“In a report submitted to the Department of Transportation, Meg Guerin Calvert, I Curtis Jernigan,and Gloria Hurdle conclude:
Changes in market conditions, including divestiture of ownership of some CRSs and expansion of the use of the Internet to make air transportation bookings, have changed the dynamics of CRS competition but have not obviated the need for CRS regulations.
CRS regulations, including those governing bias, functionality, and the relationships among airlines, CRSs, and travel agent subscribers, continue to provide an important framework that is necessary to prevent anticompetitive and discriminatory conduct that would harm airlines not affiliated with CRSs (particularly smaller airlines), to preserve airline competition, and thereby to benefit consumers in terms of prices and services.
Two CRS rules that DOT proposes to eliminate-the mandatory participation and non-discriminatory booking fee rules-should be maintained, extended to affiliated airlines, and applied to all entities that are the functional equivalent of CRSs. These rules remain necessary to protect airline and CRS competition, particularly for consumers and smaