more, on average, even if the
airlines never actually raised another fare.
The changes the airlines are aiming at the distribution system are
not occurring under conditions of a level competitive playing field in
which consumer preferences ultimately control the outcome. Instead, the
airlines are using market power, collective activities and other
devices to undermine the distribution system to achieve their goal of
reducing the public's access to independent comparative price and
service information.
The airlines have reduced both off-line and on-line commission
rates to levels that do not cover agency costs. This has forced most
agencies to charge their own fees to consumers for the sale of airline
tickets. Agency tickets sold on the Internet have been singled out for
even lower commissions. Enforcement of those discriminations is aided
and abetted by the airline-owned Airlines Reporting Corporation. The
carriers also enforce brutally discriminatory ticketing policies on
travel agents while disregarding those same policies in their direct
dealing with consumers.
The airlines jointly have refused to permit travel agency service
fees to be placed on the airline ticket stock, thus denying agents an
important adaptive efficiency, while they continued for many years to
apply self-serving discriminatory compensation policies to their
jointly owned sales agency for government and large corporate
clients.\13\ Finally, they continue, under authority approved by the
DOT's CRS regulations, to share detailed information on their
competitors' sales to consumers. Details of these activities are set
out in Appendix A to this Statement.
Consumers must have access to travel agents and other independent
distributors who provide unbiased consolidated schedule and fare
information if we are to preserve competition in the airline industry
and maintain a system that provides the public with a broad range of
options, including access to small airlines and start-up carriers.
Since deregulation, the public has had the choice of buying
directly from suppliers such as airlines at no additional cost and
overwhelmingly has chosen to deal with travel agencies. Consumers
prefer dealing with travel agencies rather than airlines when
purchasing air transportation because agencies deliver far more value,
convenience and services.
Among the most basic functions performed by travel agencies is to
collect and distribute comparative information and advice about the
price and quality of travel suppliers' offerings--a function that no
single airline can or wants to perform. In addition, consumers'
transaction costs are often lower than direct-dealing with airlines,
especially because many travel arrangements are joint purchases of the
products of several travel suppliers (for example, air transportation
and hotel/rental car). In short, one-stop shopping for accurate and
unbiased travel services at a travel agency is the essence of the
benefit to the public, as against airlines' direct selling methods.
It can no longer be assumed, that, even with new technologies,
travel agencies will be able to function in the future as independent
sources of the services that consumers value. Slowly but surely, in a
myriad of ways including those we have identified above, and in
cumulative effect, the major U.S. airlines are destroying the
competitiveness of travel agencies and, thereby, extracting ever-higher
effective prices for air travel from consumers.
In lock-step, each of the major carriers (American, Delta,
Northwest/Continental and United) that comprise the U.S. airline
oligopoly, has imposed virtually identical restraints upon independent
travel agencies, for the purpose and having the effect of, depriving
consumers of the benefits of free and open competition. Specifically,
the restraints we have identified, are designed to impede and prevent
travel agencies from offering a full range of consumer services and
thereby cause travel purchasers to by-pass agencies in favor of direct-
dealing with carriers.
The ultimate objective and actual effect of this strategy is to
warp the normal discipline of the market place and enable each airline
to achieve more than competitive profits by exploiting consumers'
inability to search out and obtain the lowest possible ticket prices.
In other words, these restraints make possible an adverse impact upon
consumer welfare much like that one would expect from traditional
cartel behavior.
No airline can be expected to provide the public with unbiased
comparative price and service information about its competitors.
Consumers may be able to get some of this information from airline-
controlled Internet sites, but the fundamental airline strategy of
disabling the travel agency distribution system will leave millions of
consumers without effective access to neutral comparative information.
The latest airline attempt to deprive the public of its only
opportunity to leverage what little competition there is must be
stopped. At the same time, the unbalanced conditions that encourage the
airlines to try every avenue to deprive the public of its only neutral,
unbiased source of travel information and arrangements must be returned
to equilibrium.
There are important areas of government action available, short of
re-regulation of the airline industry, that would go a long way toward
restoring the balance of power and assuring that consumers are not left
to the airlines' dictation of distribution channels.
One step is to pass the portions of HR 2200 that would make it an
unfair practice under the Federal Aviation Act for any airline to make
the availability of a low fare dependent upon the technology used to
access information about the fare. This one step would assure that the
millions of Americans lacking effective access to the Internet are not
deprived of access to the lowest fares and it would assure all
Americans of the freedom of choice as to distribution channel with
which to do business. Airlines could continue to offer low fares and
consumers would decide how to research them and how to buy them.
Another step, also fundamental, is to fix the problem of federal
preemption of state law. When Congress deregulated the airline industry
by passage of the Airline Deregulation Act of 1978, it prohibited
states from ``enact[ing] or enforc[ing] any law *** relating to rates,
routes, or services.'' 49 U.S.C. App. Sec. 1305(a)(1). Obviously, such
a provision was necessary to prevent the states from subjecting to
their regulation that which Congress had just removed from federal
regulation. That federal preemption provision, shielding airlines from
state regulation, has now been turned by the airlines into a sword with
which they bar the general public and small businesses from holding
them accountable under the same state law that applies to virtually
every other industry in the country. The result is that the airlines
have become a veritable law unto themselves, immune from state-law
suits seeking to hold them responsible for harm to passengers as well
as their obligations to small businesses. At the same time, the
airlines remain free to call upon, and do call upon, these same state
law principles against other parties when their own interests are
served.
Differences of interpretation in the scope of the Federal
preemption that several Justices of the Supreme Court would accord
airlines under the Airline Deregulation Act, as well as instances of
members of the public and small businesses, including other airlines,
being denied a forum for their claims, illustrate clearly that
clarification and modification of this troublesome provision must be
undertaken.
Absent a comprehensive and active administrative scheme for dealing
with private party grievances, there is simply no place to go to get
justice from an airline. The Department of Transportation ``has neither
the authority nor the apparatus required to superintend a contract
dispute resolution regime.''\14\ Clearly, it is unequipped to resolve
tort claims.
ASTA supports statutory language it believes strikes the
appropriate balance between the airlines' need to be free of state
economic regulation of fares and routes in a deregulated environment,
and the rights of consumers and others to have redress against airlines
for their failures to abide by the same state law standards of conduct
all other parties must observe. That language amends 49 U.S.C. Section
41713(b) by providing:
This subsection shall not bar any cause of action brought
against an air carrier by one or more private parties seeking
to enforce any right under the common law of any State or under
any State statute, other than a statute purporting to directly
prescribe fares, routes, or levels of air transportation
service.
This language currently appears as Section 3 of HR 2200, and also in
Section 7 of S. 477, the ``Airline Competition Act of 1999,'' offered
by Senator Schumer, and as Section 9 of H.R. 272, the ``Airline
Competition and Lower Fares Act,'' offered by Representative Slaughter.
Finally, if the government allows the airlines to proceed with
Orbitz as planned, it will have done at least three things: (1)
defeated completely the goals of the Airline Deregulation Act of 1978,
(2) rung the death knell of many small businesses throughout the United
States who will have no effective means of competing with collusive
airline distribution systems, and (3) left consumers with no long-term
hope of relief from the anti-competitive behavior of the airline
industry.
In such circumstances, where the airlines will for all practical
purposes be a single enterprise (when effect is given to all the other
relationships, immunizations and preemptions that the law and
regulators have provided them), it will be essential to permit the
distribution system to join together in collective action, with similar
relief from the antitrust laws, in dealings with the airlines. If the
United States air transportation system is to be run by an unregulated
cartel, elemental fairness, not to mention the welfare of the millions
of consumers who prefer not to deal directly with the airlines,
requires that travel agencies and other distributors of retail air
services be allowed to collectively bargain as a union would. Absent
such relief there would be no semblance of fairness or competitiveness
in the marketplace that the airline industry of three or four carriers
would produce.
Conclusion
Independent providers of travel services are absolutely necessary
for optimal consumer welfare. Consumers derive substantial benefits
from the presence of travel agents in the travel service market. This
is as true of the Internet as of the more traditional selling space,
maybe more so.
Both economic theory and recent history teach a clear and important
lesson: the firms that comprise the U.S. airline oligopoly are prone to
anti-competitive acts of predation and collusion.\15\ Their past
conduct demands constant and heightened scrutiny of their practices
toward travel agencies.
The acts and practices we have discussed threaten permanent injury
to the competitive process and, unchecked, will result in the transfer
to the major carriers of vast amounts of wealth that consumers would
otherwise enjoy. These and other carrier-imposed restraints deny to
travel agencies the freedom to take independent actions that would make
their operations more efficient and responsive to consumer demand.
By restricting travel agency output, these restraints also enable
individual carriers to exercise power over price in discrete geographic
markets for air transportation. Taken together, their aggregate effect
is to allow carriers collectively to overcharge consumers on the order
of hundreds of millions of dollars more annually than they could earn
under fully competitive conditions--a rate of welfare loss that will
only increase over time unless the carriers' anti-competitive conduct
is stopped.
By restraining the competitiveness of an industry segment that
serves all travel suppliers, not just airlines, the long-run welfare
loss is even more severe than the loss extracted by a single monopolist
that overcharges customers by setting price above its marginal costs.
At its core, and as a whole, the carriers' anti-competitive
strategy is designed to erode the ability and incentives of consumers
to seek and obtain the services of travel agencies, including emergent
on-line booking services and auction sites. The airlines know and have
acted upon the fundamental truth that when consumers are deprived of
comparative information in making travel purchases, they almost always
end up paying more--not because fares rise in absolute terms but rather
because consumers are unaware of lower fares and are therefore not able
to claim them. Simply put, carrier practices that even modestly reduce
competition from travel agencies produce immediate and out-sized gains
in carrier profitability, not because of increased efficiency but by
exploitation of consumers' inability to obtain the lowest price when
dealing directly with them.
ASTA appreciates the opportunity to have presented its views, and
remains at the Committee's disposal to assist in any way it can.
Appendix A
Non-compensatory Commission Policies
The first action in the airlines' anti-consumer campaign began in
1995, when the major airlines, save only Southwest Airlines, capped
travel agency commissions at $50 per round-trip ticket. This was
followed in September, 1997, with across-the-board reductions in the
domestic base commission rate from 10 percent to 8 percent. In 1998
international commissions were capped at $100 per round-trip and in
October, 1999, a third domestic reduction, to five percent capped, was
imposed.\16\ In dollar terms, the total compensation reduction to
agents is well over 30%.\17\
At this time, consumers have overwhelmingly elected to continue to
do business with travel agents, but millions of consumers now pay
transactions fees to agents, fees which agents have been forced to
adopt to off-set airline commission cuts. Consumers who are unwilling
or unable to pay travel agent transaction fees must contact airlines
directly and often pay higher fares as a result. As airlines continue
to reduce agency commissions, many consumers may be willing to pay
higher fees for the right to do business with agents, but millions of
other consumers will be forced to deal directly with major airlines.
This puts the consumer right where the airlines want him, bereft of
a neutral source of information to deal with a bewildering array of
complex air fares and services. As travel agents are forced out of the
industry and airlines secure more direct consumer business, consumer
alternatives will continue to decrease resulting in significantly
higher consumer travel costs. This ``revenue squeeze'' has made entire
segments of airline ticketing activity non-remunerative for agents, a
major factor in the exit of 18 percent of independent U.S. travel
agencies from the air retail industry during 1995-2000,\18\ as well as
in a shifting of resources by the remaining agencies to non-air sales.
This is the first decrease in the number of travel agencies since World
War II, and more closings are expected as agency operating reserves are
exhausted.\19\
Small domestic airlines, many international airlines, and start-up
airlines who depend upon the travel agency distribution system will be
adversely impacted if not eliminated. There is no alternate
distribution system available to these types of airlines.
Major airlines have generally misrepresented the reason for agency
commission cuts, citing a need to reduce expenses and pass savings on
to consumers. In fact, airline ticket prices have steadily increased,
and airlines are regularly posting record profits. Not one penny of the
alleged cost savings can be discerned to have been passed on to
consumers through better service or lower ticket prices. There have
been no consumer benefits, and consumers are paying the highest
airfares in history.
Agency Transactions Originating On The Internet
Major airlines have also adopted discriminatory and non-
compensatory commission policies for bookings originated on-line.
Commissions paid to on-line travel agencies and other independent
on-line ticketing services are at a general rate of 5 percent with a
$10 maximum, which is well below these firms' costs. The airlines have
thereby succeeded in arresting in its incipiency an effective counter-
measure available to agencies to offset reductions in commissions on
traditional sales: unfettered access to consumers through high-volume,
low-cost electronic marketing systems.
Most recently, in implementation of the airlines' non-compensatory
Internet transaction policies, their jointly owned alter ego, Airlines
Reporting Corporation (``ARC'') has begun issuing special numbers
called Electronic Reservations System Provider numbers (``ERSP''
numbers). Virtually all the major airlines have informed travel agents
that they must attach these special numbers to every transaction that
originates on the Internet. The only apparent purpose for this
requirement is to help the airline enforce its discriminatory
commission policy with regard to Internet transactions.
In this scenario, the airlines, through ARC, are collectively
facilitating the enforcement of commission policies designed to keep
travel agents from becoming meaningful participants in the electronic
marketplace.
New Entrant Obstacles
For at least the second time since airlines were deregulated, the
so-called ``new entrant'' airline group, which typically operates on a
no-frills, low-cost, and thus low fare, economic model, is finding it
difficult, often fatally so, to compete with major established
airlines. Major airlines monopolize airport facilities, earn huge
returns from the computer reservations systems they control and own
(and through which almost all airline reservations are made), target
small carriers using massive giveaways (such as frequent flyer program
points), and employ temporary fare-cutting tactics to deter or block
new market entry.
A competitive market for travel services, i.e., one in which
consumers anywhere in the U.S. can readily turn to independent agents
to reduce search costs and avoid buying errors, makes it possible for
new carriers to enter the market and for small carriers to expand
without bearing the full costs of second-stage entry (developing their
own distribution network). Thus, carrier practices that restrain the
ability of agents to compete also tend to raise entry barriers in air
transportation markets. Federal agencies such as DOJ and DOT have long
been concerned about market conditions that impede entry and expansion
of small, low-price carriers, and there is good reason to believe that
erosion of travel agency competitiveness will translate directly into
less competition in the market for air transportation.
Moreover, market imperfections, including consumers' notorious lack
of information about carriers' complex, ever-changing and often poorly
visible price and service offerings, enable carriers with market power
over particular routes and facilities to discriminate against captive
consumers. By restricting travel agencies' output, individual airlines
can and do exercise and maintain market power in discrete geographic
markets for air transportation, especially city-pairs involving a
``hub'' where the carrier is the dominant or monopoly provider.
If the major airlines are successful in destroying most or all of
the smaller, new entrant airlines, competition in airline pricing and
schedules will diminish even further.
Discriminatory Ticketing Policies
Major airlines refuse to permit agents to offer certain benefits
and concessions to consumers, such as the refund of so-called ``non-
refundable'' tickets, while reserving to themselves the right to make
such refunds. Transgressions are punished severely with airlines
levying cash penalties against agents to which agents are summarily
required to acquiesce or face the greater penalty of losing their
ability to issue tickets altogether. The airlines themselves often
issue such refunds. The airlines then typically force the agent to
repay the commission earned on the original sale.
Similar discrimination in competitive practices occurs with respect
to price-saving opportunities such as the sale of ``back-to-back'' and
``hidden city'' tickets, as well as highly publicized special fares
that require consumers to purchase directly from airlines. These
discriminations have the consequence of interfering with the
relationship between the travel agency and its clients, by, among other
things, impairing the agency's credibility in the eyes of the customer.
``Back-to-back'' tickets, are a pair of tickets issued to permit
the traveler to avoid the Saturday night layover normally required to
get a discounted ticket. Airlines prohibit agents from issuing these
tickets, and normally demand the agent pay the full coach fare as the
penalty for so doing.
``Hidden city'' tickets, in which the passenger buys a ticket A-B-
C, which is cheaper than a non-stop A-B ticket, then gets off the plane
at B, are also forbidden and punished severely. In addition, major
airlines, while acknowledging passenger contracts for passage legally
exist only between passengers and airlines, nonetheless reserve the
right to penalize travel agents financially when consumers buy
inexpensive round-trip tickets, travel one-way, and throw away the
return portion of the ticket. Such policies confuse and anger the
public, while undermining the relationship between the travel agent and
his client, who expects the agent to find and ticket the lowest fare
available.
Airlines have also adopted an identical condition upon redemption
of frequent flyer awards that arbitrarily forces consumers to by-pass
agencies. These awards are mostly earned at employer expense but are
commonly used by individual travelers for leisure trips, many of which
would have been arranged through travel agencies. The airlines divert
substantial revenue from agencies by requiring awards to be redeemed
directly from airlines.
As recently as January 11, 1999, Delta Air Lines announced
initiation of a $1 surcharge for each published fare component on all
U.S. domestic fares. Under this scheme most round-trip tickets, which
are constructed using two fare components, would include a $2
surcharge. Additional surcharges would apply on tickets constructed
using multiple fare components. This surcharge, however, would not be
applied to tickets issued via Delta's SkyLinks Internet website.
Thus, Delta's scheme penalized all of its customers who wished to
avail themselves of the opportunity to receive comparative cost data by
consulting a travel agent. The avoidance of the $1 surcharge penalty by
using the Delta website was ``fool's gold'' placed in consumers' paths
to lure them into remaining in the dark about fare alternatives that
could potentially save them hundreds of dollars.
Delta cited increased computer reservation system (``CRS'') booking
fees as its justification for this punitive charge for using a travel
agent. Since the airlines by and large own the CRS systems, they are
both responsible for, and benefit directly from, the increased CRS
booking fees of which Delta complained.
In this case, at least, the public outcry was so great that the
other airlines declined to match the Delta surcharge. It was dropped
after a few weeks. Delta nonetheless stated that any passenger seeking
to get credit for having paid the $1 surcharge would have to pay a $75
change fee that Delta imposes on discount tickets.
Airlines Use of Joint Assets
The airlines also use discriminatory collective or joint operation
of assets to offer concessions, benefits and services to the public
while denying comparable access to such concessions, benefits and
services through travel agents and other independent air transportation
distributors, including, but not limited to, joint sales activities,
denial of competitive tools, and denial of distribution efficiencies.
The airlines operate several collective businesses that are used to
disadvantage travel agents and to limit public access to comparative
price and service information.
These include ARC, which controls both who can become a travel
agent and the settlement of funds between travel agents and the
airlines. ARC is also involved in the formatting of standard agents'
ticket stock. When the airlines cut commissions in 1997, the travel
agency community sought the inclusion on the ticket document of a space
where the agent could insert its own service fee and process the charge
through ARC along with fares, taxes, and other charges on the ticket.
The airlines have made it clear that this important competitive
efficiency mechanism will not be provided to travel agents.
More recently ARC has begun providing ``accreditation'' of
corporate customers, purporting to make them ``agents'' of the airlines
that sell to them, so that the corporations can have standard travel
agents' ticket stock and settle accounts with the airlines through the
same system used for travel agents. In purpose and effect, this program
is collective action that facilitates the carriers' strategy. Among
other things, it enables them jointly to target, select, large volume
corporate accounts that constitute a large and lucrative source of
agency profitability and skim the ``cream'' \20\ for themselves.
Another example, until recently, was the operation of SATO, Inc.,
the functional equivalent of a mega-sized travel agency (air sales of
about $1 billion) that the airlines collectively owned and used to
compete with travel agencies for government and corporate business.\21\
The airlines claimed that SATO was more cost-effective than travel
agencies and was operated on a non-profit, strict cost-pass-through
basis, but there was evidence that the actual cost of SATO on a
percentage-of-ticket-price basis was several points higher than the
average actual cost of travel agency commissions. And when the airlines
capped travel agent commissions, no reduction was placed on SATO's
working ``commission,'' thus increasing the advantages it had over
regular travel agencies.
In fact, exempt from the same commission caps and ticketing
restrictions that the carriers have imposed upon travel agencies, SATO
enjoyed an effective commission rate of approximately eleven (11)
percent, almost twice as much as agencies' average gross commissions on
air sales. SATO has now been sold, but its historical collective use as
an unfair competitive weapon against travel agencies remains a fact.
Agents' Transaction Data
One of the most egregious of the airline practices in question, is
the process whereby the airlines share competitively significant sales
transaction data in violation of the confidentiality interests of the
travel agents and other independent air travel distributors who
generated the transactions.
Confidential business information generated by travel agencies is
routinely captured and shared by the airlines in a manner that would be
blatantly unlawful absent regulations issued by the Department of
Transportation. Those regulations require each computer reservations
system (most of which are controlled by airlines) to make available to
all participating U.S. airlines all marketing, booking and sales data
that it generates from its systems.
In addition, ARC sells to airlines travel agency ``total sales''
figures, information that would normally be confidential unless a
business consented to its disclosure. Because airlines are major
competitors of travel agencies, there are serious questions as to
whether they should have access to proprietary data of this kind.
If competitors in any other industry were to sit around a table and
exchange this type of information in the ordinary course of business,
we believe that the Department of Justice would lower the antitrust
boom on them. Yet the airlines are free to share competitive
information about their operations with their competitors without
apparent concern. And the information is then used to disadvantage the
travel agency, the only independent source the public has for neutral,
comparative information.
Endnotes
\1\ See e.g. Investigation into the Competitive Marketing of Air
Transportation, C.A.B. Docket 36595, aff'd; Republic Airlines, Inc. v.
C.A.B., 756 F.2d 1304 (8th Cir. 1985); In re Domestic Air
Transportation Antitrust Litigation, 148 F.R.D. 297, 61 USLW 2610,
1993-1 Trade Cas.(CCH) para. 70,165 (N.D.Ga., 1993); U.S. v. Airline
Tariff Publishing Co., 1993-1 Trade Cas. (CCH) para. 70,191 (D.D.C.,
1993); Spiro v. Delmar Travel Bureau, Inc., 591 N.Y.S.2d 237 (A.D. 3
Dept. 1992); and Crowder v. Kitagawa, 81 F.3d 1480 (9th Cir. 1996).
\2\ Based on Travel Industry Association of America 1998 estimate
of 221 million air person-trips taken in the United States, grown by 4
percent to 2000 annual estimated.
\3\ http://www.orbitz.com.
\4\ Joint Press Release of United Delta, Northwest and Continental,
November 9, 1999.
\5\ Id.
\6\ Attributed to Ben Burnett, Vice President of Boston Consulting
Group, a firm retained to act as ``temporary launch manager.'' ``Nearly
Two Dozen Airlines Will Join Planned Web Site of Four Big Carriers,''
Susan Carey, Wall Street Journal, February, 2000.
\7\ Antitrust Guidelines for Collaborations Among Competitors,
April, 2000, at 14.
\8\ Id. at 9.
\9\ The agencies' share of airline sales rose from 55 percent in
1977 to 81 percent in 1995. P. Ruden, Competition in the Distribution
of Travel Services 5 (ASTA 1997).
\10\ Initial Decision of Administrative Law Judge Ronnie A. Yoder,
Investigation into the Competitive Marketing of Air Transportation, CAB
Docket 36595, served June 1, 1982 at 44, n. 3, final decision in Order
82-12-85, December 16, 1982.
\11\ ATC Agency Resolution Investigation, 28 CAB 258, 260 (1959),
footnotes omitted.
\12\ These programs were originally administered by the airlines'
trade associations. They were spun off into separate companies owned
directly by the airlines when the CAB terminated antitrust immunity.
\13\ SATO was later sold to non-airline interests. See Appendix A.
\14\ American Airlines, Inc. v. Wolens, 513 U.S. 219, 232.
\15\ See for example, U.S. v. Airline Tariff Publishing Co., 1993-1
Trade Cas. (CCH) para. 70,191 (D.D.C., 1993).
\16\ The last three reductions were all led by United, the lead
investor in Orbitz.
\17\ The commission rate for June, 2000 domestic air transactions
was 4.10 percent according to official Airlines Reporting Corporation
reports. In January, 1995, before the commission caps, the rate was
10.01 percent.
\18\ Between March, 1995, the first full month after the first
commission caps, and March, 2000, the number of agency firms accredited
by ARC declined from 23,978 to 19,739. Source: ARC Monthly Statistical
Information.
\19\ Later ARC reports confirm this. Year-to-date terminations of
defaulted agencies were up 39 percent at the end of June, 2000.
\20\ As Justice Brennan observed, concurring in White Motor Co. v.
U.S., 372 U.S. 253 (1963):
Instead, [defendant] seeks the best of both worlds--to retain a
distribution system for the general run of its customers, while
skimming off the cream of the trade for its own direct sales.
That, it seems to me, the antitrust laws would not permit . . .
\21\ Since this paper was first written, the airlines have
announced that SATO, Inc. has been sold to private investors who will
operate it as a travel agency. We do not know at this time with
certainty whether a special relationship between SATO and the airlines
will survive this sale.
Explanation of Exhibits *
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* Exhibits 1-11 have been retained in the Committee files.
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Exhibit 1 LTotal Airline Sales by Distribution Source--Assumes that
travel agency airline ticket market share is 75 percent, with annual
volume increases of 7 percent in 2000 and 5 percent in 2001. Based on
ARC monthly statistical reports and estimates of Internet shares by
PhoCusWright, a technology consulting and research firm specializing in
the travel industry/Internet areas.
Exhibit 2 LAirline Sales by Distribution Source--Same data as Exhibit
1 shown in percentages of total airline sales.
Exhibit 3 LOnline Airline Distribution Marketing Share--PhoCusWright
estimates of the agency and airline shares of the online airline
market.
Exhibit 4 LAverage Commission Rate (All Fares)--From ARC monthly
statistical reports, showing the average annual commission rate on
sales reported through ARC, domestic and international sales combined.
Exhibit 5 LTotal Travel Agency Sales vs. Commissions--Contrasts the US
travel agency industry (online and off-line) sales of air fares, as
reported through ARC, with commissions paid for such sales, also as
reported through ARC.
Exhibit 6 LAirline Relationship Chart--Details in chart form the
relationships reflected in Exhibits 7-11.
Exhibit 7 LEquity Interests--Indicates equity/warrant ownership among
eight major domestic airlines and other carriers.
Exhibit 8 LEquity Interests in Computer Information Resources--
Indicates equity interests in various large Internet retailers and
Computer Reservations System companies.
Exhibit 9 LAlliance and Code Share Relationships--Shows reported code
share and major marketing alliances formed as of creation of the chart.
SkyTeam is not included.
Exhibit 10 LOrbits/T-2--Adds Orbitz to the picture.
Exhibit 11 LGlobal Cartel--Illustrates the other global airline joint
ventures on the Internet.
The Chairman. Mr. Silbergeld.
STATEMENT OF MARK SILBERGELD, CO-DIRECTOR, CONSUMERS UNION
Mr. Silbergeld. Mr. Chairman, Consumers Union and Consumers
Federation of America, which joins in my testimony, thank you
for holding this hearing and for inviting us to participate.
Orbitz, simply put, may provide its founding air carrier
investors, the nation's five largest airlines, with a vehicle
for collusion as to travel ticket prices, explicitly or through
carrier or Orbitz-designated conditions of doing business. And,
it may serve to eliminate or severely curtail the competition
from existing on-line travel agencies, that is, competition to
the airlines' current ticket sale distribution systems. And, as
well, as to favored consumers with Internet access at the
expense of those who cannot readily search and book
reservations via the Internet.
Consumers could be severely affected if the Orbitz Internet
travel agency were to further enhance the industry's ability to
direct most travelers to ticket prices that are price-optimal
as to carriers but not to the individual traveler.
When supposed competitors coordinate their sales, they
reduce the likelihood that independent action by brokers will
reduce price. And when supposed competitors exchange
information about prices or about the price/quality mix of
products, they increase the opportunity for anticompetitive
parallelism.
The most important thing that these hearings can do, Mr.
Chairman, is to identify the marketplace concerns of the
traveling public, to sort out the competing claims about the
effect of Orbitz on air travel and other travel and
entertainment markets, to identify appropriate safeguards and
to take whatever additional steps through oversight or through
legislation are necessary to make sure that those safeguards
are in place and in effect.
I would emphasize what the DOT witnesses said earlier this
morning; that the safeguards need to be in effect before Orbitz
actually starts up so that we do not have the specter of the
government trying to change process of a business once that
business is already in place and proceeding to do what it
intends to do, whatever it intends to do.
Consumers need airline booking agencies, whether they be
bricks and mortar or whether they be on the Internet. Their
information should be based on a thorough search of relevant
data, presented in an unbiased manner, and be equitable with
respect to consumers who cannot access the Internet or use it
with facility as well as to those who can.
As this Committee well knows and as has been repeated this
morning, this is a joint venture by an industry that does not
have a history of price competition. If anything, the airline
industry sells tickets in the atmosphere they have created,
which can only be compared to a rug bazaar in which the seller
sizes up each individual purchaser, checks out to see if
they're wearing diamonds or plastic, and tries to sell them a
ticket that is price optimal based upon their own computer-
assisted calculation of what that individual passenger is
willing to bear.
Three passengers sitting abreast on the same flight to the
same destination may well have paid three wildly varying fares
for that same transportation.
So we are not talking here about an attempt to find the
best price for the consumer. We are talking about an industry
that has a history of trying to nail each consumer to the wall,
to get the highest price, the figure they can take that
consumer for.
This venture has been managed in its development by the
Boston Consulting Group, which as previous witnesses have
described, has published a book that describes the problem, and
how to solve the problem, of a ``consumer-oriented navigator,''
as Blown to Bits calls it. The navigator becomes consumer
rather than seller oriented and makes it necessary for the
individual sellers to compete. It does this by comparing their
prices and service quality for the consumer against those of
their competitors, and the solution suggested in that book is
simply to deny the information, to act in a parallel, conscious
manner, so that the navigators cannot operate to the consumer
advantage.
What happens, then, is that same firm, Boston, takes over
and helps this already anti-competitive industry to integrate
their ticket sales vertically forward and carry out that
prescription for avoiding competition that would result from
price comparison and service quality comparison.
This should raise red flags all over the country, and it
should result in the most thorough possible investigation by
the Justice Department and the Department of Transportation,
that those two departments can possibly mount. And it needs to
happen before Orbitz actually goes into business with this
business plan as a booking plan.
Orbitz, on the other hand, is clearly operating in the
realm of verbal assurances. It has told various forums that it
plans to reduce the airline's degree of investment in the
venture. That it is seeking other investors to replace airline
investment, that it has not described any plan for doing that,
is anything other than an attempt to make this collusive effort
sound as innocent as possible.
When I asked Orbitz' representatives whether they had any
plan to have public directors on the Board of Directors, for
instance, all they could say was that the plan didn't preclude
it, but certainly they couldn't tell me that the plan included
it. That would be a potential safeguard, not enough safeguard
by itself, of course, but one safeguard against the use of this
venture as a platform for collusion.
As to the thoroughness of the price search, Mr. Chairman,
Orbitz makes certain representations, but operators of existing
CRS systems dispute that this new technology is going to give
us anything more useful.
Ordinarily, the marketplace would sort that out, but when
there is collusion by the sellers in the venture that makes the
claim, then it seems to me that there has to be a very, very
thorough comparative test of those and the marketplace alone is
not going to do it.
``Equitable access in the digital divide.'' I would only
remind the Committee that according to the Federal
Communications Commission's most recent official figures, only
about a quarter of U.S. households have Internet access, and in
addition to that many consumers, as we've heard this morning,
are not sophisticated enough, even when they get on line and
use the existing on-line travel agencies, to find the cheapest
fares. What the DOT witnesses described this morning suggests
that we need a lot more than mere access in order to assure
that all consumers, even sophisticated consumers, can use the
systems efficiently.
So I would conclude, Mr. Chairman, by urging the Committee
to take a look at the things that need to be done. I cannot
imagine this going forward without some kind of a consent order
that is enforceable by the Justice Department. We need a plan
for reduction of airline ownership of Orbitz to a less than
controlling interest on an appropriate and strict timeline.
We need Orbitz' Board of Directors to include independent,
public directors who will be responsible to the public and
assure that it is not used and its business plan does not serve
as a mode of collusion.
We need periodic Justice Department review of Orbitz'
business plan and a requirement for periodic reports under a
Consent Order, revised Department of Transportation regulation
on all reservation systems, whether or not they're owned by
airlines, whether or not they're on the Internet to assure that
everybody is putting that information out, unbiased, on a level
playing field, and provisioned by the airlines of deeply
discounted tickets in all venues.
I thought that Mr. Mead's recommendation in that respect
was eloquent this morning, and we strongly endorse it.
I thank the Chairman for the time, and I will be happy to
answer any question.
The Chairman. Thank you.
Senator Bryan and Senator Cleland, the vote just started,
and because of this 11:30 imposed deadline, perhaps you would
like to go over and vote and then come back and I'll wait until
you get back and then go and vote if that's agreeable to you.
Mr. Katz, I think it would be only appropriate to allow you
to respond to any comments that have been made at whatever
length you choose to respond.
Mr. Katz. Thank you, Mr. Chairman.
I think the core of the issue that I continue to hear and,
of course, I'm very respectful of the concerns and am very
personally familiar with not only the history but what it means
to be an airline executive setting prices and doing yield
management, and a CRS executive trying to determine best search
algorithms and best technology.
Let me go back to the fundamentals.
Our airlines are investors in a very high-risk proposition.
They represent the Board of Directors, and I am building the
management team. I as head of the management team have the
obligation to run this business in the best interests for the
long-term of consumers. We do not require airlines to give any
fare or anything to us that they are not free to give to
others. If they choose to do so, and I presume that will have a
lot to do with the economic terms and conditions with which----
The Chairman. Could I interrupt you just for a second with
a question, Mr. Katz; and I don't intend this hearing to be
adversarial.
If the airlines have an investment in Orbitz, why wouldn't
they be inclined not to give that same information to the
competitors of the enterprise that they have an investment in?
Mr. Katz. The airlines want to see the business grow and be
successful. The airlines have a huge interest to see there be
more than 2 and, frankly more than 3, competitors in the next
20 years Internet environment. So they want to do what is best
to encourage competition and have more than two competitors.
The Chairman. And, yet, they've made a significant
investment in one.
Mr. Katz. They've made a significant investment in one,
because if you were to go out and have a meeting with Morgan
Stanley or Goldman Sachs today and say, I have this great new
technology, I have this wunderkind from MIT who's got a great
new fare engine, I'm going to go compete against Microsoft and
Sabre, they'd say, ``Nice idea, good-bye.'' Or ``find me other
investors who have $50 million, and then maybe I'll consider
it.''
And that's exactly what the airlines have done.
And then they further said, ``go find somebody who knows
this business a little bit and has a chance at least to compete
on a know-how business,'' and that's also what they've done.
The whole notion of fares I think we overplayed. Our whole
marketing competition and our whole customer promise is to
leverage the new technology. When you have the opportunity to
look at Orbitz in the marketplace, the main thing you will see
is more choice. You will see simply more airlines, more fares,
and those fares, and I'd say with over 99.5 percent
probability, those fares will be fares that are readily
available to everybody, but the nuances of the way the CRSs
work simply limit the ability of today's approach in CRS to
find them in the appropriate amount of response time.
The Chairman. Could I interrupt again?
Do you understand and appreciate--I hope you do--because of
our previous involvement with an airline-owned CRS, where the
Department of Transportation and the GAO were able to conclude
that there was bias in the system toward the owners; can you
appreciate the skepticism, then, that exists here?
Mr. Katz. Completely. Completely. With all due respect,
I've been there, done that.
We are contractually obligated to be unbiased, and we don't
have a product, we can do no more than say we will and
contractually do so and abide by the law. We have no
exclusivity on any fare by contract. We get no fare before it
is simultaneously available to the public. We get no fare that
has not come from a mechanism that is Department of Justice
consent decree compliant.
This is really about competition not collusion. I
understand the skepticism, but as Chairman of this Board, I can
tell you, not on my watch. We understand the law, we can comply
with the spirit and the letter.
The Chairman. Is there anything else you'd like to say?
Mr. Katz. I think I'd also like to say there's been a lot
of words transmitted, for example, on frequent flyer
redemption, and so on. These features are currently not
planned, certainly that I'm aware of it, or that our business
is working on.
We are working on investors. We certainly have plans to
have outside investors.
And, again, we welcome the competition the other
competitors can offer and, if they choose to compete, they
probably will receive the fares. But if the deck is stacked in
a way that we are not allowed to come into the markets in a
fair and open way, there will be no CRS price competition,
there will be no new technology, and there will be 2 duopolies.
And as this market gets big, a lot of the fears that have been
raised by Consumer Union or travel agents will certainly happen
more likely with 2 than with 3 or 4 or 5. If we don't get in,
nobody else is likely to come in.
The Chairman. Do all carriers have an opportunity to invest
in Orbitz on the same terms as American, Continental, Delta,
Northwestern, United?
Mr. Katz. All carriers have the opportunity to participate
on exactly the same terms. We're new, so we're just starting,
but we also have low fare carriers coming in--AirTran,
Vanguard, Spirit. We're working hard on America West and expect
to get their agreement to participate, and we're even working
hard on Southwest and hope to convince them that they, too, can
benefit from an opportunity like Orbitz with a lower cost
channel of distribution than otherwise available.
The Chairman. Is that participation the same as equity
ownership?
Mr. Katz. That participation is exactly the same as would
be offered whether they were investor or not.
The Chairman. You make concrete assurances that the
customers will never be presented with flight display bias.
Will the air carriers that are not equity stakeholders in
Orbitz have the same opportunity to inspect Orbitz' flight
display algorithm periodically to ensure there's no display
bias?
Mr. Katz. We would invite any seller through Orbitz to
evaluate our Safeway, search for any problems they might have.
In fact, I would say we go further than today's actual CRS
rules do, in terms of the whole area, not only bias but also
consumer privacy.
The Chairman. Mr. Jones, have you made the same offer on
the same financial terms that Orbitz has made to the airlines
in order to sell their e-fares through Orbitz?
Mr. Jones. No, don't believe we have made the same offer.
As was discussed earlier, we're looking for a general group
of fares to be offered here, not just e-fares but all fares,
because we don't know what this group of sellers as they get
together will do.
So I was pleased to hear the DOT suggest that they extend
their regulation to cover all fares. They suggested an economic
alternative as well that we hadn't heard before, which we'd
like to learn more about to see if that's appropriate, although
the fees that they mentioned were negotiated between a company
that the airlines own so we're not sure that was an open
negotiation, because they owned the company they negotiated
with, but I'm pleased to understand what those are and see if
that's an appropriate solution.
Mr. Katz. Mr. Chairman.
The Chairman. Go ahead, Mr. Katz.
Mr. Katz. I might add that we have negotiated this
agreement with quite a number of carriers, nearly 30, and only
5 of them at present are owners, so I think given that we have
already accumulated 30, I can say it's been a fair and open
negotiation. We have quite quickly accumulated a portfolio of
carriers who seem to have an interest in the business model.
Mr. Jones. Again, isn't the question--pardon me, sir----
The Chairman. Go ahead.
Mr. Jones.--isn't the question really about fair and open
access to information? The fees are an issue that have been
discussed here. It's quite interesting, too, that the owners of
Orbitz own a CRS, and they could be reducing fees there as well
should they choose. They haven't chosen to do so. So I think
the fees are one issue, but access to information seems to be a
very different issue. As you said, you've been down this path
before, but fair and open access to information is quite
important across the spectrum that we're talking about.
Mr. Katz. Mr. Chairman, there are--fair and access
information is a nice ideal. This is really about competition.
It's about letting a new player come into the marketplace, a
lower-cost new player.
It is, to some degree, analogous to Southwest. They brought
into the U.S. airline marketplace low cost competition, and
growth ensued and low fares ensued. With lower costs, we can,
in fact, support lower fees, and therefore we ask our
associates to give us the opportunity to promote with our lower
cost the lower fares into the marketplace.
It is about competition, and there are many thousands of
fares which even Orbitz will not have--group fares, government
fares, corporate fares, Association of American Retired People
fares, left-handed tennis player fares. These fares are not
available except to certain travel agents, cheaptickets.com,
specialty providers of that kind. Orbitz won't have these and
these represent a massive portion of what is sold and travelled
today. So it's about competition, it's about letting the low-
cost provider get into the market and compete.
The Chairman. Mr. Katz, I mentioned in my opening statement
that one of the major aspect and reduction in cost to air
travel is the so-called ``low fare airlines,'' specifically
Southwest but Air Transit and others.
So we sort of look at--anecdotally, I was told that when
Southwest announced that they were going to Raleigh-Durham,
that fares dropped by some 25 percent before their first flight
took place, and we were seeing other hubs where they're allowed
in that was reduction in fares as a result in competition, a
principle I think most of us believe in.
But, yet, the low fare carriers are in opposition to your
enterprise.
(1) Why do you suppose that is; and (2) Is there a way that
you can think of bringing them around to supporting your
effort?
Mr. Katz. Mr. Chairman, a super question.
First of all, Southwest is a great airline. Having worked
abroad, I can tell you they are the world model for consumerism
and for low cost competition.
We do have low fare carriers flocking to Orbitz already. We
have Vanguard, we have Spirit, we have AirTran, and, as I
mentioned, we are working diligently on Southwest. What makes
Southwest a great carrier is low cost, and part of the way they
get their low cost is they do not participate in any CRS system
and do not pay any booking fees except to Sabre, who has
created a very unique, very interesting product, which allows
them to charge Southwest a low fee, and they're the only one
for whom this product seems to fit in the world.
Therefore, what Orbitz brings by lowering CRS booking fees
to any participant is another form of cost competitiveness
against Southwest of these other low fare carriers, and I could
imagine Southwest would like to hang on to this cost advantage
which they now have and have alone.
A second important fact to realize is that Orbitz has a
great search fare engine. You can get on the web and see what
it does even today. www.itasoftware.com.
The Chairman. We won't charge you for that commercial.
[Laughter.]
Mr. Katz. But what happens when this low fare search engine
is put to work is that, more often than today, what will be
displayed through Orbitz will be low fares by other airlines,
not just Southwest, and these low fares will now be as visible
as Southwest low fares might have been visible, and that
perhaps is another cause for concern they have about their
competitive advantage.
A great carrier. We would love to have them in, and I think
and hope we can find a way to make them a deal where they
continue to have low cost and are satisfied with what we help
them bring to their customers.
The Chairman. Thank you. Time requires me to go in order to
make the vote. If you would just relax for a few minutes, I
think Senator Bryan and Senator Cleland will be back with their
questions, and then I'll return.
Thank you very much.
[Recess.]
Senator Bryan. (Presiding.) Thanks very much. Let me now
defer to Senator Cleland for any questions that he may have to
ask.
We are going to be rejoined by the Chairman momentarily.
As you will recall, because an objection has been lodged,
we will have to adjourn this hearing at 11:30.
Senator Cleland.
Senator Cleland. Thank you very much, Mr. Chairman. Thank
you for avoiding a disaster.
Let me just say, I've been thinking, trying to connect the
dots, that an information society in which we find ourselves a
part, and 70 percent of the jobs have to do with exchange of
information, and that exchange of information has been
dramatically accelerated by technology, sometimes referred to
as the Internet, sometimes referred to as the web.
It does seem to me that in order to make the information
society work, especially for consumers, that consumers be given
additional information, or great information, or information
more accurately, more instantaneously. And then with that
information, they have the opportunity to compare quality,
compare backgrounds, compare brands, compare prices, and this
is a fundamental rule in the information society, in the world
of the Internet, in the world that we live in.
Now, if you apply this to what we're talking about here,
and that is airlines and fares or access to information about
fares or the making of reservations, it does seem a little
unusual that the Boston Consulting Group, which helped found
the Orbitz group we're talking about here, mentions in the book
Blown to Bits that the economics of information requires
imperfect markets.
And that's the originators of information have some ability
to limit the access of others to it through copyrights or
patents or simple secrecy, they'll never earn the return to
justify the original investment. If there is no limit on the
ability of others to copy it, owning information is worthless.
Another quote from the book, suppliers and retailers are
the source of the information on product features, price and
availability that the new navigators need, ``new navigators,''
I presume being consumers. Some simply refuse to make that
information available. That's a little disturbing.
My comment, Mr. Katz, to you is, I know you've mentioned
that you feel that Orbitz is making information available that
is comprehensive and unbiased, but the challenge is that it is
a ``Platform for collusion.'' Which is it?
Mr. Katz. Well, I think this is really simply in the end a
question of competition not collusion. I understand the
viewpoint, I understand the concerns. We talked about it a bit
earlier when the Chairman was here.
All I can say is that we are doing what one can do to make
sure that this is not a collusive endeavor, and I'll say it
very specifically: we're contractually obligated to be
unbiased. We have no exclusivity on any fare. We are the low-
cost channel, therefore, it is more interesting for any airline
to provide us with those e-fares rather than some other
channels.
We get no fare before it's simultaneously available to the
public. All fares we receive are compliant with the Department
of Justice consent decree mechanism. And, as Chairman of the
Board, I can only commit that we understand the law, and we
commit to follow the law, and we ask for a chance to compete in
a very, very tough market with competitors that have 70 percent
market share already.
Senator Cleland. Do you feel that there is any need for any
additional regulations or additional laws?
Mr. Katz. Well, my personal view and my personal experience
has always been that the consumer coming to a site, booking or
not booking, is always the harshest form of regulation in
governance.
I think if we are allowed to come to market, show what we
can do, the marketplace channels will work. We will be very,
very lucky to achieve number three position in this
marketplace. We don't have access to AOL to MSN, et cetera,
those are locked up. It's a very challenging road. And what we
simply do is say we'll be unbiased, we have the new technology,
we are low cost, much as Southwest has done for the low-cost
environment.
Let us benefit where we can from the low costs, but the
other competitors are free to make any offer and do any deal
they want with airlines. I suspect they will do so. I suspect
that will happen.
Senator Cleland. Thank you very much.
Mr. Silbergeld, is Orbitz comprehensive and unbiased, or is
it a platform for collusion?
Mr. Silbergeld. It is a potential platform for collusion,
it is a joint venture by an industry that has not only been
noncompetitive, but has engaged in enormous number of practices
through the use of market power to prevent consumers from
gaming the purchase transaction the same way the airlines
individually game it.
They now are colluding to set up a system whereby they have
a joint business plan.
I would have been very happy to hear Mr. Katz say that they
could live with the Inspector General's recommendations this
morning about the universal availability of those deeply
discounted fares. I have not heard that said yet.
Senator Cleland. Mr. Ruden, do we have a comprehensive and
unbiased system in Orbitz or is it a platform for collusion?
Mr. Ruden. Well, Senator, as we've indicated, we think that
it's collusive by its nature and experience here should teach
us not to allow a repetition of things that have gone on in the
past. I was interested in listening to Mr. Silbergeld and to
Mr. Mead struggling to come up with a list of palliatives and
Band-aids and restraints and controls and regulations and
alterations to the business plan that might overcome some of
the problems that these folks, who speak for the public with no
commercial interest in this matter, think are necessary.
It sounds almost like we're talking about a national
epidemic, with the resources to be devoted to trying to contain
something like this, when the simpler solution is to simply
make the airlines compete one-by-one the way the Airline
Deregulation Act and other national transportation policy
contemplates.
There is no reason that we have heard yet, other than
``Wall Street made us do it,'' that one of these giant airlines
could not have, on its own initiative, taken the software, and
I'll accept for present purposes that it's everything they say
it is, for sake of argument, take that software and use it
against their competition and then force the competition to
find better software.
That's the way the market will work, and that's the way in
the end consumers benefit from the dispersal of information, as
you have correctly indicated, as the cornerstone of an open
marketplace.
Senator Cleland. Mr. Jones, do we have an open marketplace
here?
Mr. Jones. I don't think we do, Senator Cleland. Clearly,
the current laws just don't cover this, as we have a group of
producers coming together, and that's why we support extending
the regulations to give this fair and open access.
Because you can have an unbiased system, you can have a
great search engine, but if there aren't any fares in it, it
really doesn't do much for the consumer. So having more people
have those fares will cause competition.
We have airlines that come to us with fare specials but
nothing is long-term because they go and give them to somebody
else to move things around, to create competition. It's like a
sale in a grocery store. It happens in one store and then it
happens in another. Supplier interaction with sites like ours
is useful because that competition is good. If that all goes to
one place and a group of owners say this is the only place that
will happen, we are quite concerned about that.
So, again, I think it's appropriate to consider the
solution posed by the DOT this morning to extend the rules to
cover this kind of behavior, because it's not just about e-
fares. It may be about e-fares today; what fares is it going to
be about tomorrow or a year from now? As the Internet and fares
themselves dynamically change, we don't know where this might
go.
I think many of the comments have been made saying, this
needs to be done now and quickly before something happens so
that we have taken care of this issue, because we have seen
this problem in the past, and we know what the solution should
be.
Senator Cleland. And some of the rules that you suggest be
transferred to the new technology have to do with experience of
the CRSs in the past?
Mr. Jones. Yes, they do. It's my belief, and I was there
when the rules were imposed, the rules were put into place for
displays in travel agencies, but they weren't really to protect
travel agents, they were to protect consumers in the end to get
that in fairly to the consumer. Well, now the consumer
themselves, of course, are manipulating these systems, and yet
there's no rule to protect them to say that things should be
unbiased or that fares should be distributed equally when
owners are there involved in owning a system.
So I think we have consumer protection at heart here, and
if we apply these rules to the display of fares to consumers,
then I think we have a fair and equitable solution.
Senator Cleland. Thank you very much, Mr. Chairman.
The Chairman. Senator Cleland.
Let me follow-up on that, Mr. Jones.
You're saying that if you could write out a wish list of
things for us to do in the Congress it would be to extend the
regulations currently that apply to the CRS system that do not
apply to this Internet system. Do you believe that that would
be sufficient to level the playing field?
If I misunderstood your comment, I don't want to
characterize it improperly.
Mr. Jones. No, I think that is correct. The rules, as
they're written today, have several categories, and one of them
deals with how things are displayed, to be displayed in an
unbiased fashion, which means there's no undisclosed
manipulation in flights to the consumer.
The consumer says, order them by time, they're ordered by
time. The consumer says order them by price, they're ordered by
price. It's not undisclosed manipulation.
In addition those rules say that if there are a group of
airlines that own one of these sites, a producer, in this case
today a CRS, in the new world would be a travel agent or a CRS
producer, and they give specific information or fares or flight
availability to one that they own, they must give it to all.
They don't have to give it out, they can just keep it for
themselves on the airline site. But if they do give it to
anyone else, then it must be generally available, and we
believe that's quite important.
The Chairman. Mr. Katz, what's wrong with that? That sounds
reasonable to me. What's wrong with that?
Mr. Katz. If I may.
The Chairman. Sure.
Mr. Katz. The CRS rules today, as Mr. Mead pointed out, are
a very complicated patchwork of rules that were created in the
middle 1980's to deal with competition issues of airlines and
CRSs in the middle 1980's. There are fewer airlines and there
was no Internet, and the rules are so strange today that they
don't even apply to the biggest CRS in the world, Sabre. So I
think it's a complicated issue.
One, I believe, should try to think through or I hope
people try to understand that first what Orbitz does to be
unbiased and comprehensive, it uses a completely different
methodology developed at MIT by a bunch of smart guys. It uses
new technologies before it can even find all the fares,
flights, and airlines which the CRSs don't do today.
So principal number one is: We are really doing something
new and risky.
And principal number two, the airlines can do what they
like; principal number two is if a competitor says, OK, I'll
give you a CRS rebate, too, once you book on Internet site XYZ,
then a CRS has the privilege and the opportunity, which an
Orbitz will never have, of raising a booking fee through the
travel agency channel or through other means, and that
offsetting mechanism is something we'll never be able to do.
We are the low-cost channel. That's the way we do it. We
start from scratch, much as Southwest started from scratch.
Because we're the low cost channel, it is more interesting
for airlines to sell through us, and I would ask that you let
us provide that information and the statements of collusion are
simply statements of concern.
There are mechanisms to control us should there ever be any
hint that that's happening, and I don't want to work at a
business where it's happening because the consequences are
personally too painful.
The Chairman. Mr. Katz, there is a history, I think, that
gives some of us some skepticism and some concern.
Acknowledging for the sake of argument that yours might be a
new technology, I still don't understand why the underlying
principals, admittedly the language would have to be changed to
reflect the new technology as you've characterized it, but
those same underlying principals, it seems to me, would be
available.
I gather you're telling us from your perspective you don't
want any regulations to be adopted to apply to this system?
Mr. Katz. Well, as a consumerist, of course, I said earlier
I think the consumers are tougher regulators than government,
and I understand the concerns and the skepticism.
The Chairman. We've come a long way from caveat emptor. I
mean, the consumers over the years have asked governmental
agencies at the state level and at the federal level to kind of
intervene to balance the playing field in a whole realm of
services and goods that are sold in the marketplace, so there's
some history.
Let me ask specifically a couple of questions. We're going
to have to adjourn this because of the objection in 2 minutes.
How do you propose dealing with the carrier that's not a
member or participant of your system? I mentioned in the
earlier colloquy with Mr. Mead, that Southwest, as I
understand, how do you display their fares? How are they to be
treated in this system?
Mr. Katz. Any carrier that's not what we call an associate
member of Orbitz, we will display all their fares that are
publicly available, all their flights that are publicly
available in an unbiased manner. You will be able to book them
as you would any other carrier.
Southwest is a rather unique situation. They only
participate in one CRS, Sabre, and therefore they're only
bookable through Travelocity or Sabre Travel Agent. Any other
travel agent, any other website can display their fares, as we
will. Then you must call Southwest directly and book the
flight.
The Chairman. But those carriers that participate, or to
use your language, are associates. What agreements or
conditions are imposed upon them as a condition of their
association?
Mr. Katz. We ask that they provide us with all their fares,
as they do every other on-line travel site, including Internet
fares. And we say further that any fare they provide to others
they must also provide to us.
The Chairman. Are there any exclusivity provisions with
respect to their relationship with you that are part of these
agreements?
Mr. Katz. There's absolutely no exclusivity. They have the
right to provide whatever they want to whoever else they want.
The Chairman. And I would take it that there's probably
some type of contractual arrangement that they enter into, a
contract as a condition? Are those contracts available? Can we
take a look at those?
Mr. Katz. Those contracts are certainly floating around in
the public, and if we can make--I'm sure we can do the
arrangement; this is an agreement that we've made in private
with another party. If we can make an arrangement where we
could ensure that they would be kept in confidence, we'd be
happy to do so.
The Chairman. I can't speak for the Chairman. I'd like to
see if that could be pursued because I'd like to see a copy of
that contract, and we'll talk with you and our staff later to
see how that might be effected.
Unfortunately, our time is expired. Gentlemen, let me thank
you for your perception and involvement. I apologize for the
truncated nature of today's proceedings. But we had a vote and
now an objection.
This hearing will stand adjourned.
[Whereupon, at 11:30 a.m., the hearing adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. Max Cleland
to Hon. Kenneth M. Mead
Question 1. How would you respond to the charge that the U.S. airline
industry has begun to operate as a single enterprise, of which the
joint web-site is just the most recent manifestation?
Answer. We believe that, overall, the airline industry continues to
operate competitively, although there are problems with high airfares
in some markets. Nonetheless, past behaviors by the airlines have
justified a healthy dose of skepticism regarding the airlines' plans to
operate a joint website and it is appropriate that the Government and
others scrutinize development and operation of this venture. Our
assessment, at this time, is that there is nothing unique to the
structure of Orbitz that would encourage or facilitate collusion on
pricing or other anti-competitive behaviors. The airlines will have no
greater access to each others' fares than they currently have through
browsing their competitors' websites and purchasing CRS data. Although
Orbitz will gather much of this information in one place, it will not
offer a substantially greater platform upon which the airlines can
communicate on forward pricing.
We have proposed that interim measures be established to ensure
that the airlines make their lowest fares available to any other online
travel agency that is willing to offer the same financial conditions in
return. This would ensure that the airlines' choices for where they
distribute their lowest fares are based on solid financial reasoning
and not as a means of harming or eliminating their competitors.
Question 2. Mr. Mead, both as the IG, and before that in your GAO days,
you did a lot of work on the computer reservation system (CRS) issue.
My recollection is that not only the GAO and the DOT, but also the
Department of Justice and the Civil Aeronautics Board, when it still
existed, raised concerns about the CRS's and their anti-competitive
practices, including excessive booking fees, the extremely high
profitability of CRS's, the highly restrictive contracts CRS's imposed
on travel agents, and bias in CRS displays. Rules were put in place in
1985, but 3 years later, DOT put out a study showing that the rules had
had relatively little effect in limiting the anti-competitive practices
of the CRS's. Can you please give us your view of the anti-competitive
practices and effects of the CRS's?
Answer. The regulations established in the 1980's and subsequent
amendments have gone a long way to solving the original display bias
problems in airline-owned CRSs. The blatant biasing of displays by the
owner-airlines to favor their own services is gone, although some
allege that architectural bias still exists in the form of searching
and displaying services on the basis of certain criteria, such as
airplane size, that would tend to favor large airlines over smaller
ones. The OIG has not independently verified whether or to what extent
such bias exists, and whether it would actually be in violation of
existing regulations.
Although the OIG's work to date has focused on the airlines'
practices related to ticket distribution, a number of CRS issues have
emerged through this work that are of concern.
First, CRS fees continue to rise unchecked. Limited competition
between only four CRSs has allowed significant and sustained booking
fee cost increases. For example, between 1990 and 2000, fees for direct
access on one large CRS have increased from $2.10 to $3.54 per segment
booked, a growth of almost 70 percent. While CRSs maintain that the
increases reflect improvements to the systems, critics allege that the
fee growth has far outpaced cost savings achieved during this time from
improvements in technology. If CRS fees continue to escalate unchecked,
airlines will need to raise fares to accommodate the increases or
accept reduced profits. It is our opinion that a more competitive CRS
environment could help check the rate of further growth.
Second, access to competitor pricing, sales, and inventory
information could result in an unfair competitive advantage for large
carriers. Under the structure of the current system, all carriers have
a legal right to obtain the marketing, booking, and sales data of their
competitors for all sales made through a CRS. This rule was developed
to address concerns that only airline owners of CRSs would have access
to data on their competitors which they could use to an unfair
advantage. The decision was made to make these data equally available
to all carriers. These data are currently available for between 75 and
80 percent of all sales. Information on the remaining 20 to 25 percent
of tickets, which are sold directly by the airlines through their phone
reservation systems or websites, is not available to sources outside
the respective airlines.
For tickets sold through travel agents that are processed through a
CRS, airlines can obtain and then use this information to develop
competitive pricing, scheduling, and sales strategies to try to attract
some of their competitors' market share. While small airlines
theoretically have the same ability to use these strategies against
their larger competitors, they believe the larger airlines gain a
stronger competitive advantage because of their ability to direct
significantly greater resources to analyzing the data and developing
competitive strategies.
In addition, in earlier work, we identified the potential for
override agreements between travel agents and airlines to influence the
neutrality of information provided by the agent to the consumer. These
override agreements are based on an agent's ability to move market
share to a particular carrier. Without information on the total market,
a carrier can measure growth in an agent's total sales, but it cannot
measure the growth relative to the market. If transaction data were no
longer made available except with respect to a carrier's own
transactions, override agreements would be virtually unenforceable.
Third, a significant problem with the CRS regulations is that
changes in the industry and ticket distribution environment have
rendered them increasingly obsolete. The regulations apply only to
airline-owned CRSs, which are rapidly going by the wayside. Also, the
non-bias requirements apply only to integrated CRS displays. The
regulations do not apply to what an agent actually presents to
consumers or how an online agency displays data on its website. As
technology evolves closer to the point where CRSs may no longer be the
primary vehicle through which information about airline services is
communicated, decisions need to be made over whether these regulations
are even necessary; if they are, what modifications need to be made to
make them relevant to the current state of the industry; and/or whether
new regulations need to be developed to foster competition and protect
consumers.
Question 3. Is it fair to say that for the past 20 years, competitive
entry into the CRS industry has been extremely difficult, if not
impossible?
Answer. While the first attempts to create CRSs were made in the
1960's, the CRS industry did not become established until the mid
1970's. Since that time, only a small handful of CRSs (four today) have
emerged and maintained sufficient market share to remain viable.
Competitive entry into the CRS industry has been extremely difficult
for several reasons.
Start-up costs. In the 1970's, the development of a CRS was
an enormously expensive proposition at a time when the costs of
computer hardware and software were far greater than they are
now. When American developed SABRE, it devoted thousands of
labor-hours to extensive programming efforts, building an
expensive data network to handle the tremendous--and growing--
volumes of computer traffic that developed, and creating a
SABRE marketing organization of several hundred people.
American did not earn a profit on SABRE until 1984, 9 years
after SABRE had begun operation. Still, today, starting a CRS
would involve large up front capital costs to develop the
system and large marketing expenses to establish a customer
base among travel agents.
Uncertain future. As technology changes and the Internet
gains acceptance in business and home use, CRSs are facing the
need to develop ways to reach beyond the dedicated CRS terminal
in a travel agency and meet the needs of a diverse group of
users including individual consumers and corporate travel
managers. In order for the information provided through the CRS
to be available to everyone in a user-friendly format, many
issues, such as distribution security and widely diverse
hardware and computing capabilities, must be resolved. Even the
most experienced industry players do not know exactly which
technology, distribution medium, and channels are ultimately
going to survive and be the preferred choice of end customers.
The existing systems continue to make the investments necessary
to meet these challenges because newcomers to the industry are
faced with the prospect of large investments in technology and
development that bear a significant risk of not paying off.
Travel agent contracts. The key to CRS profitability is the
CRS-travel agency relationship. Competition to convert agencies
from one system to another continues to be intense. Throughout
the years, travel agents have selected their CRSs on the basis
of technical factors and prices, but also as a function of the
agent's relationship with the airlines. Agents have tended to
choose the CRS of the carrier with the most airline capacity in
its particular city, and in some cases it has been alleged,
were ``forced'' to do so by the vendor-airlines. An agent
choosing an alternative CRS might find itself excluded from
special fares made available to his competitors.
In 1992, DOT adopted new rules, which among other things,
required vendors to offer agents the option of a 3-year
contract term in addition to the previous 5-year standard.
Vendors now offer this option, although most agents choose the
5-year contracts because of lower monthly rates. A new CRS
entering the scene would not only have to break down the
established relationships between airlines and agents, but also
the contractual relationships between agents and their CRSs.
Question 4. Is it fair to say that Orbitz, in particular, and the new
technologies it represents, in general, are a form of new competition
for these CRS's, or perhaps indirectly for the CRS's and directly for
the major Internet sites that are based on the CRS's?
Answer. As currently structured, Orbitz is not competing with CRSs
as much as it is competing with other travel agencies. By passing on a
portion of the volume booking incentive that Orbitz has negotiated with
Worldspan, Orbitz is making itself a less costly distribution outlet
than other online or brick and mortar travel agencies. In offering this
lower cost outlet, Orbitz is hoping to entice airlines to offer lower
fares on Orbitz than they would choose to offer through other more
costly avenues. Orbitz will then use these lower fares as a marketing
tool to lure consumers to its website. Orbitz competitors that want
these same low fares will be pressured to offer airlines the same kind
of financial incentive to make these fares available.
As currently envisioned, however, Orbitz could eventually pose
strong competition for the CRSs. In the near term, Orbitz will be
dependent upon Worldspan to process the ``back-end'' or booking
functions for its transactions. In the not-to-distant future, however,
Orbitz is hoping to establish direct connections with the airlines'
internal reservation systems. When accomplished, Orbitz would no longer
require a CRS for most, if not all, of the booking transactions and in
fact would be functioning essentially as a CRS. To the extent airlines
could steer passengers' air travel purchases to Orbitz or their own
websites, where no booking fees would be incurred, the airlines could
stand to save hundreds of millions of dollars each year. The CRSs would
need to respond with competitive price actions, or their bookings and
revenues will begin to wane.
Question 5. Do you believe that the Department's CRS regulations should
apply to Internet sales?
Answer. As part of our Congressionally-requested work related to
airline ticket distribution and access to low airfares, we are
continuing to review issues related to the adequacy of existing CRS
regulations and other CRS-related issues. We have not yet formed an
opinion on these issues.
Nevertheless, there is little question that the current CRS
regulations, as drafted in the early 1980's and amended in the early
1990's have been eclipsed by marketplace changes and technological
innovation. When the rules were written, few consumers even knew what
the Internet was. By 2003, according to Jupiter Communications, 63
percent of all consumers will have access to the Internet from their
own homes. The Internet presents new opportunities and challenges to
airline ticket distribution, and raises concerns that did not exist 20,
or even 10 years ago.
The regulations were originally drafted, in part, to prevent
airline-owners (vendor airlines) from biasing the data in their systems
to favor their own services over other airlines (non-vendor airlines).
Now that airlines are divesting or diluting ownership in the CRSs, it
is unclear whether the independent CRSs are still required to comply
with the non-bias requirements. While airlines cannot introduce bias
into their own CRSs to favor their own services, there are no
prohibitions against an airline purchasing bias in an independently
owned CRS. This underscores the need to reevaluate the relevance and
scope of the existing regulations without further delay.
Orbitz, as well as Travelocity, Expedia, and hundreds of other
travel web-sites, operate as online travel agencies. They receive data
from their CRSs which they present electronically to their customers.
Just as brick and mortar travel agents are not legally bound to present
unbiased information to their customers, online agents have no legal
responsibility to present travel options in an unbiased manner. It
would be difficult to argue the merits of regulating information passed
along electronically and not applying the same standards to brick and
mortar agencies. In fact, many online agencies are simply an electronic
storefront for well-established brick and mortar agencies; and it would
seem contradictory to regulate one and not the other.
The Department is in the process of reviewing extensive comments
received in response to its Supplemental Notice of Proposed Rulemaking
issued on the CRS rules. We will also be reviewing these comments and
discussing them with stakeholders in order to form an opinion on what,
if any, regulations should apply to the sale of airline tickets over
the Internet.
Question 6. There have been claims that the practice of biasing the
display of information viewed by travel agents is still practiced by
the computer reservation system vendors. In your opinion, does this
practice still continue today? If so, to what extent?
Answer. Allegations of architectural bias persist today, but to our
knowledge, there is no comprehensive assessment of the problem's
extent. It is also not clear whether the existence of such bias would
be a violation of existing regulations. Current CRS regulations do not
require a specific algorithm to be applied, but require that whatever
algorithm is used must be used consistently and not be based on carrier
identity. The criteria selected and the weight given to the selected
criteria may favor some airlines over others, but as long as they are
objective criteria--such as aircraft size or elapsed time--it would
appear to be a legitimate and legal application.
We note that in the early 1990's, non-vendor airlines (those
airlines that did not own CRSs) claimed that hidden bias still remained
in the CRSs. Their claim was that by allowing the vendor airlines to
choose the display algorithms, they could prioritize criteria that
would favor their own services. Although some parties believed that the
Government should prescribe the order in which flights are displayed to
travel agents, the Department rejected this idea, believing that the
marketplace was the best judge of the most efficient schedule displays.
Although the CRS regulations prohibit CRS vendors from
intentionally biasing the integrated displays seen by travel agents,
the regulations do not extend to the practices of travel agents or
independent software vendors that provide electronic interfaces for the
data supplied by the CRSs. Travel agents that have commission override
agreements with air carriers might welcome a software program that
structures the data display to highlight and give preference to the
offerings by carriers covered by the override agreements. Such displays
would make it simpler for agents to promote those services that will
help them satisfy the booking volume requirements of their override
agreements.
______
Response to Written Questions Submitted by Hon. Max Cleland
to Paul M. Ruden
Question 1. ASTA has requested the Department of Justice to investigate
Orbitz for possible violation of our anti-trust laws. Why do you
believe the driving force behind Orbitz is to squash competition rather
than to reduce distribution costs, as the airlines maintain?
Answer. First, the issues raised by Orbitz should not be viewed as
a simple choice between two views of the airlines' intent. The question
is whether the collaboration among competitors is likely to have
anticompetitive consequences compared to the outcome when the airlines
are required to act independently as true competitors. The least anti-
competitive outcome should always be preferred, regardless of the
airlines' ``intent.'' Orbitz contains elements that plainly restrain
competitive behavior (most favored distributor clause, payoff of in-
kind promotion with exclusive access to lowest fares, natural
propensity to favor their own joint investment over independent
parties). No reason has yet been advanced why an individual airline, or
multiple airlines acting separately, could not have undertaken what
Orbitz proposes.
Second, history keeps a dear school. When allowed to collaborate,
the airlines have consistently shown a marked tendency to harm their
competition. They do it through the Airlines Reporting Corporation.
They demonstrated it in their collective plan to settle the class
action price-fixing case against them in Atlanta in the early 1990's by
including a provision that would have eliminated travel agents from
redeeming $450 million in coupons issued to consumers under the
settlement). They did it through the computer reservations systems when
they biased displays to damage competitors. They did it when they
negotiated collectively to establish the so-called Voluntary Customer
Service Commitment last year (creating benefits available only through
their direct-call reservations systems). Given their history, we see no
reason to trust them in the Orbitz collaboration.
Question 2. How are traditional travel agents doing in the competition
with on-line agents? Do you believe there is a continuing role for the
traditional travel agent in the Internet age and that travelers will
continue to seek out traditional travel agents for added services that
a website like Orbitz, Priceline, Travelocity or Expedia cannot or does
not offer?
Answer. For this question we take ``traditional travel agent'' to
refer to a purely brick-and-mortar agency location, configured to
permit physical visits by clients but otherwise equipped with computer
reservations systems and access to the Internet.
The answer is that the traditional travel agents are, and will
continue, to function as long as they have equal access to products and
services, including prices, available in the broader marketplace so
that they can respond to consumer demand with their own particular form
of market presence. Right now, demand for air travel is strong. Most of
the growth in air sales appears under our analysis to be going to the
on-line distribution channel and more traditional agencies are either
abandoning air sales altogether or are reducing the economic importance
of such sales to the agency's financial outcome. In short, agencies are
adapting to changing circumstances. Many have set up their own Web
sites and many more will soon do so. The traveling public continues to
seek out traditional agencies for a broad range of travel services.
As long as these agencies are permitted to adapt (i.e., the
airlines are prevented from jointly creating barriers and obstacles to
such adaptation), the traveling public, leisure and corporate, will
continue to enjoy access to the full line, full service channel option
that is still, and will remain, preferred by many millions of them. The
problem presented by Orbitz is that it represents a collective attempt,
among several others, to cut off agency adaptation to the technology-
based marketplace that is evolving.
Question 3. As I recall, your organization advocated for stronger
provisions in the CRS rules to protect travel agents from abusive and
restrictive contracts by CRS's. DOT adopted some of the protections you
advocated, but not others. So the DOT rules, while they provide some
protections to travel agents from abusive CRS contracts, do not provide
as much as you originally advocated. Is that correct?
Answer. Yes, it is correct. And, as a result, travel agents have
continued to suffer economically at the hands of the CRS's and their
airline owners. By way of example, because of the airlines' reduction
in commissions starting in 1995, many travel agencies have been forced
to reduce the share of their business represented by air travel sales.
This is a smart and widely recommended technique for adapting to the
changed marketplace. However, many agencies are parties to one-sided
CRS contracts that impose penalties on them if the volume of air
tickets processed falls below specified thresholds. In many cases these
thresholds were non-negotiable and thus the agency's adaptive strategy
runs into another economic punishment from the largely airline-owned
CRS's. (We understand that one CRS no longer has a majority interest in
airline hands, but during the relevant period, airline dominance of CRS
ownership has been complete.)
Question 4. Is it your position that the largest CRS should not be
required to abide by the CRS rules, including the rules protecting
agents from abusive contracts? In other words, should it be allowed for
CRS's, if they do not happen to be owned by airlines, to force agents
to sign 100 year contracts, or insist on exclusive use of their CRS,
two of the practices prohibited by existing CRS rules? Would you
support making the CRS rules apply to all CRS's, regardless of who
happened to own them, if they had travel agents under contract?
Answer. We believe that all of the four major CRS's continue to be
bound by the DOT's CRS rules because the rules cover all carriers that
``own, control, operate, or market computerized reservations systems
for travel agents.'' The CRS regulations in turn require covered
airlines to ``ensure'' that CRS operations comply with the rules. We
are not aware of any airline owner or marketer of a CRS claiming that
it is unable to comply with that mandate. For the present, therefore,
no CRS may engage in the conduct outlined in the question.
Were a CRS to both cease to be owned and marketed by an airline and
thus emerge from this regulatory regime, the issue would then arise as
to whether that CRS was free to exercise its market power over travel
agents and, ultimately over consumers, without restraint. The
regulatory jurisdiction of the Department of Transportation under
current law would cease in that case. ASTA's probable position would
then be that Section 5 of the Federal Trade Commission Act would apply
to the operations of that CRS and that attempts to exercise market
power as outlined in the question would violate that section. This view
is based in part upon the fact that Section 411 of the Federal Aviation
Act, which is the statutory basis for DOT's CRS regulations, was
intended to be, and has always been interpreted as, the analog of
Section 5 of the FTC Act. Conduct that was judged to violate Section
411, and thus was prohibited by the CRS rules when DOT had jurisdiction
over the CRS due to its airline relationships, would, in the absence of
those relationships, violate Section 5. We would likely see the
adoption by the FTC of a Trade Regulation Rule emulating the CRS
regulations at that point.
A shorter answer, then, is that we would not willingly accept a
situation in which a CRS, not owned or marketed by an airline, was free
to impose its will without restraint on travel agencies.
Question 5. If the government prevents an airline from recovering its
cost to sell its tickets, is it possible the airline will simply quit
offering the lowest fares that cannot be sold economically through
every outlet?
Answer. Requiring airlines to make all fares available for sale
through every medium will not prevent airlines from recovering their
selling costs. Nor are pricing decisions made on the basis of actual
retail selling costs. There is no relationship between most Internet-
only fare levels and selling costs of any channel. When it was cheaper
to sell tickets through travel agents than it was by direct sales
through airline city ticket offices and reservation center calls,
airlines charged the same price for each channel. Prices are set to
move inventory of a perishable product now considered mainly to be a
commodity (constrained by the extent of competition in the market), and
to gain a competitive advantage and/or deter entry (constrained only by
whatever limits on airline market power may exist), and to maintain or
increase market share. The relationship of such prices to selling costs
is often indeterminable and incidental.
In any event, the issue raised by Orbitz is somewhat different.
Orbitz involves joint airline action that appears clearly calculated to
deprive competitors, both current and prospective, of access to the
lowest fares. Such joint determinations of channel selection and
content should not be allowed in any circumstances.
Question 6. Your testimony takes issue with the fact that the airlines'
``lowest fare'' guarantee extends only to its telephone reservation
agents.
Answer. What would be the value of extending that guarantee to
travel agents, given that perhaps the travel agents' most significant
role is to find their customers the lowest fares?
Most travel agents today will find the lowest fare for any client
to whom this factor is important. The problem is that the airlines are
withholding some fare inventory from agents. The public for whom the
absolute lowest fare is crucial, therefore, is denied the right to have
such fares ticketed through their favored distribution source. To the
extent that airlines are required to make such fares available for
ticketing through travel agents, the public will have the freedom to
select their distribution source without fear that they are
automatically excluded from certain discounts.
______
Response to Written Questions Submitted by Hon. Max Cleland
to Mark Silbergeld
Question 1. By providing the flying public with a one-stop website,
Orbitz has said that it is boosting competition, since everyone who
wants to buy an airline ticket will know what's out there. Do you, in
fact, believe that Orbitz will be a boon to the traveling public?
Answer. No, not as Orbitz is presently constituted. There are
several reasons for this conclusion. First, there are already several
independent Internet sites that provide one-stop shopping for airline
ticket searches and bookings. Consumers Union does not believe that
they do the job that needs to be done for travelers seeking best fare
information and bookings. But it is doubtful that a new competitor
owned by the major air carriers, as contrasted with rules to prohibit
certain unfair or deceptive practices, is the answer to this problem.
(Although, of course, new booking service market entrants that serve to
actually increase competition should be welcome.) Second, Orbitz seeks
to define the market in which it will be participating, and in which it
proposes to increase the competition, as travel booking services. But
the ultimate product for the consumer is air passenger carriage.
Booking services is a related but secondary market. Additional
competition would be welcome in that market, but not if it serves to
decrease competition in the primary market of air travel. Vertical
integration of the carriers into the secondary services market through
a joint venture may well serve to further restrict competition in the
already non-competitive primary market. Third, Orbitz premises its
claim on the proposition that it has a superior search engine which
provides consumers with far more information, hence better information,
regarding flight/price options. This may well be a false premise.
Consumers need viable option information that identifies the lowest
cost tickets available for the trip they plan within the travel
parameters they specify. More information, as contrasted with more
accurate information, does not necessarily identify more viable
options. Listings of thousands of connections between a city pair are
useless to most consumers. Few of the many options identified are
viable, because they involve multiple stops, changes of aircraft, and
lengthy travel times. Other computer reservations services may well be
able to identify the same viable options as can Orbitz. Fourth, more
accurate identification of viable options than is now available to
consumers undoubtedly will occur only if the Department of
Transportation revises its Computer Reservations Systems rules to cover
services in all venues and regardless of airline ownership. Orbitz has
not agreed that it should be covered by a modernized set of rules.
Additional competitors, as contrasted with more effective and unbiased
search result presentation, will not necessarily increase competition,
especially if a new entrant can serve to restrain competition in ticket
prices (see answers below).
Question 2. Do you share ASTA's concerns that Orbitz will ``inevitably
lead to price fixing''?
Answer. Yes, most certainly as the ownership of Orbitz is presently
constituted, and unless there is a Justice Department order addressing
the competition issues now under investigation. In fact, we are
concerned that the investor air carriers may already have created a
business plan that constitutes price fixing and other anticompetitive
practices, even before Orbitz commences ticket-booking services. The
sorry history of the major air carriers with respect to competition
does not suggest that either the purpose or the outcome of Orbitz will
be increased competition in airfares.
Question 3. I have heard concerns from some of the low fare airlines
that there are more disadvantages than advantages in participating in
Orbitz. How would you speculate things might change for the small
airlines that elect to participate in a system such as Orbitz? What do
you think would be the impact on their customers?
Answer. The primary concern is that the major carriers will find
ways to use Orbitz to carry out predatory pricing strategies to run
these smaller participants out of business, then raise prices and fail
to fill the service gaps that result. This obviously would disadvantage
current users of discount air carriers.
______
Response to Written Questions Submitted by Hon. Ernest F. Hollings
to Hon. Kenneth M. Mead
Question 1. More and more airlines are divesting their interests and
ownership in CRSs: AA has divested of Sabre, CO has sold its shares in
Amadeus, US has sold its interests in Galileo, and UA has sold its
interests in Galileo. Interestingly, however, each of these carriers
(with the exception of US) has invested a collective $100 million
(according to press reports) in a new distribution means--Orbitz--that
is in many ways a virtual CRS on the Internet. Is this a replay of the
early 1980's--and a concerted effort by the airlines to regain control
of distribution of information to consumers?
Answer. The better answer to the question is not that Orbitz is an
attempt to regain control of distribution, which the airlines never
really relinquished, but an attempt to regain control of distribution
costs.
While the degree of confusion and debate over Orbitz may make it
seem like the 1980's all over again, the issues are different. In
essence, Orbitz views itself as an attempt to fix what went wrong
during that time. During the 1970's and early 1980's, the airlines
chose to develop separate and competing entities--the Computer
Reservation Systems (CRS)--which each hoped to bias towards their own
services. CRS regulations were implemented in the early 1980's that
curbed much, although not all, of this abuse. In contrast, Orbitz
promises to display flight information in an unbiased manner.
Subsequent to the original CRS regulations, the airline-owners of
the CRSs raised fees in an attempt to offset revenues lost from not
being able to blatantly bias displays. Rising CRS fees have made a
significant dent in airline profits; one major airline reports that
booking fees now represent over $300 million each year. Airlines have
been successful in limiting other distribution costs by reducing and
capping commissions, but CRS costs continue to grow. As airlines divest
of their interests in these entities, the profits of the CRSs no longer
contribute to the airlines' bottom lines, and the incentive grows to
avoid or at least pressure CRSs to price competitively.
The airlines that have chosen to invest in Orbitz, albeit at a
magnitude of about one-half the amount suggested in the question, see
Orbitz as a way of lowering distribution costs, particularly those of
the CRSs. The incentive to participate in Orbitz is a rebate of
approximately one third of the CRS booking fees incurred on every
ticket booked through the site.
Since deregulation, the airlines have been free to determine how,
where, and at what cost, they choose to make their services available
to the public. Most airlines have realized that they need to tap every
possible distribution source, regardless of its costs, in order to
remain competitive. But they are not legally obligated to do so. One
exception is Southwest Airlines, whose business strategy is to utilize
primarily those channels that do not incur external costs, including
CRS fees or commissions. Like Southwest, the airlines that are
participating in Orbitz are also striving to lure more business to
channels with lower distribution costs, and the booking fee rebates
that Orbitz promises makes it an attractive choice.
Question 2. Don Carty recently testified before the Senate Judiciary
Committee that Orbitz would have exclusive fares. What assurances did
the owner/carriers of Orbitz make during the course of your
investigation as to how Orbitz will operate? Have you seen any
indication that the owner carriers will withhold certain low fares from
other distribution channels and make them available only on the Orbitz
website?
Answer. Mr. Carty stated before the Senate,\1\ ``it is envisaged by
this particular site that some offerings will be made on this site that
won't be made on other sites.'' This statement invokes a concern among
Orbitz competitors and consumer groups that the participating airlines
intend to withhold certain low fares that they provide to Orbitz from
other distribution channels.
---------------------------------------------------------------------------
\1\ Statement of Don Carty, Chairman, President, and CEO of
American Airlines, May 2, 2000 before the Senate Judiciary Committee,
Subcommittee on Antitrust, Business Rights and Competition
---------------------------------------------------------------------------
In our testimony before the Committee, we proposed that interim
provisions be established to protect against the possibility that
airlines might withhold their lowest fares from competitor agencies,
not just to lower their distribution costs, but to drive their
competitors out of business. Our proposal would help ensure that given
a level playing field, the airlines would not be able to act in an
anti-competitive manner. The proposal would require airlines to make
available any fares they provide Orbitz to any other agency willing to
offer the same financial terms concerning booking fee rebates as
Orbitz. Such a provision would be predicated on agreement by these
agencies to abide by the non-bias regulations that apply to CRSs.
We have not seen, and Orbitz assures us that they do not exist, any
agreements, tacit or express, among the Orbitz participants or owners
to restrict any fares exclusively to the Orbitz site. Our
interpretation of the charter agreement indicates the opposite--it
explicitly allows any participant to make available the fares it
provides to Orbitz to any other entity, on- or off-line. The only
restriction is that participants cannot make a lower fare available
elsewhere.
However, just because the airlines are not contractually required
to, or have not made commitments to provide certain fares exclusively
to Orbitz, that does not mean that an airline might not independently
decide to do so. Airlines are free to choose what fares they offer and
where they offer them, and an airline may decide that it is not
economically feasible to offer certain deeply discounted fares through
higher-cost distribution outlets. On the other hand, the airlines may,
for a variety of reasons, decide to provide their Internet-only fares
to entities besides Orbitz that provide less attractive financial
terms, or even non-financial incentives. The Orbitz charter explicitly
allows participating airlines to make such choices, and as long as they
are made independently and have a solid financial basis, we support the
airlines' right to choose what fares are made available in which
channels, even if that means limiting certain fares to Orbitz.
______
Response to Written Questions Submitted by Hon. John McCain
to Terrell B. Jones
Question 1. I am told that the airlines offer their e-fares only
through inexpensive distribution outlets. In other words, if
Travelocity was priced as inexpensively as Orbitz, the airlines would
readily sell their e-fares through Orbitz.
Have you made the same offer, on the same financial terms, that
Orbitz has made to the airlines in order to sell their e-fares through
Orbitz? If not, why not?
Answer. Before describing the various discussions that have
occurred with the airlines, it is helpful to understand how Travelocity
earns revenues from travel suppliers. We derive revenues generally from
two sources: 1) transaction fees, which in turn consist of (a)
commissions paid directly by travel suppliers to us and (b) the booking
fee incentive paid to us by our CRS provider; and 2) advertising sales.
My understanding is that the ``offer'' made by Orbitz to the
airlines relates to the two financial components of transaction
revenues. That is, Orbitz will receive a commission charged for each
ticket issued, but, in exchange, will rebate all (or most) of the
booking fee incentive paid to Orbitz by Worldspan, its CRS provider. (I
use the term ``offer'' here somewhat reluctantly because Orbitz is of
course controlled by the very parties to whom the ``offer'' is being
made.) I have also been informed that Orbitz will not accept airline
advertising on airline-related web pages, hotel advertising on hotel-
related web pages, and so on.
Each airline sets its own commission policy for brick and mortar
and on-line agencies. With respect to commissions, I believe
Travelocity is fully competitive; we have had no indication from any
airline that Orbitz has ``offered'' to accept a lower commission than
is currently paid to Travelocity. Those commissions are now capped
generally at $10 for a roundtrip ticket, $5 for a one way ticket for
bookings made by on-line agencies such as Travelocity. For example,
assuming that we sold a one way full-fare coach ticket from Washington
D.C. to Minneapolis/St. Paul on Northwest Airlines at $826 (the one way
fare as of August 10, 2000) Travelocity would receive $5. For a round-
trip ticket with a price of $1752, Travelocity would be paid $10. We
believe this cost is lower than the associated internal fulfillment
cost of the airline itself, when messaging costs, reservations calls,
and other expenses are accounted for.
With respect to booking fees, both Travelocity and Sabre have
approached the airline owners of Orbitz for the purpose of reaching
commercial arrangements to provide Sabre and Travelocity access to
their e-fares. In particular, Sabre has developed a new program under
which Sabre provides a discount of 30% off a carrier's normal booking
fee for ``distressed inventory,'' the typical low fare inventory made
available by airlines only through their proprietary websites
This special program, called Clearance Fare Outlet, was designed
for the very purpose of facilitating the sale through Sabre of e-fares
by on-line Sabre agencies, such as Travelocity.com and many others. The
30% discount off the normal Sabre booking fee would put the net booking
fee to be charged to carriers by Sabre at a level equivalent to the net
Worldspan booking fee the carriers would pay for bookings made in
Orbitz. (The written testimony of Kenneth Mead, the DOT Inspector
General, filed with this Committee on July 20, 2000 observed that
carriers would receive a discount of 1/3 off the normal Worldspan
booking fee for Orbitz generated bookings; Sabre's normal booking is
roughly the same as that of Worldspan.)
Published reports have placed the initial start-up costs of Orbitz,
after marketing and advertising costs, at about $100 million. Given
this substantial up-front investment, we believe that the ``net cost''
to these five carriers of each booking generated through Orbitz will
actually be far higher than the fee for fares sold by Travelocity
through the Sabre Clearance Fare Outlet.
In short, Orbitz' owners have indeed been offered a booking fee
that would give them a comparable--if not lower--net cost per booking
for these e-fares than the costs they will absorb for e-fare bookings
made through Orbitz. Unfortunately, my understanding is that none of
the Orbitz owners has yet agreed to participate in this special
discount program for e-fares. By contrast, I've been informed by Sabre
that National Airlines, Air Trans Air and other carriers have agreed to
be participants in Clearance Fare Outlet.
I do want to clarify one other point in the Committee's question,
as it relates to the issue of booking fee rebates from Orbitz to its
owners. If the term ``same financial terms'' means an offer by
Travelocity to rebate its booking fee incentive on all airline
bookings--rather than just on e-fares--I would have serious
reservations about the impact of such a proposal on independent travel
agencies. Nearly three quarters of Travelocity revenues come from
transaction fees, and booking fee productivity payments are a
substantial portion. Requiring us or any large on-line travel agency to
rebate a substantial portion of revenues on one hundred percent of
bookings--in exchange for getting access to e-fares--would seriously
impair the economics of the business. While an airline-funded travel
agency perhaps could agree to such terms--knowing that its losses from
operations could be funded by carrier-owners perhaps indefinitely--I
doubt that most independent travel agencies would accept such an
``offer.''
Alternatively, if the proposal is for each CRS vendor to return one
third of all transaction revenues in exchange for access to e-fares, it
would seem to me that this would equally undermine the economic
arrangements between the vendors and their thousands of agency
subscribers. While I obviously do not speak for Sabre, it is unlikely
that the CRS vendors--which have invested billions of dollars in the
hardware, software and telecommunications infrastructure that are the
essence of a CRS--would accept such an offer.
Question 2. Travelocity claims that it will not have ``access'' to the
Web fares that Orbitz will. It seems to me, however, that you do
actually have ``access'' to these fares, which you can purchase through
an airline's Web site on behalf of a customer, you simply won't be
commissioned on that sale. In what other industry has Congress required
a seller to pay another party a commission to sell its product?
Answer. Travelocity does not have access to the Web fares as a
travel agent. While theoretically Travelocity (or really any company
with a credit card) could purchase such a fare ``on behalf of our
customer,'' Travelocity could not provide any additional benefit to its
customers. The sale would not be serviceable through Travelocity; in
the event of a change in plans, or a schedule change, or other event
requiring re-ticketing, Travelocity would not be able to assist the
customer, as the booking would not reside in Travelocity. The customer
would be required to deal directly with the airline, creating confusion
and an unacceptable experience for Travelocity users.
Travelocity's objection to Orbitz having such fares, when
Travelocity does not, has nothing at all to do with whether such fares
are commissionable. (In fact, as noted in our response to the first
question, we believe Orbitz will in fact receive a commission on such
fares.) Our sole concern is the failure of airlines to allow such fares
to be sold by third party websites other than Orbitz, even on a non-
commissionable basis.
The Department of Transportation has long required under its CRS
rules that carriers that own a CRS participate in competing systems and
pay for such participation so long as the fees charged are commercially
reasonable. The same public policy considerations that lead DOT to
prohibit carriers owning a CRS from refusing to participate in
competing systems in a non-discriminatory way apply with equal force to
carriers owing Orbitz. Without such a duty, large carriers jointly
owning or controlling a website targeted at consumers can use their
leverage as airlines to distort and even undermine competition with
their website.
My understanding is that there are in fact instances where Congress
has required a supplier to offer its product to reselling companies,
who may compete with the supplier downstream at the end user level. A
few examples are set out below:
Under the EPA Act of 1992, the Federal Energy Regulatory
Commission (FERC), is statutorily impowered to force utility
companies, under certain circumstances, to ``wheel'' power
across or into its transmission systems to a competitor for
resale.
In the telephone arena, Local Exchange Carriers must, in
essence, sell interconnection services to Competitive Access
Providers (i.e, competing sellers of telephone services). 1996
Telecommunications Act 47 U.S.C. Sec. 251(c). In addition, the
FCC and implementing regulations pursuant to this Act outline a
myriad of instances where other telephony companies must
``sell'' various types of services to competitive resellers.
Under the Staggers Rail Act, railroads can be compelled to
participate in through routes and joint rates, which, in
essence, forces a railroad to allow a competing rail company to
sell the others' rail services. 49 U.S.C. Sec. 10705(a)(1).
Cable companies are required to carry certain local
broadcast channels (in essence, ``sell'' their transmission
capacity by foregoing opportunity costs associated with the
carriage of other programming) under the Cable Television
Consumer Protection and Competition Act. 47 U.S.C. Sec. 534.
Virtually every state requires liquor and alcoholic beverage
manufacturers to sell their products through an independent
third party distributor.
In each of the above cases where a supplier is required by
legislation (or by an agency acting pursuant to such legislation) to
sell through other independent distributors, the supplier is being
forced to ``split'' with the distributors a share of profits it would
otherwise obtain if it had been allowed to refuse to deal with those
distributors. In economic terms, this requirement has the same
financial effect as requiring Orbitz carriers to sell their products
through other independent outlets and to treat those competitors of
Orbitz in a non-discriminatory way in terms of booking fees and
commissions.
It is also worth noting that in Canada and in Australia the
competition authorities in 1989 and 1993, respectively, required large
air carriers who were joining to back a single CRS to enter into
consent decrees agreeing not to discriminate against competing CRSs
and, for that purpose, to participate in those competing CRSs and to
pay them booking fees. The banding together of the five biggest
carriers in the U.S. (accounting for over 80% of all enplanements) to
back Orbitz is nothing short of the Internet Age equivalent of the
combinations of large carriers in days gone by in Canada and Australia
to back a single CRS. The competitive risks to airline and distribution
channel competition posed by such combinations might require exactly
the same sort of safeguards that anti-trust officials in Canada and
Australia insisted upon as a precondition for allowing those CRSs to
begin operations.
Question 3. To borrow a phrase from your testimony, what is
particularly ``consumer centric'' about Travelocity entering into
contracts with airlines to swing market share for a particular airline,
regardless of whether that carrier is offering the lowest fares in the
market? Are there techniques that Travelocity uses to ``swing share,''
other than by offering discount fares on that airline?
Answer. Travelocity generally receives a modest commission that, as
stated above, is capped at $5 one-way/$10 round trip, and thus has
little or no incentive to ``swing market share'' regardless of the fare
charged. Indeed, Travelocity has gone to great lengths to promote low-
fare search capabilities on its site with such features as best fare
finder, alternate airports, and fare watcher. In one recent example,
Travelocity e-mailed all its customers to advise them of an
unadvertised sale by most major airlines. We believe this can save our
customers tens of millions of dollars.
In a few instances, Travelocity has entered into agreements in
which commissions are increased depending on the total sales the
airline achieves through Travelocity versus the airline's existing
market share. These are quite common in the travel agency business. The
important point here, however, is that Travelocity fulfills such
agreements while still offering consumers comprehensive unbiased
displays. This is because on-line airlines can achieve desired results
through the use of: 1) banner advertising on the site; 2) targeted
email messages to our customers; 3) links to special promotion fare
offerings.
In each instance of a special promotion Travelocity ensures that it
is obvious to consumers that an advertisement is being shown. We do not
reorder the displays received from our CRS provider (Sabre), which
comply with the CRS rules. Travelocity has already stated it will abide
by the CRS rules if extended to the Internet, so long as the principals
of Orbitz agree to be bound as well.
It is logical, and understandable, that the principals of Orbitz
would be vehemently opposed to the conduct of a travel portal or on-
line agent in selling advertising space and in otherwise ``moving
market share.'' This is because advertising tends to increase the total
volume of promotional sales among competitors. Special promotions
resulting from the desire of airlines to preserve market share tend to
lead to ``fare wars,'' thus reducing the net prices charged to
consumers. However, we believe this result is entirely ``consumer
centric.''
Question 4. In your testimony, you state that ``it is unclear why the
airline suppliers apparently shifted resources, investment dollars and
development away from their individual sites to collectively focus on
investing in and developing a joint Internet sales and marketing
agency.'' Is it possible that the ability to create a one-stop shopping
forum is a key reason for this investment, since that is what consumers
prefer.
Answer. To determine the actual objectives and motivations of the
principals of Orbitz, we would urge the Committee to obtain the
formative documents and e-mails that have been provided from the
carriers and the Boston Consulting Group to the Department of Justice
in its current price-fixing inquiry.
The existing airline distribution infrastructure allows for the
airlines to easily create a one-stop shopping forum with all fares.
This could be accomplished by each of the airlines providing such fares
through computerized reservation systems. Orbitz does not make this
objective easier to accomplish, thus one must question whether this is
indeed a ``key reason'' for the investment as opposed to one potential
benefit.
Whatever the stated objective in creating Orbitz, we believe the
Committee could still have legitimate concern over the effect on
airline competition of an agreement among airlines not to invest in
their own individual websites (let alone not to deal with third-party
sites). We would refer the committee to the testimony submitted by
Southwest Airlines in this regard.
Question 5. Travelocity has criticized Orbitz's ability to offer
special fares that nobody else has. Does Travelocity run fare specials
that none of its competitors has? If so, why is that different from
Orbitz's running a fare special that none of its competitors has?
Answer. Travelocity, Expedia and other on-line travel sites have
regularly run sales and special promotions with carriers. The typical
duration of such exclusive promotions is four weeks or less. If this is
all that Orbitz and its principals were proposing to do, we suspect
that groups like Consumers Union and Consumer Federation of America
would have fewer objections.
Travelocity has no agreement with any carrier that permanently
requires such carrier to provide it with EVERY sale made available
through a competitor. Travelocity has no agreement with any carrier
that in effect BARS such carrier from ever running a special sale on
another website--even its own website.
Orbitz goes much further. It eliminates an existing form of
competition among independent on-line agents (special sales) and
through its most favored nations provision severely lessens the
incentive of airline participants to undercut the prevailing price.
______
Response to Written Questions Submitted by Hon. John McCain
to Hon. Kenneth M. Mead
Question 1. Some of the low fare carriers have raised the prospect that
Orbitz will make it easier for the major carriers to monitor their
activities, both on the front end--their pricing--and on the back end--
what inventory they have sold at what fares. Enhanced monitoring, the
low fare carriers claim, would hurt them competitively.
Do you agree with this concern? Please feel free to elaborate in your
answer.
Answer. On the pricing issue, although Orbitz will have each
carrier's e-fares in one place for the first time, it is currently very
easy for competitors to monitor each other's e-fares. The advent of
Orbitz, therefore, does not materially change the competitive situation
with respect to price information. In the short term, Orbitz will
provide booking information on e-fares that currently are only sold on
each airline's own website and is, therefore, not available to an
airline's competitors. In the long term, however, if Orbitz abides by
its charter and follows through on its business plan, Orbitz will
actually reduce the inventory and sales information available to an
airline's competitors.
Orbitz' charter specifically states that all data related to sales
of tickets over the website are the sole property of the airlines whose
tickets are sold. In the short term, Orbitz ticket bookings will be
processed through a CRS, so this information will still be available to
competitors. However, Orbitz hopes in the future to establish direct
links with airlines' internal reservation systems, which will allow
bookings to occur without the need for a CRS. When and if this happens,
and if Orbitz abides by its charter, information related to these
bookings will not be available to any other airlines.
If Orbitz adheres to its charter and this business plan, Orbitz can
be viewed as a potential outlet to relieve small carriers from unwanted
scrutiny of their pricing and inventory details. Under the structure of
the current system, all carriers have a legal right to obtain pricing
and inventory information of their competitors for all sales made
through a CRS. This rule was developed in the early 1980's to address
concerns that airline-owners of CRSs would have access to data on their
competitors which they could use to an unfair advantage. The decision
was made to make these data equally available to all carriers. These
data are currently available for between 75 and 80 percent of all
sales. Information on the remaining 20-25 percent of tickets, which are
sold directly by the airlines through their phone reservation systems
or websites, is not available to sources outside the airlines.
For tickets sold through travel agents that are processed through a
CRS, airlines can obtain and then use this information to develop
competitive pricing, scheduling, and sales strategies to try to attract
some of their competitors market share. While small airlines
theoretically have the same ability to use these strategies against
their larger competitors, they believe the larger airlines gain a
stronger competitive advantage because of their ability to direct
significantly greater resources to analyzing the data and developing
competitive strategies.
Orbitz offers a potential partial fix to what we see as a
continuing concern related to open access to airline booking data. But
this fix is down the road and will only apply to the bookings processed
through Orbitz. Under its best-case scenario, Orbitz projects that this
will represent 2 percent of all ticket sales. We would encourage the
Department to revisit its rules on granting open access to booking data
in light of competitive concerns raised by smaller airlines, as well as
consumer protection issues the OIG has raised in conjunction with
travel agent overrides.
Question 2. Mr. Mead, I asked this question during the hearing, but
your answer focused on the exclusivity issue instead. I want to restate
the question to make sure that I was clear. In order to qualify for the
discounted CRS booking fee, participating air carriers in Orbitz must
enter into a so-called ``most favored nation'' clause. If an airline
sells a low fare elsewhere, the MFN clause requires it to offer that
fare on Orbitz, as well.
Would such a provision inhibit carriers from offering their most cut-
rate Web fares, since it would be uneconomical to sell those fares
through the more costly Orbitz travel agent?
Answer. We don't believe this would be the case. Airlines currently
offer a very limited number of last minute, deeply discounted fares via
their own websites. The airlines sell these seats at very low cost but
with restrictions that are so severe in terms of travel dates, length
of stay, and available flights, that they result in having very limited
appeal for most travelers. As a result, their sales constitute only a
fraction (less than \1/10\th of 1 percent) of an airline's total ticket
sales.
The airlines have generally limited these fares to their own
websites because selling them through travel agencies or their own
phone reservation systems incurs labor costs, commissions, and CRS
booking fees that would make it difficult to justify such low fares.
Orbitz will provide a more costly outlet than the airlines own
websites, because of commissions and (reduced) booking fees, and in
most cases their phone reservation centers, but it will provide
substantial savings over bookings through travel agencies, including
its online competitors. If the airlines' options are to incur slightly
higher costs to sell these tickets on Orbitz, or eliminate these fares
entirely and fly these seats empty, it is likely that these sales will
continue, but with the following potential caveats:
Airlines will post these last minute fares on Orbitz but
institute other incentives for booking directly through their
own websites, such as frequent flyer bonuses or other non-fare
related promotions.
Airlines will slightly increase fares on these deeply
discounted tickets to cover the added costs of their sale
through Orbitz (booking fees, commissions). It is unlikely that
the increases would be substantial or sales would diminish.
Airlines that believe the financial costs of providing these
fares to Orbitz outweighs the savings that they would receive
on all booking fees--not just e-fare specials--will choose not
to enter into this MFN agreement. Those airlines will be able
to make their fares available through any channel they choose
without being required to make them available on Orbitz. They
will not, however, receive any rebates on their booking fees
for sales through Orbitz.
What can or should the government do about the uncompetitive aspects of
the MFN clause?
Answer. The MFN clause, at face value, does not appear to be anti-
competitive. The Orbitz charter explicitly allows carriers to make
available the same fares it makes available on Orbitz to any other
distribution channel. Although the airlines have contended that they
will make their lowest fares available to any other channel that is
willing to provide the same financial incentives as Orbitz, the concern
remains that the individual airlines will each choose not to do so.
This concern could be addressed by requiring the airlines to make
these fares available to other travel agencies under specific
conditions. Other agencies would have access to these fares if they are
willing to offer the airlines the same financial terms (in the form of
CRS booking fee rebates) and are willing to abide by the CRS
regulations prohibiting bias. Possible protections could take the form
of a departmental action or a formal agreement by the airlines to
voluntarily adhere to these requirements.
Question 3. Southwest Airlines has laid out the following concerns
about Orbitz. What is your response to each of these points?
Southwest's concerns are:
Orbitz may lead to collusion by participating airlines on prices
charged to the public.
Answer. We do not see anything unique to the structure of Orbitz
that would encourage or facilitate collusion on pricing. The airlines
will have no greater access to each others' fares than they currently
have through browsing their competitors' websites and purchasing CRS
data. In the current state of technology, airlines can become
instantaneously aware and respond immediately to changes in their
competitors' fares and services--although Orbitz will gather this
information more easily in one place, it will not offer a substantially
greater platform upon which the airlines can communicate about pricing.
Orbitz may stifle competition among airlines by effectively replacing
the competing websites of individual airlines with a single website
that discourages independent decision-making.
Answer. Orbitz will provide significant savings over other travel
agencies and some airlines' phone reservation systems, but it will
still be more costly for airlines to book travel through Orbitz than
through their own websites. All airlines would prefer to ultimately
draw consumers to their own websites instead of Orbitz, but know that
for most, this is impossible. The large pool of price-sensitive
consumers who patronize travel agencies for their ability to compare
fares and services across airlines are unlikely to ever become
exclusively loyal to one airline. For these consumers, the airlines
would prefer they do their comparison shopping on Orbitz than on one of
its more costly competitors.
It is more likely that airlines will continue to compete with
Orbitz by offering consumers incentives other than price to purchase
travel directly on their websites. These websites provide such
substantial savings over Orbitz (no commissions or booking fees) that
it would never be in the interest of the airlines to forego their own
websites' operations in favor of forming one ``mega'' Orbitz site.
Orbitz may mislead the public by presenting the illusion that it offers
neutral and comprehensive fare information while actually offering
selective and/or biased displays that favor the airlines that own and
control Orbitz; and
Answer. Orbitz' charter commits to providing an unbiased display of
airline fares and services. To our knowledge, no other online agency
has made such a commitment. For Orbitz, this means that it will not
enter into any marketing or override agreements that enable one carrier
to receive preferential or ``enhanced'' display treatment. For small
carriers, this will mean that their fares alone will define where they
are featured in the Orbitz display.
Orbitz' decision to provide a bias-free display is not a legally
required one. As a travel agency, it is not covered by the bias
restrictions in the current CRS regulations--a point we made in our
testimony. No travel agency, including Orbitz' competitors, are
restricted in how they present information received from their CRSs.
The concern with Orbitz is that information could be displayed in such
a way that the airlines owning and controlling Orbitz will be favored.
However, if this were to occur (which would be contrary to the Orbitz
charter), it would not be markedly different from other travel
agencies' practices of displaying information in such a way that the
airlines that have purchased preferential display options are favored.
Although it is not legally compelled to present bias-free displays,
the fact that Orbitz is jointly owned by competing airlines makes it
more likely that it will comply with its charter. The Orbitz charter
specifically states that all information on Orbitz will be displayed
without bias, with priority display based exclusively on lowest
airfare. Given Orbitz' joint ownership, a decision to allow display
advantages to be purchased (i.e., ``selling bias'' to a particular
airline) would have to be made by the owner airlines who would stand to
be harmed by such purchase.
Finally, if Orbitz markets itself to the public as a bias-free
agency, it could be considered a deceptive practice if it then offered
selective and/or biased displays. The Department of Transportation has
oversight for such activities and our expectation is that such a
practice would result in swift and meaningful action. In fact, any
travel agency--regardless of ownership--that holds itself out to be
unbiased and comprehensive should expect similar treatment if it then
engages in practices that bias displays in favor of a specific
carrier's services or otherwise treat a carrier's services
preferentially.
Orbitz may facilitate coordination by the major airlines to use their
combined resources to stifle competition from nonparticipating low fare
airlines.
Answer. Our testimony raised the possibility of potential long-term
harmful impacts on the travel marketplace. If the airline equity owners
of Orbitz refuse to make their lowest Internet fares available to
online competitors, Orbitz would have a significant marketing advantage
that could allow it to achieve a dominant online market share or even
to eliminate its online competitors. In either case, airlines would
likely feel compelled to be listed on the Orbitz system or risk
foregoing significant business to their competitors.
At such a point, with its market power over the airlines
established, Orbitz might choose to charge premiums to airlines to
participate (i.e., raise costs) rather than offering reduced costs
through lower booking fees. Such an outcome would benefit Orbitz'
equity owners to the detriment of other participating airlines. One way
this could be mitigated is by diluting ownership among more airlines
and soliciting non-airline owners. As we suggested in our testimony,
another way would be to require the equity-owner airlines to make their
lowest fares available to other channels willing to offer in exchange
the same terms and conditions as Orbitz. The Departments of Justice and
Transportation need to evaluate the likelihood of this or other
scenarios playing out to determine whether prior intervention is needed
to protect competition and consumers.
______
Response to Written Questions Submitted by Hon. John McCain
to A. Bradley Mims
Question. Following up on your prepared statement, Mr. Mims, what
questions have been raised by the smaller airlines about ``Orbitz's
potential adoption of restrictions on the airlines' participation in
Orbitz that could undermine the competitive position of smaller
airlines . . . ?
Answer. Each airline that becomes a ``charter associate'' in Orbitz
will obtain a rebate on the computer reservations system fees incurred
when a traveler uses Orbitz to book the airline. Status as a charter
associate requires certain obligations from the airline, however. It
must make available to Orbitz all of its publicly-available fares sold
through any other distribution channel, including Internet fares
otherwise offered only on the airline's own website. The airline must
also assist Orbitz' marketing efforts. Some smaller airlines have
complained that the ``most favored nation'' clause on fares unduly
restricts their ability to offer special discount fares through other
distribution channels and to engage in special marketing promotions
with other travel agencies and distribution firms. They have also
complained that the obligation to bear some marketing expenses is
subject to a cap which in practice will benefit the largest airlines
and will require smaller airlines to bear a larger share of the
marketing effort than is justified by the relative amount of their
sales. One airline has complained that it was turned down when it asked
to become one of Orbitz' owner airlines.
______
Response to Written Questions Submitted by Hon. John McCain
to Paul M. Ruden
Question 1. Mr. Ruden, your organization advocates that an airline's
most inexpensive fares should be required to be sold through every
medium, regardless of the cost to the airline of a particular medium of
ticket sales.
If the government prevents an airline from recovering its cost to sell
its tickets, is it possible the airline will simply quit offering the
lowest fares that cannot be sold economically through every outlet?
Answer. Requiring airlines to make all fares available for sale
through every medium will not prevent airlines from recovering their
selling costs. Nor are pricing decisions made on the basis of actual
retail selling costs. There is no relationship between most Internet-
only fare levels and selling costs of any channel. When it was cheaper
to sell tickets through travel agents than it was by direct sales
through airline city ticket offices and reservation center calls,
airlines charged the same price for each channel. Prices are set to
move inventory of a perishable product now considered mainly to be a
commodity (constrained by the extent of competition in the market), and
to gain a competitive advantage and/or deter entry (constrained only by
whatever limits on airline market power may exist), and to maintain or
increase market share. The relationship of such prices to selling costs
is often indeterminable and incidental.
In any event, the issue raised by Orbitz is somewhat different.
Orbitz involves joint airline action that appears clearly calculated to
deprive competitors, both current and prospective, of access to the
lowest fares. Such joint determinations of channel selection and
content should not be allowed in any circumstances.
Question 2. Your testimony takes issue with the fact that the airlines'
``lowest fare'' guarantee extends only to its telephone reservation
agents.
What would be the value of extending that guarantee to travel agents,
given that perhaps the travel agents' most significant role is to find
their customers the lowest fares?
Answer. Travel agents today will find the lowest fare for any
client to whom this factor is important. The problem is that the
airlines are withholding some fare inventory from agents. The public
for whom the absolute lowest fare is crucial, therefore, is denied the
right to have such fares ticketed through their favored distribution
source. To the extent that airlines are required to make such fares
available for ticketing through travel agents, the public will have the
freedom to select their distribution source without fear that they are
automatically excluded from certain discounts.
______
Response to Written Questions Submitted by Hon. John McCain
to Mark Silbergeld
Question 1. I understand Orbitz' competitors concerns that air carriers
will offer exclusive deals on Orbitz that will not be available
elsewhere. From an antitrust perspective, however, is it permissible
for individual airlines to reach that decision as long as they did not
act collectively to reach that decision?
Answer. In the airline industry, that decision reached individually
would still be the appropriate subject of antitrust scrutiny. The
industry is not competitive in many geographical (i.e., route-by-route)
markets, has a history of anticompetitive behavior (as Members noted
during the hearings) and a history of parallel behavior. In such an
industry, there are serious antitrust concerns about conscious
parallelism that would warrant Justice Department review. Further, the
airlines cannot now go back in time to reach the same decisions
individually that they have already reached collectively. In other
words, the anticompetitive decisions reached through the platform of
T2/Orbitz cannot be undone.
Question 2. In order to qualify for the discounted CRS booking fee,
participating air carriers in Orbitz must enter into a so-called ``most
favored nation'' clause. If an airline sells a low fare elsewhere, the
MFN clause requires it to offer that fare on Orbitz as well.
Would such a provision inhibit carriers from offering their
most cut-rate Web fares, since it would be uneconomical to sell
those fares through the more costly Orbitz travel agent?
What can or should the government do about the uncompetitive
aspects of the MFN clause?
Answer. The MFN might well inhibit airlines from offering their
most cut-rate web fares under the MFN arrangement, depending on how the
clause is worded in the agreement. If the agreement reaches e-fares,
the last minute bargain fares, the answer most probably is yes. The
government needs to review the MFN clause and impose restrictions on
it, in a consent order issued by the Department of Justice, so as to
assure that the MFN clause does not prohibit the issuance of lowest-
cost fares individually based on individual decisions by each
participating carrier. Otherwise, the MFN clause serves to set floors
on fare bargains. And it serves as an agreement to refuse to offer
lower prices based on lower selling costs of the competitor travel
sites, where such lower costs exist. It may well be that a Department
review will conclude that the MFN clause is inherently anticompetitive,
in which the clause should be banned by departmental order. Any
conditions short of a ban on implementation of the clause must be
susceptible of effective monitoring and enforcement.
______
Joint Prepared Statement of Nancy Linares, CTC, Chairman of the Board
and Alexander Anolik, Esq., General Counsel, Association of Retail
Travel Agents
Chairman McCain and esteemed members of the Senate Commerce
Committee, we want to begin by thanking you for shining the spotlight
on Orbitz and similar airline-owned entities that threaten to cripple
competition in the U.S. air travel market.
This morning, we wish to request that the Congress should take all
necessary steps to investigate and remedy the anticompetitive effects
of Orbitz and other proposed Internet sites jointly owned, operated,
and funded by consortiums of major U.S. and international air carriers.
We make this request on behalf of the Association of Retail Travel
Agents (``ARTA''), a nonprofit trade association organized and existing
under the laws of the District of Columbia and headquartered at 2692
Richmond Road, Suite 202, Lexington, Kentucky 40509-1542.
ARTA is the largest nonprofit association in North America
representing travel agents exclusively, with more than 4,600 travel
agent members in the United States and Canada. Most of ARTA's travel
agent members are appointed by the Airlines Reporting Corporation
(``ARC'') to sell airline tickets to the public, including tickets on
the air carriers identified as joint owners of the Internet sites in
question. In the sale and distribution of airline tickets to the
public, regardless of the sales methods used (e.g., telephone, fax,
Internet, in-person agency visit), these ARTA members compete for sales
with the airlines themselves.
On November 9, 1999, four U.S.-based air carriers--United Airlines,
Delta Air Lines, Northwest Airlines, and Continental Airlines--
announced plans to launch a jointly owned Internet travel site in six
months to sell airline, hotel, car rental, cruise, tour, and other
travel services to the public. According to press reports, the jointly
owned site will stand apart from competing Web sites by operating as a
one-stop shopping location offering features such as exclusive discount
fares and preferred seating arrangements available only through the
airline-owned site. The new site--initially named ``T-2'' by the press
for ``Travelocity Terminator'' (a reference to the leading independent
online travel agency), but now called ``Orbitz''--will be developed by
the Boston Consulting Group, a Chicago-based general management
consulting firm.
On January 13, 2000, 23 additional U.S.- and foreign-based air
carriers signed letters of intent to become charter associates in T-2:
American, USAirways, ATA, AirTran, Hawaiian, Midwest Express, Midway,
Vanguard, Air Canada, Air Jamaica, Air New Zealand, Alitalia, All
Nippon Air, Austrian, British Midland, COPA, CSA Czech, Iberia, KLM,
Korean, Mexicana, Singapore, and Varig. (American later joined the four
founding airlines as an equity owner.)
On May 11, 2000, 11 European-based air carriers announced the
creation of a similar jointly owned site (dubbed ``Me-Too'' by travel
trade editors): Aer Lingus, Air France, Alitalia, Austrian, British
Airways, British Midland, Finnair, Iberia, KLM, Lufthansa, and SAS.
Relying heavily upon Antitrust Guidelines for Collaborations Among
Competitors (issued jointly by the Federal Trade Commission and by the
U.S. Department of Justice in April, 2000), ARTA alleges nine separate
concerns that, taken separately or jointly, support our primary
concern:
Orbitz and other airline-owned sites harm competition by increasing
the ability or incentive profitably to raise price above or reduce
output, quality, service, or innovation below what likely would prevail
in the absence of the relevant agreement.
1. LThese airline-owned sites constitute a per se illegal agreement
to share the domestic air travel market by allocating lines of
commerce.
L Currently, the airlines that own Orbitz and Me-Too sell air
travel via their own individual airline Web sites, via leading online
travel agencies such as Expedia and Travelocity, and via independent
travel agencies that have their respective agency Web sites with
booking engines.
L By combining assets, exclusive airfare discounts, frequent
flyer mile promotions, preferred seating arrangements, and other
competitive strengths not available through the other retail channels,
Orbitz and Me-Too will succeed eventually in crippling or destroying
other online retail outlets for air travel--leaving these air carriers
(collaborating openly via the two sites) in complete control of the
online travel sales market.
L The overall competitive effect of these agreements is the
concerted, deliberate re-allocation of online air travel commerce by
air carriers from a somewhat competitive mix of independent single-
airline sites, independent online travel agencies, and independent
retail travel agencies with their own Web sites to a single-channel
distribution system controlled directly by consortiums of U.S. and
international airlines.
L These consortiums can claim not one single true efficiency in
this collaboration. Typically, participants in an efficiency-enhancing
integration combine assets to achieve procompetitive benefits that they
could not achieve separately. However, the individual air carriers in
these consortiums operate their own respective successful Internet
sites, and they sell growing amounts of air travel via online travel
agencies that earn ``capped'' commissions. Because equal or comparable
procompetitive benefits may be achieved through these practical,
significantly less restrictive means, the Orbitz and Me-Too agreements
are therefore not reasonably necessary.
2. LThese airline-owned sites limit independent decision making by
the competing air carriers.
L In launch announcements, the Boston Consulting Group and its
airline clients make clear their intention to enforce collective
policies on competitively significant variables such as quality,
service, and promotional strategies to increase market power--in
effect, ``to create the most comprehensive travel site on the Web.''
USA Today, Nov. 10, 1999, B-1. ``Identical to the commitments of the
initial airline partners [United, Delta, Northwest, and Continental],
the additional [23] airlines will provide a number of services to the
site including co-op marketing programs, access to customer loyalty
programs and exclusive marketing support.'' BusinessWire, January 13,
2000, emphasis added.
L In effect, this agreement reduces the individual airlines'
control over assets necessary to compete and thereby reduces their
ability to compete independently. Also, it combines the financial
interests of the individual air carriers into a single jointly owned
site in ways that undermine incentives for the airlines to compete
independently (e.g., the single site reduces or eliminates comparative
airline advertising, thereby harming competition by restricting
information to consumers on price and other competitive significant
variables).
3. LThese airline-owned sites facilitate horizontal collusion.
L Orbitz and Me-Too will greatly increase the temptation for
their airline owners to engage in practices of price signaling, display
bias, and price fixing that air carriers have attempted--and federal
agencies have largely succeeded in preventing--in other airline-owned
electronic media, notably computerized reservation systems (``CRSs'')
and the Airline Tariff Publishing Company (``ATPCO'').
L Prior to its demise in 1985, the Civil Aeronautics Board
(``CAB'') found that the domestic airlines that owned CRSs displayed
information on the system screens viewed by travel agents in a way that
favored their own flights over the flights of competing airlines that
may have been better choices from the consumer's perspective. The CAB
adopted regulations (currently enforced by the Department of
Transportation) to eliminate ``display bias'' so that travel agents and
consumers could receive objective and accurate flight information about
all air carriers listed on respective CRSs. See 14 C.F.R. Sec. 255.1-
255.12.
L In 1992, the Department of Justice filed suit against eight
major U.S. airlines alleging that they colluded to raise prices and
restrict competition by signaling airline price changes through
elaborate footnotes and codes filed with ATPCO (a central computer
system owned by the airlines that distributes changes in ticket prices
to major airlines and CRSs). Two years later, the air carriers settled
the suit by agreeing to restrictions on the use of ATPCO footnotes and
codes and to a prohibition on pre-announcing price increases except
where widely publicized. (In April, 2000, Rep. Peter DeFazio asked the
Justice Department to review the airline industry's current compliance
with the 1994 settlement.)
L The Orbitz and Me-Too sites raise the very strong probability
that this horizontal collusion--prohibited and largely eliminated by
federal agencies in other contexts--would be resurrected on the
Internet.
L For example, the airline owners of these sites will share--in
electronic formats that make data manipulation a simple process--
information relating to price, output, costs, and strategic planning,
as well as current operating and future business plans. These data will
be available as individual company data, rather than aggregated data,
so that respective airline owners can identify individual firm data--in
effect, ``automating'' the horizontal collusion.
L Further, ARTA alleges that the Orbitz and Me-Too sites foster
express or tacit collusion among the airline owners and charter members
in a manner akin to the coordinated interaction theories outlined in
Horizontal Merger Guidelines at 14.
4. LThese airline-owned sites lead to unhealthy levels of market
concentration.
L ``In some cases . . . a determination of anticompetitive harm
may be informed by consideration of market power.'' Antitrust
Guidelines at 12.
L Just as the major U.S. air carriers have developed ``fortress
hubs'' to carve up and protect their respective shares of the U.S. air
travel market, the Orbitz and Me-Too jointly owned sites will become
``fortress Web sites'' that the owner airlines will use ultimately to
inflate airfares, curtail consumer choices, and choke competition posed
by smaller rival airlines and independent retailers.
L On the one hand, ``market share affects the extent to which
participants or the collaboration must restrict their own output in
order to achieve anticompetitive effects in a relevant market.''
Antitrust Guidelines at 17. The larger the percentage of total supply
that a firm controls, the less severely it must restrict its own output
in order to produce a given price increase, and the more likely it is
that an output restriction will be profitable.
L In the case of the Orbitz site, the collective market share
of the participating domestic airlines (as owners or as charter
members) totals as follows (figures reflect revenue passenger miles
obtained from the current volume of Aviation Daily Data at 88, and the
total reflects rules found in the Commission's 1992 Horizontal Merger
Guidelines for calculating market share):
United 19.07% share
American 16.95% share
Delta 15.96% share
Northwest 11.29% share
Continental 9.06% share
USAirways 6.26% share
American Trans Air 1.70% share
Hawaiian 0.73% share
AirTran Holding Corp. 0.52% share
Midwest Express 0.30% share
Midway Airlines 0.15% share
Vanguard 0.13% share
L The airline owners and charter members of Orbitz control an
extraordinary 82.12% domestic market share--an almost unprecedented
stranglehold being brought to bear on the online travel marketplace.
L On the other hand, ``market concentration affects the
difficulties and costs of achieving and enforcing collusion in a
relevant market.'' Antitrust Guidelines at 18. The Federal Trade
Commission uses the Herfindahl-Hirschman Index (``HHI'') as an aid to
interpret market concentration data.
L Calculated by summing the squares of the individual market
shares of all participants, the HHI results before and after the
formation of Orbitz show a tremendous difference:
HHI before Orbitz 1,215
HHI after Orbitz 6,800
L ``When the post-merger HHI exceeds 1,800, it will be presumed
that mergers producing an increase in the HHI of more than 100 points
are likely to create or enhance market power or facilitate its
exercise.'' Horizontal Guidelines at 13. In the case of Orbitz, the
airlines' joint forces will result in an extraordinary increase in
their collective market power as measured by the HHI.
L (ARTA argues that the joint ownership and operation of Orbitz
constitutes, in practical terms, a merger of significant corporate
resources, meeting the general requirements of the HHI instrument.)
L ARTA echoes the prescient comments of former CAB Chairman
Alfred Kahn: ``[W]hen I see what can only be described as real
monopolistic exploitation of travelers with limited alternatives, I do
worry about the sufficiency of competition in the airline industry.''
Conde Nast Traveler, Sept. 1998, 132.
5. LThese airline-owned sites fail the ``safety zone'' test.
L Section 4.2 of the Antitrust Guidelines outlines a ``safety
zone'' to provide participants in a collaboration with a degree of
certainty in those situations in which anticompetitive effects are so
unlikely that the arrangements are presumed to be lawful without
inquiring into particular circumstances. ``Absent extraordinary
circumstances, the Agencies do not challenge a competitor collaboration
when the market shares of the collaboration and its participants
collectively account for no more than twenty percent of each relevant
market in which competition may be affected.'' Antitrust Guidelines at
26.
L The airline owners and charter members of Orbitz control an
extraordinary 82.12% domestic market share--more than four times the
maximum threshold of the ``safety zone'' outlined by federal antitrust
officials in the Antitrust Guidelines.
6. LThese airline-owned sites fail four of six factors affecting
the ability of the participants to compete independently of each other.
L Among the six factors listed in Antitrust Guidelines at 19,
the Orbitz and Me-Too sites fall short in four areas:
L``(c) the nature and extent of participants' financial
interests in the collaboration or in each other;''
LThe greater the financial interest in the collaboration,
the less likely is the participant to compete with the collaboration.
In the case of Orbitz, the five equity airline owners--United, Delta,
American, Northwest, and Continental--currently control a 100% interest
in the site, According to press reports. Therefore, they will receive a
lower net return from aggressive independent collaboration.
L``(d) the control of the collaboration's competitively
significant decision making;''
L``[T]he collaboration is less likely to compete
independently as participants gain greater control over the
collaboration's price, output, and other competitively significant
decisions.'' Antitrust Guidelines at 20. As full equity owners, the
primary owners--United, Delta, American, Northwest, and Continental--
will presumably make final decisions regarding Orbitz' operations,
staffing, and promotions. Further, they will presumably exert veto
rights such as the refusal of new entrant airlines as participants of
Orbitz.
L``(e) the likelihood of anticompetitive information
sharing;''
LGiven the concerns outlined in section 3 of this letter,
ARTA alleges that the likelihood of anticompetitive information sharing
by the airline owners and charter members of Orbitz and Me-Too is
extremely high.
L``(f) the duration of the collaboration.''
L``In general, the shorter the duration [of the
collaboration], the more likely participants are to compete against
each other and their collaboration.'' Antitrust Guidelines at 21. In
this case, Orbitz and Me-Too are designed to operate as permanent
Internet sales sites, reducing effectively the incentives for their
airline owners and charter members to compete independently.
LWhile the adoption of appropriate safeguards to prevent
anticompetitive information sharing may mitigate such concerns, the
track record of these airlines as outlined in section 3 of this letter
speaks against any reasonable reliance simply upon the good faith of
the air carriers involved.
7. LThese airline-owned sites exclude entry by new online travel
agencies and by new start-up airlines.
L The proven difficulty of entry by start-up air carriers and
online travel agencies in competing against the airline owners and
charter members of Orbitz and Me-Too in traditional avenues is well
documented. In this instance, that track record supports ARTA's
contention that entry by new or additional competitors would not be
``timely, likely, and sufficient in its magnitude, character and scope
to deter or counteract the anticompetitive harm of concern.'' Antitrust
Guidelines at 22.
L In 1999, Federal Trade Commission staffers recommended a
review of the planned acquisition of Ingram Book Group by Barnes &
Noble, arguing that the control of an important part of the book
distribution marketplace might enable Barnes & Noble to shut off
competing sellers from Ingram's services or to deny access on
competitive terms, thereby raising the costs of Barnes & Noble's
rivals. Ultimately, the acquisition would have led to less competition
on the Internet for bookselling. In the same vein, ARTA argues, the
Orbitz and Me-Too transactions will lead ultimately to less competition
on the Internet for travel sales.
8. LThese airline-owned sites pose an enormous threat to the online
privacy interests of traveling consumers.
L Orbitz and Me-Too generate substantial questions about the
confidentiality of traveling consumers' personal data and the sharing
of that data among the sites' airline owners and charter members.
L Typically, online sites run by air carriers collect a larger
than usual assortment of personal data, including emergency contacts,
passport and visa information, and other details beyond the consumer's
contact information and credit card information collected by other e-
commerce sites. Accordingly, the risks of misuse of these data rise in
proportion.
L In particular, ARTA argues that the Committee should consider
carefully the anticompetitive effects of the merging of online and
offline data by these airline owners and charter members. See
``Electronic Commerce and Beyond: Challenges of the New Digital Age''
by FTC Chairman Robert Pitofsky, Woodrow Wilson Center ``Sovereignty in
the Digital Age'' Series, Feb. 10, 2000.
9. LThese airline-owned sites support price discrimination based on
the ``digital divide.''
L The announced sales policies of Orbitz and Me-Too to offer
special discount airfares and reservation benefits available
exclusively through these Internet sites greatly exacerbate the
negative effects of the ``digital divide'' facing consumers.
L According to National Telecommunications and Information
Administration (NTIA) surveys, whites are more likely to have access to
the Internet (particularly from home) than Blacks or Hispanics have
from any location. At almost every income level, households in rural
areas are significantly less likely to have Internet access than those
in urban or central city areas. More than 61 percent of those with
college degrees now use the Internet, while only 6.6 percent of those
with an elementary school education or less use the Internet; in fact,
this gap actually widened by 25 percent from 1997 to 1998. While almost
59 percent of Americans making more than US$75,000 frequent the
Internet from any location, only 16 percent at the lowest end of the
pay scale (US$5,000-US$10,000) use the Internet. See ``Falling Through
the Net: Defining the Digital Divide,'' NTIA, July 1999.
L While consumers across racial and socioeconomic boundaries
may counter a lack of Internet access by shopping more aggressively in
local markets--e.g., they can generally find local sales prices on
compact discs sold at similar discounts on the Internet--the special
sales and exclusive airfares available through Orbitz and Me-Too cannot
be found by consumers shopping locally through traditional retailers or
through the airlines' traditional direct sales methods (e.g., toll-free
reservation numbers).
Conclusion.
In conclusion, we urge the Committee to take all available steps to
prevent further consolidation in the online travel market via Internet
sales sites that are jointly owned by the major air carriers.
Though the Orbitz and Me-Too sites are not yet functional, ARTA
argues that the very nature of the agreement governing these
collaborations between competitors jointly controlling more than 80
percent of the domestic airline market ``give[s] rise to an intuitively
obvious inference of anticompetitive effect.'' California Dental Ass'n
v. FTC, 119 S. Ct. 1604, 1617-18 (1999). As the Antitrust Guidelines
state, federal antitrust officials generally challenge agreements
without a detailed market analysis in cases where ``the likelihood of
anticompetitive harm is evident from the nature of the agreement . . .
absent overriding benefits that could offset the anticompetitive harm .
. . '' Antitrust Guidelines at 4.
Further, we believe that the Committee should act swiftly in order
to be sensitive to the reasonable expectations of participating
``charter agreement'' air carriers that have made significant sunk cost
investments in reliance on the Orbitz and Me-Too agreements that may
later be judged anticompetitive.
Thank you for the opportunity to submit these comments.
______
Orbitz,
Chicago, IL, August 25, 2000.
Hon. John McCain,
Chairman,
Committee on Commerce, Science, and Transportation,
Washington, DC
Dear Mr. Chairman,
This is to follow up on the hearing your Committee held on July 20,
regarding Aviation and the Internet.
As you noted in the hearing, circumstances on the Senate floor,
unrelated to this hearing or to your Committee, resulted in the hearing
having to be concluded early. As a result, we were not always able to
fully respond to the concerns you raised in the hearing, despite your
good efforts to provide adequate time for response. Some of the
questions you raised, and the questions you have posed since the
hearing, certainly merit a fuller response than was possible in the
time constraints of the hearing. This is to provide you that fuller
response, as well as to respond to your post-hearing questions.
You raised the question of opposition to Orbitz from low-fare
airlines. For a start-up company, my view is that we are making good
progress getting the interest and commitments of low-fare airlines.
Most low-fare airlines are very supportive of Orbitz, once they learn
what we are offering. Among the airlines that have already signed
associate agreements with Orbitz are Aloha, Hawaiian, Midway, Midwest
Express, Spirit, and Vanguard. And we are actively engaged in getting
the interest of others. Before we launch I am certain we will have
signed up a very good representation of low-fare airlines, because only
Orbitz represents their base fares and their special fares without bias
and in such a user-friendly way.
What I think is most compelling for low-fare airlines is the simple
truth that we offer all airlines, including low-fare airlines,
absolutely equal and unbiased display. And they need not invest one
nickel in Orbitz to obtain this benefit. Many smaller airlines have
complained over the years that they cannot get truly equal ``shelf
space'' in the CRSs, and now in CRS-based Internet sites. In Orbitz
they will be displayed on exactly the same terms as the very largest
airlines.
Another feature that seems to be appealing to low-fare airlines
(who we know are particularly cost conscious) is that we offer them an
indirect offset to the CRS booking fees they pay. This is of critical
importance to most low-fare airlines, because CRS booking fees, while
excessive for all airlines, weigh particularly heavily on low-fare
airlines. This is because these fees constitute a much larger
percentage of a low-fare ticket than of a full-fare ticket. The booking
fee offset offered by Orbitz, while identical for any associate
airline, whether large or small, low-fare or not, investor in Orbitz or
not, as a percentage of the ticket cost offers savings far greater for
the low-fare airline.
And third, the smaller low-fare airlines have complained
increasingly that the CRS rules (Part 255) on booking data do not
protect them from being at a competitive disadvantage in access to and
use of that data. At Orbitz, we have solved that concern by doing what
no CRS has been willing to do: we provide by contract that all booking
data on Orbitz is the property solely of the airline on which that
booking was made. This puts the low-fare airlines on an absolutely even
footing with any other airline with respect to data at Orbitz.
The on-the-record exception to this favorable view of Orbitz is
Southwest, and that is because Southwest is the notable exception to
other airlines in so many ways. Southwest is an excellent airline, with
a great and unique business plan, and a history that puts it in a
position no other airline can duplicate. Southwest is the only airline
that has managed to put itself in a position where it pays no CRS
booking fees. Every other airline envies Southwest in that regard, but
no other airline can duplicate the peculiar history by which Southwest
has achieved that result.
Southwest prevents sale of its tickets on all CRSs but one, and has
a unique (and impossible to duplicate) arrangement by which it pays no
CRS booking fee (but does pay a smaller alternative fee) on that one
system. Orbitz will list Southwest flights and fares and give Southwest
absolutely unbiased display, but like most systems, Orbitz will not be
able to sell Southwest seats, because Southwest does not allow its
seats to be sold in a way that incurs any CRS booking fee (even a
reduced one). We sympathize with Southwest's position on booking fees,
and are working on a way in which we can make it possible for Southwest
seats to not only be displayed on Orbitz, but to be sold on Orbitz
without incurring any CRS booking fee. But in the interim, as is the
case with most CRSs and travel agents, customers of Orbitz would see
the Southwest display, and then call Southwest to make the booking.
However, from a competitive point of view, Southwest's greatest
competitive advantage, particularly over other low-fare airlines, is
that the others pay a CRS booking fee and Southwest does not.
Therefore, it presumably sees the offset to the CRS booking fee offered
by Orbitz as benefiting its airline competitors, and particularly its
low-fare airline competitors, more than it would benefit Southwest. In
our view, one of the primary reasons Southwest has therefore elected to
oppose Orbitz, is in the hopes of preventing its competitors,
especially its low-fare competitors, from getting even a portion of the
booking fee advantage it now enjoys alone.
There is one other marketing nuance that makes Southwest what many
think of as the consumer role model for air travel. In America most
people view the Southwest name and brand as synonymous with ``low
price.'' When Orbitz launches it will be much easier than ever before,
however, for consumers to find low prices on all airlines (including
Southwest). For the first time, it will be easy to see the best deals
of all airlines. This will be good for consumers, but not exactly an
``edge'' that Southwest would like, from their own marketing point-of-
view, to see shared with others.
Southwest's tactical position notwithstanding, the CRS booking fee
problem has disproportionately burdened low-fare airlines for years,
and is only getting worse. Nothing would so benefit low-fare airlines
as a break on the excessive CRS booking fees they pay. Orbitz offers
low-fare airlines that break.
You raised the question of whether airlines would choose to put
many of their lowest fares on Orbitz, and thereby disadvantage other
channels. Of course, only the airlines themselves can answer this
question with certainty. However, the fact is that there are many fares
already out in the marketplace through specialized websites, clubs, and
specialized travel agencies. Thus one can see that where the costs and
distribution efficiency make sense, the airlines are quick to put
special fares out into the market through multiple channels. In this
airlines are no different from those who market other goods, whether
they are selling cars, or pants, or books.
What I can say categorically to the question of where airlines will
choose to put their fares, is that the Orbitz agreements expressly
provide that no airline is or would be required to put fares on Orbitz
and not on other channels. The agreement Orbitz has with airlines is
very explicit that there is no exclusivity--the airlines would remain
free, as they are today, to decide what fares to sell and where to sell
them. But your question goes beyond that, to whether individual
airlines would choose to put fares on Orbitz and not on other channels.
My view, as somebody who has worked both on the airline side and on
the distribution system side, is that airlines must sell at least 99%
of their fares through all channels. However, most airlines also have
their own websites, and selling through those websites (which typically
do not incur CRS booking fees and other costs) is far less expensive
than selling through travel agents, and is even less expensive than
selling through Orbitz will be. Yet typically these airlines choose to
put 99.9% of their fares on all channels. And the one-tenth of one
percent of all fares that today they put only on their own website are
so low (typically ``distressed inventory'' seats that are about to be
flown empty) that they simply cannot be sold economically through many
of the more expensive channels.
This is simply a reflection of a very basic and compelling fact of
the airline life--it is a narrow margin business, and no airline can
afford to turn its back on the customers who use any particular
channel, even relatively small channels. You raised the question of the
Committee's concern in the past about the CRS industry, and its concern
now that some of those same issues might apply to the Internet in
general and to Orbitz in particular. You and your Committee were quite
right to be concerned about CRS in the past, and you should be every
bit as concerned about it today. As Inspector General Mead pointed out
in his testimony, the existing CRS rules have not been adequate and are
rapidly being overtaken by changing circumstances. We are even at the
point where the largest CRS in the world does not appear to be covered
by the CRS rules. This is clearly an absurd outcome. But as important
is the fact that the CRS rules never effectively dealt with excessive
CRS booking fees, never fully protected travel agents from restrictive
CRS contracts, never afforded the agents and their customers truly
unbiased displays, and never adequately protected smaller airlines from
unequal access and misuse of booking data.
It would be a tragic and bitter irony for consumers and for
competition if, after years in which government expressed all these
concerns about CRS but did so little about them, it now, on the basis
of its concerns about CRS, squelched the one possibility for
competition to CRSs. The effort against Orbitz is being directed and
fueled by Sabre, the largest CRS in the world, and Sabre is doing so in
order to slow or prevent a potential competitor from entering its
highly uncompetitive business. Sabre holds nearly 50% of CRS booking,
holds nearly 50% of online agency bookings (through its Internet arm,
Travelocity), and has used its dominance to raise booking fees over the
last 17 years by approximately 1400%. While Sabre/Travelocity now raise
their ``concerns'' about competition, it is they who benefit most from
the absence of competition, who ``swing market share'' on the Internet
in return for payment, and whose Internet site is funded by their
extraordinary CRS booking fee profits. Sabre/Travelocity knows that
blocking Orbitz is the key to perpetuating their dominant position,
built on the market power of their CRS. Orbitz is not, in fact, a CRS,
but an important antidote to the long-standing anti-competitive
problems of CRSs.
You asked for our views on the proposal made by Inspector General
Ken Mead at the hearing. We understand that the proposed regulation
would require an airline, if one online travel agency offered it the
same benefits as that airline received from another (e.g., in the case
of Orbitz, indirect offset of part of the booking fee, unbiased
displays, etc.), to grant the same benefits to the first agency as it
had granted to the second (e.g., in the case of Orbitz, access to
webfares). We assume that the proposal is to put the same requirement
on all online agencies, not just on Orbitz.
We do not believe that the principles embodied in this proposal, if
fully and effectively implemented, would harm consumers or competition.
But attempting to reduce these principles to a regulation could have
far-reaching and unintended consequences, with significant harm both to
consumers and to competition. For example, Mr. Chairman, attempting to
mandate these principles as a rule could well result in CRS owners of
online agencies increasing their booking fees, and portal-owned online
agencies increasing their subscription fees. These are ``financing
opportunities'' that Orbitz simply could not compete with, and the pro-
consumer and pro-competition benefits of Orbitz would simply be lost.
And furthermore, as much as some appear to worry about our
potential to be too strong in the market due to our access to webfares,
I worry that any rule attempting to implement Mr. Mead's principles may
not be implementable. And as a former head of an airline, I can predict
that if the rule is not implementable, the result will not be good for
consumers, because airlines will retrench to selling their best fares
only on their own websites.
Mr. Mead's proposal, and your question, clearly merits a more
thorough discussion, so please allow me to respond at greater length.
First, we note that the proposal recognizes that the key issue
before the Committee is not simply access to e-fares. The Inspector
General keenly understands that there is a relationship between the
current lack of any price competition for CRS booking fees, and the
issue of the availability of fares. He has clearly rejected the idea
that government should simply and unconditionally require that all
fares be available through all channels, and has done so on the basis
that that would not be good for consumers or for competition. Orbitz
has the potential to for the first time in twenty years bring a degree
of price competition to CRS booking fees, some degree of competitive
pressure on other sites to improve the quality of the displays and
information they make available to consumers, and some degree of
competition on other CRS practices, such as the use and misuse of
booking data. It is important that that potential new competition not
be lost.
Second, although we cannot predict whether other online agencies
would choose to match the benefits offered by Orbitz (and we do not
know for certain how each airline would respond to any such offer), we
clearly believe that every airline would eagerly accept such an offer,
even in the absence of regulation. It is a simple matter of their
economic interests: if it was in an airline's interest to enter into an
agreement with Orbitz, then it would be even more in its interest to
enter into equally favorable deals with additional retail channels. The
airline would not only be able to reach more consumers, but would also
receive an indirect offset of the excessive CRS booking fees on a
larger percentage of its ticket sales, which by itself would be of
considerable value to most airlines.
Third, it is an absolute fact that no airline that wishes to enter
into a deal with the same benefits as its Orbitz deal (or any other
deal) with another online agency will be prevented from doing so
because of the airline's agreement with Orbitz. Every Orbitz agreement,
with every airline, expressly provides that the agreement is non-
exclusive, and that the airline is free to join in promotions and other
marketing arrangements with any other retail channels, as the airline
deems appropriate.
Moreover, if the government were to decide to impose the Inspector
General's concept by regulation (i.e. that airlines accept an Orbitz-
like agreement from any other online agency), it also must ensure that
those regulations are far more exacting, and far less subject to
creative evasion, than the current tattered rules that supposedly
control anti-competitive CRS behavior. If the government wishes to
adopt the Inspector General's proposal as a regulation, the government
should implement it effectively. If it does not, the proposed
regulations would only further entrench the market power of the CRSs.
What would it take to effectively implement the Inspector General's
proposal by regulation? Let me mention a few of the prerequisites.
First, the requirement that other online agencies would also have
to offer an equal indirect offset of the CRS booking fee would have to
be more than illusory. Because Travelocity, for example, is merely the
Internet arm of Sabre, the largest CRS, Travelocity could on the
surface comply with the indirect offset requirement, but in fact evade
it through increased booking fees on Sabre. To effectively implement
the Inspector General's proposal, the government therefore would have
to cap CRS booking fees. (Indeed, it would need to consider requiring
the CRSs to reduce their fees, to reflect the vast decline in the cost
of computing power over the past twenty years.) Since Part 255 was
first adopted, the government has fretted that CRS booking fees were
excessive and the product of monopoly power, but it has never before
been willing to intervene and stop their upward spiral. If the
government is now finally willing to do so, the benefits for consumers,
agents, and competition (especially for the low-fare airlines) could be
significant.
We also emphasize that Orbitz' offer to indirectly offset CRS
booking fees applies to all fares sold through Orbitz. If another
online agency is to have a right to the same deal as Orbitz, then in
return it must offer the airlines the same deal as Orbitz. The proposed
regulation must therefore require that an offset be provided for all
fares sold through that agency on any given airline.
Second, as the Inspector General recognized in his testimony,
Orbitz has offered the airlines not only indirect offset of the CRS
booking fee, but also far superior displays. Orbitz will provide
genuinely unbiased and comprehensive information, which consumers can
rely on to show them the best flights and fares. Every airline,
investors and non-investors alike, will be treated the same. Unlike
Travelocity or some other sites, an airline would not pay to obtain
``preferred'' status on Orbitz. My written testimony to the Committee
included numerous examples of instances in which an airline had offered
an attractive promotion to consumers, only to discover subsequently
that Travelocity failed to show that promotion to its users. This is a
disservice both to airlines and consumers.
Unbiased and comprehensive displays are an inherent part of Orbitz'
agreement with the airlines. If other online agencies want to match
that benefit for consumers and airlines alike, I welcome the
competition. But again, other online agencies should not be able to
automatically get the e-fare access Orbitz gets from the airlines
without providing the same benefits to the airlines, and to consumers,
as Orbitz does. Any regulation implementing the Inspector General's
proposal should require more than mere compliance with Part 255's
display requirements. Instead, it should require that searches on that
site be genuinely unbiased, that the site comprehensively searches not
just selected but all available information about flights and fares,
and that its displays be as unbiased and comprehensive as those of
Orbitz. And any continuation by the online agency of override
commissions or other incentives to ``swing market share'' should be
presumed to be evidence of continuing bias--if a site is being paid to
``swing market share,'' it is hard to see how it can do so and be
strictly unbiased, as is Orbitz.
Third, Orbitz' deal with the airlines includes another important
benefit for the airlines (and for competition): the ownership of their
own booking data. This has been a particularly troubling issue for low-
fare airlines. Part 255 promises all airlines equal access to the data
compiled by CRSs from the sale of tickets. But the rule has not worked
in practice; for example, CRSs can price the data beyond the easy reach
of a new-entrant carrier. Orbitz solves this problem. By contract,
applicable to every participating airline, Orbitz provides that the
data generated by the sale of a ticket through its system will be the
sole property of the airline on which that booking was made. Every
airline, whether an investor in Orbitz or not, has in the case of
Orbitz ultimate control over its own data.
This is also an inherent and indivisible part of the benefits
Orbitz provides to every participating airline. Any regulation
implementing the Inspector General's proposal should require other
online agencies to also give participating airlines ownership of the
data compiled from the sale of their tickets.
Finally, if the goal of any proposed regulation is somehow to
``level the playing field'' and provide equal access for all
participants to resources they might need to compete effectively, the
regulation should not focus just on the one resource seized upon by
Orbitz' adversaries (i.e. webfares), but also on other key resources
(such as access to the major Internet properties) that can provide a
critical advantage to an Internet-based business. Sabre/Travelocity
contends that it needs access to webfares in order to compete, and that
airlines should be compelled to give them to it, apparently even if it
is unwilling to match what Orbitz offers in return for access to those
fares. At the same time, Sabre/Travelocity and Microsoft/Expedia, the
two dominant online agents, have secured exclusive access to the six
most-visited Internet properties, including AOL and Yahoo--exclusive
relationships Sabre/Travelocity describes as critical to success in
online travel sales (see attached chart). These exclusives are
extraordinarily powerful barriers to new competitors. For example, over
three-quarters of all Internet users use portals with which Travelocity
has locked up an exclusive arrangement. Yet Sabre/Travelocity
apparently wants to continue to deny Orbitz, or other potential new
entrants, a chance to obtain access to those key Internet properties,
even if Orbitz (or another potential new entrant) were willing to meet
or beat the terms Sabre/Travelocity has paid to obtain such
exclusivity. Why should the proposed regulation dictate that the
dominant, established players get access to one resource, but continue
to allow them to retain contractually exclusive access to another? No
regulation should sanction such an inequity, particularly when it
favors the established players and penalizes the prospective new
entrants trying to break into the market.
In sum, if government were to impose Mr. Mead's concept by
regulation, that regulation must require that other online agencies not
just appear to offer but actually offer consumers and airlines the same
benefits as does Orbitz, and that established incumbents not retain
contractually exclusive access to Internet resources that others may
need to compete. The Inspector General's proposal is, at its heart, a
right to match. A regulation implementing that proposal should ensure
that established players like Sabre and Travelocity cannot get the
benefits of matching without truly matching and therefore reforming
their practices and meeting every pro-consumer and pro-competition
obligation in the Orbitz arrangement. It should also ensure that new
entrants get an opportunity to gain access to the necessary resources
that the dominant incumbents have already locked up. And of course, any
regulatory requirement must apply to all online agencies, regardless of
whether or not they are owned in whole or in part by an airline.
This is not simply a matter of fairness. Orbitz, and the new
technology we will bring to the distribution of air travel, are the
last best hope to correct many of the competitive problems that have
plagued consumers, agents, and airlines in the CRS arena for two
decades. Orbitz has the intent, and the ability; to bring new
competition with respect to automation costs, display bias, unequal
access to data, and other issues that continue to plague the CRS arena,
despite the well-intentioned efforts of the DOT through Part 255. But
if the systems that already control 70% of the online agency displays
and sales need not offer all of the same pro-consumer and pro-
competition features of Orbitz to get the same access to e-fares as
Orbitz, then they will never upgrade their systems to compete with
Orbitz, and nothing will change; Sabre and Microsoft will consolidate
their dominance of online travel and the anti-consumer and anti-
competitive practices that characterize the CRS arena will continue
unimpeded. We do not believe that is what the Inspector General intends
or has proposed.
Finally, the Inspector General's proposal would require the
government to for the first time enact rules that specifically regulate
the content of the Internet. This is an issue with societal
implications far beyond air transportation. There is widespread concern
that once the government starts regulating Internet content, even for a
worthy purpose, it will be that much harder to keep that regulation
from rapidly spreading to many other aspects of the Internet. If, as we
believe, the Inspector General's proposal would merely duplicate what
would happen in the marketplace without regulation, then this may not
be an appropriate place to cross the Rubicon of regulating Internet
content.
In general, we believe that the Inspector General's concept will be
realized without regulation, in that airlines will accept offers from
other online agencies which offer approximately the same value as
Orbitz does. Attempting to impose the concept by regulation, however,
would be a complex task if done effectively, and would be a sham
otherwise.
A closely related concept, which I should also address, is the
question of whether government, by regulation, should require Orbitz,
and possibly other online agencies, to adhere to Orbitz' commitment to
unbiased displays, or at least to Part 255-compliant displays. This, of
course, raises the same issues of Internet content regulation that I
have just discussed. But setting those issues aside for a moment, my
point is simply that Orbitz will be truly unbiased, while the other
major online agencies not only are biased, but also sell that bias to
airlines. It would make no sense to regulate the displays of the only
truly unbiased system, and not the displays of those that clearly are
biased. Our position is that, while we do not believe regulation of
display bias on the Internet is necessary (we believe the competitive
pressure that Orbitz will bring to the market will force the other
online sites to limit the degree of bias they build into their
systems), we believe that any regulation of online agency displays
should apply equally to all online agencies. We would also suggest that
under any such regulation, any online agency that accepts payment from
individual airlines, in the form of override commissions or otherwise,
for the purpose of ``swinging market share,'' should not be considered
to be unbiased.
You also asked whether low-fare airlines were precluded--or are
precluded--from investing in Orbitz.
Let me be as clear as I can be as to how Orbitz envisions its
relationship with low-fare airlines. We actively seek the participation
of low-fare airlines in Orbitz. Our entire business strategy is based
on the idea that we will hold out to the consumer that we are the best
site to visit because we will offer all publicly available flight and
fare options, of all airlines, and will offer them in an unbiased and
readily useable and understandable way. If we cannot do that, there
will be no reason for us to exist, and certainly no reason for the
consumer to ever bother to visit our site.
That is why we are committed to offering unbiased and comprehensive
displays to every airline, offsets to CRS booking fees on the same
basis to every airline, ownership of marketing and booking fee data to
every airline, non-exclusivity to every airline, and so on.
Moreover, any airline can have all these benefits without having to
invest in Orbitz. For many airlines, especially many of the low-fare
airlines, the greatest barrier to their participation in Orbitz would
be if they had to invest in order to get those benefits.
We are pleased that a number of low-fare airlines have already
signed up as associate airlines. And it is important to note that all
airlines, whether low-fare or not, whether associates or not, will be
displayed in Orbitz exactly as if they were investors.
If an airline wishes to invest as well as participate in Orbitz, I
welcome their interest. In fact, I am actively looking for additional
investors. In part in response to the concerns some have raised about
airline investment in Orbitz, I am at this time focusing my efforts on
attracting non-airline investors, so that, as Orbitz has always
planned, airlines will soon own less than 50% of Orbitz. However, I am
more than willing to talk with any potential investor willing to invest
in Orbitz at its current equity valuation. My mission, in fact, is to
make Orbitz truly open to all interested investors, by making it a
publicly traded company.
One final complexity that I must call to your attention. Attracting
non-airline investors is key to dealing with concerns about airline
investment in Orbitz. I can assure you that launching an enterprise
such as Orbitz is an expensive proposition, and has only been made more
expensive by the tactics some of our competitors have engaged in to try
to prevent us from entering the market. Indeed, their threatening
statements about Orbitz have been designed to handicap Orbitz' efforts
to attract additional investors, and to ensure that we will not be able
to assuage any lingering concerns about our airline ownership, much
less bring Orbitz online. The government should not help the
established players bar Orbitz from the playing field, either directly
or indirectly, before it has even had a chance to bring competition to
CRS booking fees, to bring unbiased displays to consumers, and so on.
It should be consumers, not the existing competitors, who decide which
Internet sites best meet the needs of consumers.
Thank you again, Mr. Chairman, for the opportunity, both in the
hearing and now, to respond to the issues regarding the Internet. In
general I would say that serious competition issues have existed in the
CRS industry and continue to exist today. The Internet has the ability
to provide new competition that could improve the practices of the CRS
industry and of existing CRS-based online agencies, with respect to
booking fees, display bias, booking data access, and perhaps even agent
contracts. It is imperative that government not take any action that
would, however inadvertently, prevent the Internet from playing this
important pro-competitive and pro-consumer rule. Otherwise, government
would find that it had simply helped perpetuate and entrench the CRS
problems it has long been concerned about.
In this regard, it is particularly important to recognize that
Orbitz has not even come to market yet. What we are dealing with is
wild speculations about what might happen in the future, not acts that
have occurred. It would seem highly prejudicial to remedy problems that
have not occurred, and are quite unlikely to ever occur. (This is
particularly true when the established players who fret that they might
not get access to all fares in the future, today hold by contractual
right exclusive access to key Internet properties.) Even in the CRS
arena, where the problems were well known and thoroughly analyzed by
government, the resulting regulations often proved ill suited to
solving the problems. To regulate before the problems are even known is
far less likely to produce regulations which are effective and which
avoid unintended and negative consequences. At this point, if
government were to regulate, it would be chasing ghosts, often ghosts
conjured up only in the fevered imaginations of competitors--parties
whose interests should not be assumed to be the same as those of
consumers. I would urge that we allow reality to catch up with this
debate. Let's identify an actual disease before we start injecting the
patient with drugs. There will be time enough to observe whether any of
these dire predictions have any basis in reality, and to correct actual
problems in the unlikely event they occur.
Orbitz will benefit low-fare airlines with respect to the CRS
problems which have burdened them disproportionately; will be an
important and long-needed new competitive discipline to CRSs (and CRS-
based websites); is strictly non-exclusive, allowing airlines to
conclude similar arrangements with any other online agencies willing to
do so; will offer the most comprehensive and unbiased displays
available to consumers and (we hope) by that competition push other
sites to offer more comprehensive, less biased information to consumers
than they do today; and we are taking Orbitz in the direction of more
open investment by more kinds of investors. The proof is not in what
anybody says, but in what we do. And once we are up and running, you
will find that what we do is pro-consumer and pro-competition. We will
demonstrate the basic economic principle that better information to
consumers makes for better competition.
Thank you again for the opportunities you have afforded us to
present our views. If you have any further questions or concerns, I
would be more than happy to discuss them with you, including meeting
with you. I believe Orbitz represents an important new option for
consumers, and I do not see how denying consumers that option can
benefit the public interest.
Yours truly,
Jeffrey G. Katz,
Chairman, President and CEO.
Attachment
On-Line Travel Agencies' Affiliations With Top 10 Internet Sites i
(Ranking Based on Neilson/Net Ratings' Estimation of the Number of Unique Visitors in July 2000)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reach (% of Reach (% of
Property Unique Home Internet home Unique Work Internet work Affiliation with Travel Exclusive
Visitors ii users) Visitors iii users) Site
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. AOL Websites iv 53,051,036 60.15 21,031,727 66.19 Travelocity Yes; 5 years; Travelocity
(TVLY) will pay $200 mill
to AOL; AOL will pay TVLY
a % of ad revenues v
--------------------------------------------------------------------------------------------------------------------------------------------------------
2. Yahoo! vi 47,566,989 53.94 21,002,396 66.1 Travelocity Yes; TVLY will pay at least
$28 mill over 3 years;
expires end of 2002.vii
--------------------------------------------------------------------------------------------------------------------------------------------------------
3. MSN and 35,158,084 and 39.87 and 37.14 17,456,689 and 54.94 and 56.54 Expedia Yes; 5 yr. carriage and
4. Microsoft viii 32,750,239 17,964,294 cross promo agreement;
Expedia will pay Microsoft
$2.0 mill in 2000 and $2.2
mill in 2001, plus
incentive fees ix
--------------------------------------------------------------------------------------------------------------------------------------------------------
5. Lycos Network 24,174,846 27.14 12,019,437 37.83 Travelocity Yes; 2 year agreement
expires 9/15/00 x
--------------------------------------------------------------------------------------------------------------------------------------------------------
6. Excite@Home 21,568,038 24.46 10,947,874 34.46 Travelocity Yes; TVLY must pay a
minimum of $11 mill;
expires 2002 xi
--------------------------------------------------------------------------------------------------------------------------------------------------------
7. GO Network 18,308,910 20.76 9,614,102 30.26 Travelocity preferred provider on the
Go Network Travel Center;
one year term; TVLY will
pay Go Network a % of net
revenues derived from GO
Network users and the co-
branded sites; TVLY must
purchase certain level of
advertising xii
--------------------------------------------------------------------------------------------------------------------------------------------------------
8. About.com 14,333,886 16.25 7,538,170 23.73 Travelocity advertising Appears to accept ads from
banner appears other travel sites, but
throughout the Air with less favorable
Travel section of placement.
About.com site.xiii
--------------------------------------------------------------------------------------------------------------------------------------------------------
9. Time Warner Sites 14,163,776 16.06 7,958,742 25.05 CNN properties, which Exclusive with almost all
are owned by TW, link CNN Properties, including
to leisureplanet CNN.com, CNNfn.com,
exclusively; xiv other CNNSI.com,
TW sites' deals (if CNNtraveler.com; 3 year
any) are unclear agreement signed 12/99 xv
--------------------------------------------------------------------------------------------------------------------------------------------------------
10. AltaVista 13,242,720 15.02 8,031,204 25.28 Trip.com Yes; $15 mill for 5-year
contract signed 4/07/
98.xvi
--------------------------------------------------------------------------------------------------------------------------------------------------------
iIn addition to the above-listed alliances, TVLY also has alliances with, among others, the following Internet sites:
aPriceline.com (exclusive marketing and customer referral agreement). According to TVLY's press release, ``Priceline.com, Travelocity.com Marketing
Alliance Launches,'' 4/10/00, ``the two companies will share the largest user base in the Internet travel industry, estimated at more than 22
million.'' See also Jones,Terrell, PhoCusWright Investor Conference, 4/27/00, ``Key Partnerships'' slide 8 at http://media.corporate-ir.net/
media_files/NSD/TVLY/presentations/tvly_000427-01/sld008.htm. According to Media Metrix's estimation, Priceline was the 45th most visited Internet
Property, based on the number of unique work and home Internet users for June 2000. (Media Metrix Press Release, ``Media Metrix Releases U.S. Top 50
Web and Digital Media Properties For June 2000 & Reveals Number One Web Sites Within New Categories,'' 7/20/00, available at http://
www.mediametrix.com/press/releases/20000720a.jsp).
bRoad Runner (3-year alliance which expires 12/20/02). Road Runner will provide TVLY with premier positioning and promotion in its travel-related
areas. TVLY will pay Road Runner a fixed amount for each person who visits TVLY directly from the Road Runner service and another fixed amount for
each person, directed from Road Runner, who purchases a ticket; expires 12/20/02; renewable upon mutual agreement. (See Travelocity SEC Form 10K405
for fiscal year ending 12/31/99).
ciwon.com. (See Jones, Terrell, PhoCusWright Investor Conference, 4/27/00, ``Key Partnerships'' slide 8 at http://media.corporate-ir.net/media_files/
NSD/TVLY/presentations/tvly_000427-01/sld008.htm). According to Media Metrix' estimation, iwon.com was the 21st most visited Internet Property, based
on the number of unique work and home Internet users for June 2000. (Media Metrix Press Release, ``Media Metrix Releases U.S. Top 50 Web and Digital
Media Properties For June 2000 & Reveals Number One Web Sites Within New Categories,'' 7/20/00, available at http://www.mediametrix.com/press/releases/
20000720a.jsp).
iiSee Neilsen/Net Ratings. ``Unique Home Visitors'' refers to the number of individual users estimated to have visited the specified site, through home
access to the Internet, in July 2000. The estimates are based on a sample of households that have access to the Internet and use Windows 95/98/NT or
MacOS 8 or higher.
iiiSee Neilsen/Net Ratings. This refers to the number of individual users estimated to have visited the specified site, through work access to the
Internet, in July 2000. The estimates are based on a sample of at-work users that have access to the Internet. Individuals that visited a site through
an Internet connection at work may also have visited a site through a home connection and would be considered a separate visitor for home use
estimation purposes.
ivThe AOL Websites include AOL's proprietary network, AOL.com, the CompuServe Service, Netscape Netcenter, and Digital City. (See Travelocity SEC Form
10K405 for fiscal year ending 12/31/99).
vUnder the agreement, TVLY is the exclusive travel booking system for AOL for the five years ending 3/31/05, on the United States versions of AOL,
AOL.com, the CompuServe Service, Netscape Netcenter, Digital City and, for a one-year term, AOL Plus. (See Travelocity SEC Form 10K405 for fiscal year
ending 12/31/99). In addition, AOL is obligated to place promotions throughout the AOL properties that will permit AOL users to link to TVLY-AOL co-
branded sites. Id.
viYahoo! is a minority investor in TVLY. (See Travelocity SEC Form 10K405 for fiscal year ending 12/31/99).
viiSee Travelocity SEC Form 424B3 filed 02/08/00 (Proxy Statement/Prospectus filed in connection with TVLY's merger with Preview Travel). TVLY is the
exclusive provider of air, hotel and rental car booking services for Yahoo! (See Travelocity SEC Form 10K405 for fiscal year ending 12/31/99). See
also Travelocity Press Release, ``Yahoo and the Sabre Group Team Up to Bring Users Travel Booking Services,'' 11/10/97, available at http://
svc.travelocity.com/pressroom/pressrelease/0,1090,14|TRAVELOCITY,00.html.
viiiMicrosoft Corp. is an 85% owner of Expedia, Inc. (See www.hoovers.com, Expedia, Inc. Company capsule).
ixSee Expedia Prospectus, 11/9/99, at 44 and 59. Under the terms of the partnership, Microsoft will supply Expedia with premium placement on the MSN.com
website, the Hotmail email service and the WebTV platform. According to Expedia's Prospectus, Hotmail is one of the largest e-mail systems in the
world, and WebTV is one of the largest providers of television-based Internet access. According to Media Metrix's June 2000 data, Hotmail was the
leading E-mail service website with more than 20 million unique visitors. (Media Metrix Press Release, ``Media Metrix Releases U.S. Top 50 Web and
Digital Media Properties For June 2000 & Reveals Number One Web Sites Within New Categories,'' 7/20/00, available at http://www.mediametrix.com/press/
releases/20000720a.jsp). In addition, MSNBC.com and Expedia jointly produce the travel section on MSNBC.com's site. (See Travel Section, MSNBC.com at
http://www.msnbc.com/news/trav-main_front.asp, which has a direct link to Expedia.com).
xSee Travelocity SEC Form 10K405 for fiscal year ending 12/31/99. Under the agreement, TVLY and Lycos have a co-branded site that is promoted throughout
the Lycos Web site. Lycos will display a minimum number of Internet links to TVLY and the co-branded site. TVLY is obligated to make payments to
Lycos, as well as pay a portion of commissions TVLY earns through the co-branded site in excess of specified thresholds, and pay Lycos ``fees for
providing links to [TVLY's] services above specified thresholds.'' Id.
xiSee Travelocity SEC Form 10K405 for fiscal year ending 12/31/99. Excite@Home is a global media company focused on combining leading brand and media
with distribution. The company is the result of a merger between Excite, Inc. and @Home Network in 1999. (See ``Excite@Home Fact Sheet available at
http://corp.excite.com/about/facts.html). Prior to the merger, TVLY had separate agreements with Excite Inc., a leading Internet search engine
provider, and @Home Network. TVLY is the exclusive provider of travel booking services for Excite's Travel Channel (City.Net) in the United States and
for the WebCrawler Travel Channel. The agreement with Excite expires in 2002. (See Travelocity SEC Form 10K405 for fiscal year ending 12/31/99). TVLY
is the exclusive travel booking service provider for @Home Network subscribers. @Home is a leading provider of high-speed Internet services via the
cable infrastructure. Under the TVLY-@Home agreement, @Home agreed not to create a channel that provides travel information for any of TVLY's direct
competitors or to allow any competitor to place any promotional material on @Home Network Web pages on which TVLY is featured. In addition, TVLY
committed to pay @Home the greater of a set fixed quarterly rate or a variable rate equal to a portion of TVLY's revenues from advertising on @Home
and from the sale of services to @Home subscribers. This agreement expires in 2001. (See Travelocity SEC Form 10K405 for fiscal year ending 12/31/99;
see also Travelocity Form 424B3 filed 02/08/00, and Travelocity Press Release, ``@Home Network Taps the SABRE Group to Deliver a One-Stop Shop for
Travel Services,'' 4/21/98, available at http://svc.travelocity.com/pressroom/pressrelease/0,1090,39|TRAVELOCITY,00.html).
xiiSee Travelocity SEC Form 10K405 for fiscal year ending 12/31/99. Go Network (Infoseek) will not sell banner advertising space on the Go Network
Travel Center to 3 previously identified competitors of TVLY. The agreement provides that, after March 2000, either party can terminate the agreement
upon 90 days notice. In addition, the parties may mutually agree to extend the deal for one year terms. Id.
xiiiThe ``front page'' of this section is available at http://airtravel.about.com/travel/airtravel/mbody.htm.
xivSee, e.g., ``CNN, Leisureplanet Travel in Circles,'' The Standard, 12/21/99, available at http://www.thestandard.com/article/display/
0,1151,8406,00.html. CNN made a $20 million equity investment in leisureplanet.com and Leisureplanet.com committed to purchase $30 million in
advertising on CNN properties. (See Leisure Planet Press Release, ``CNN Newsgroup to take $20 Million Equity Stake in Leisureplanet as part of
Strategic Agreement,'' 12/20/99, available at http://leisureplanet.com).
xvSee Leisure Planet Press Release, ``CNN Newsgroup to take $20 Million Equity Stake in Leisureplanet as part of Strategic Agreement,'' 12/20/99,
available at http://leisureplanet.com.
xviSee Trip.com press release, ``TheTrip.com and AltaVista Search Site Sign Exclusive $15 million five-year deal for Internet travel service,'' 4/7/98,
available at http://www.trip.com/information/pressroom/article/1,1298,1-1-7,00.html. Galileo is Trip.com's parent company. (See ``Partners of
TRIP.com'' available at http://www.trip.com/information/partners/resources/).
Prepared August 2000
______
Prepared Statement of Southwest Airlines Co.
Southwest Airlines is pleased to submit this statement to the
Senate Commerce, Science & Transportation Committee in response to its
hearing on ``Internet Sales of Airline Tickets.''
Overall, Internet Sales of Airline Tickets Have Been Enormously
Beneficial to Travelers, but the Potential for Abuse Exists
from Collective Ventures like Orbitz.
The subject of this hearing is critically important for the cost,
convenience, and accessibility of air travel by the public. As it has
in many industries, the Internet is transforming the sale of air
transportation to empower individuals to deal directly with suppliers
so that they may choose for themselves among the travel options that
are available. Just a few years ago, only the most technologically
savvy consumers ``surfed the net,'' and even fewer used the Internet
for the purchase of goods and services. Today, most households either
own personal computers or have access to them, and individuals are
making an increasing number of financial transactions over the Internet
with confidence. Air travel is no exception to this trend, as airlines
and other travel providers have developed numerous websites--such as
Southwest Airlines' site at www.southwest.com--that allow individuals
to book seats directly with airlines over the Internet.
In fact, research by independent organizations has shown that the
correlation between use of the Internet and travel is especially
strong. In a 1999 report, the Travel Industry Association (TIA) found
that the number of online travelers has grown 190 percent in the last
three years to 85 million people.\1\ TIA also found that online travel
is already the largest Internet commerce category and predicted that
online travel sales will approach $30 billion by 2003.
---------------------------------------------------------------------------
\1\ Travelers' Use of the Internet, Travel Industry Association of
America, 1999.
---------------------------------------------------------------------------
These trends have profound implications for the traveling public.
As demonstrated by the popularity of Southwest's own website, the
emergence of online booking options by individual airlines as well as
independent (non-airline owned) websites has brought consumers new,
low-cost means of making travel arrangements. These online options have
also intensified competition among airlines by opening new ways for
rival carriers to attract customers with low fares and additional
services.
But, just as the Internet has been a positive force for change in
the sale of airline tickets, it has also opened the door to potential
abuse, by creating new ways for airlines to collaborate in ventures
that would stifle competition and harm consumers. This ``dark side'' of
Internet ticket sales is illustrated currently by Orbitz (formerly T-
2), a joint venture of the largest airlines to consolidate their
Internet sales into a single mega-website which they will jointly own
and control. Unlike individual airline websites and independent online
sites, this collective venture has the dangerous potential to
strengthen major airlines' dominance and control over the information
that is provided to consumers, reduce independent decision making by
participating airlines, and to facilitate coordinated actions against
non-participating low-fare carriers such as Southwest.
The ability to sell airline tickets on the Internet thus produces
both enormous public benefits--as illustrated by individual airline
sites and independent on-line options that promote competition, and the
risk of serious public harm--as illustrated by collective Internet
sales ventures that will reduce competition. The appropriate
governmental authorities must recognize this fundamental difference
between unilateral and collective action, and craft public policy
accordingly. While Internet sales by individual airlines should be
encouraged, the government should not allow collective ventures like
Orbitz to control the flow of information to consumers or otherwise
suppress competition among airlines.
Individual Airline Web Sites--Like www.southwest.com--Are
Procompetitive and Beneficial to Consumers.
Southwest's entry into the world of e-commerce began in 1996 as
something of an experiment, with a homemade web page produced at the
initiative of a few company employees. From this modest beginning,
Southwest's Internet site has grown in the last few years to become not
only the largest individual airline website but one of the top e-
commerce sites among all industries, in terms of revenue generated. In
February of this year, Southwest announced that approximately 25
percent of the company's revenues are being generated through its
website, a pace that will produce more than $1 billion in e-commerce
revenues for the year 2000.
By accessing www.southwest.com, consumers may view the full range
of Southwest's flight schedules and fares that are available to any of
the 57 destinations that Southwest serves in the U.S. By simply
entering basic information about desired travel dates and destination,
the consumer receives all flight and fare options that are available,
and may purchase seats with a few clicks on the computer.
The enormous popularity of Southwest's website, as well as the
growing usage of other individual airline sites, demonstrates how much
the public has come to enjoy the convenience, efficiency, and freedom
of choice that the Internet can offer. Additionally, the low cost of
Internet bookings benefits all passengers. For Southwest, the
transaction cost of selling tickets via the Internet is approximately
$1 per booking, compared to about $5 per booking through the company's
own reservation agents, and $10 per booking through travel agents. The
lower cost of Internet sales is a significant public benefit, because
Southwest passes these savings on to consumers in the form of low
fares. Considering that ticket distribution costs are Southwest's third
largest expense category (after salaries and fuel), the savings from
Internet bookings make a significant contribution to keeping the
company's bottom-line costs--and thus its fares--low.
Individual airline sites like Southwest's, as well as the many
independent non-airline-owned online booking sites, have also enhanced
competition among airlines by providing a new arena for competing
carriers to display their fares and services, to make special offers,
and otherwise to attract passengers from their rivals. All of this
independent and unilateral activity generates significant benefits to
consumers--in greater personal convenience, lower travel costs, and
increased airline competition.
Unlike Single-Airline Web Sites, Collective Ventures Like Orbitz Have
the Potential to Control the Flow of Information to Consumers
and Reduce Airline Competition.
The Committee's interest in holding the present hearing is
understandably driven by concern over Orbitz, a prospective Internet
venture owned jointly by five major U.S. airlines and joined by
approximately 30 other airlines as non-equity ``associates.'' Orbitz
claims that it will offer exclusive access to the lowest fares
available by U.S. airlines. Southwest is neither an owner nor a
participating airline in Orbitz,\2\ as Southwest prefers to make its
fares available to the public unilaterally rather than in combination
with its competitors.
---------------------------------------------------------------------------
\2\ According to press reports, Orbitz has claimed that it will
``offer'' Southwest's flights on its website. Southwest has not
consented to the use of its proprietary information on the Orbitz site,
and does not understand how Orbitz can make this claim.
---------------------------------------------------------------------------
Until recently, there has been no governmental scrutiny of Orbitz,
despite the fact that this cooperative venture is owned by airlines
that together represent over 80% of the U.S. air travel market (over
90% if the United-USAirways merger is consummated). Several weeks ago,
the Department of Justice announced that it was investigating Orbitz
for possible antitrust implications. The Department of Transportation
recently stated that it has also begun to investigate Orbitz.
Among the concerns that have been raised by numerous parties
regarding Orbitz are the following:
Whether Orbitz will lead to collusion by participating
airlines on prices charged to the public. This concern is
especially relevant in light of the past actions by major
airlines to coordinate their fares via electronic signaling.\3\
---------------------------------------------------------------------------
\3\ See U.S. v. Airline Tariff Publishing Co., et al., 1994 WL
45430 (consent order settling DOJ complaint of price-fixing against
several major airlines).
Whether Orbitz will stifle competition among airlines by
effectively replacing the competing websites of individual
airlines with a single website that discourages independent
---------------------------------------------------------------------------
decision-making.
Whether Orbitz will mislead the public by presenting the
illusion that it offers neutral and comprehensive fare
information while in actuality offering selective and/or biased
displays that favor the airlines that own and control the
system.
Whether Orbitz will facilitate coordination by the major
airlines to use their combined resources to stifle competition
from non-participating low-fare airlines like Southwest. This
is especially relevant in light of mergers and other types of
consolidation now being proposed in the airline industry.
Southwest shares these concerns, and we urge Congress, the DOJ and
the DOT to investigate them fully. In doing so, the authorities should
remember that all of the airlines participating in Orbitz already offer
their fares to the public over the Internet via their individual
websites, as well as through independent, non-airline owned sites that
offer unbiased displays. Thus, all major airlines already have access
to the efficiencies and cost-savings that Internet sales of tickets
offer, via their separate, individual, competitive sites. We question
the justification for combining these independent websites into one
cooperative venture owned and operated jointly by a group of airlines
that are supposed to be competitors of one another.\4\
---------------------------------------------------------------------------
\4\ Antitrust guidelines recently issued by the DOJ note that
``marketing collaborations'' that involve competitively sensitive
assets such as an ``extensive distribution network'' can result in
anticompetitive harm:
Such agreements can create or increase market power or facilitate
its exercise by limiting independent decision making; by combining . .
. control over competitively significant assets or decisions about
competitively significant variables that otherwise would be controlled
independently; or by combining financial interests in ways that
undermine incentives to compete independently.
Antitrust Guidelines for Collaboration Among Competitors, Federal
Trade Commission and Department of Justice, April 2000 at p. 14.
---------------------------------------------------------------------------
The basic problem with Orbitz is its very structure, whereby all
major airlines other than Southwest would combine to establish a single
distribution outlet for their Internet fares. Would the nation's major
oil companies be allowed to combine operations to sell gasoline through
a single dealership? Would the major U.S. automakers be permitted to
collectively sell cars through a single distributorship? Of course not.
And, for the same reasons, the major airlines should not be permitted
to combine their Internet sales operations into a single venture under
their joint control.
Moreover, Orbitz must be viewed in the larger perspective of
today's airline industry, in which the Big Six airlines have launched
an unprecedented drive for consolidation. United Airlines and USAirways
have already proposed to merge, of course, and there are widespread
reports that the other four are also seeking mergers, leaving three
airlines to control over 90% of the nation's air travel market. At the
same time, those airlines are not only proposing to combine their
Internet ticket sales through Orbitz, but--according to recent press
reports--are also preparing to launch another collective Internet
venture (Hotwire.com) to jointly market unsold seats to consumers.
Viewed in this perspective, it appears that Orbitz is just one part
of a larger effort by the major airlines to consolidate their
operations, coordinate their decisionmaking, and to concentrate their
resources to more easily deal with their few remaining airline
competitors (primarily Southwest). Orbitz could play a critical role in
this strategy by serving as a type of ``control valve'' over the
information provided to consumers about available fares and services,
and a facilitator among airline participants to coordinate their
actions against competitors. Recent history has shown that the mega-
carriers will not hesitate to combine forces to disadvantage low-fare
competition. Internet technology spawns new opportunities to achieve
that objective.
Special vigilance is needed to prevent these consequences. The
stakes are huge: numerous studies have demonstrated that the only
significant price competition in the airline industry today occurs in
markets served by a low-fare airline. The DOT found, for example, that
``at network hub cities where low-cost carriers do not compete, fare
premiums are quite high and are increasing.'' \5\ Further, Southwest
Airlines has been widely recognized not only as the nation's principal
low-fare airline, but the only nationwide source of price discipline in
the industry today. As the Transportation Research Board recently
concluded in a major study of airline competition,\6\
---------------------------------------------------------------------------
\5\ The Low Cost Airline Service Revolution, April 1996.
\6\ Entry and Competition in the U.S. Airline Industry, Special
Report 255 at p. 52 (1999).
``No other airline operates in the same way on the same scale
as Southwest Airlines. This airline alone accounts for about
75% of the passenger traffic carried on low-fare airlines . .
---------------------------------------------------------------------------
.''
It is therefore crucial that the Congress and agency decision makers
take all necessary steps to prevent joint efforts that would threaten
the growth of low-fare competition.
Because of both the severity and complexity of the dangers posed by
Orbitz, Southwest does not believe that they may simply be ``fixed'' by
subjecting Orbitz to DOT regulation in some fashion. Regulation
inherently lags behind technological change, and has the additional
risk of harmful ``spillover'' to innocuous or procompetitive entities
such as single-airline websites. Consequently, Orbitz and other
collective airline ventures that pose similar anticompetitive
consequences should simply be prohibited.
Consumers are entitled to fare and schedule information that is
unfiltered and unrestricted by a consortium of the major airlines.
Consumers are also entitled to continue to receive the benefits of low-
fare competition provided by Southwest and others, free from collective
efforts to suppress it. Joint ventures of the major airlines like
Orbitz should not be permitted to interfere with these worthy and
proper expectations of the public.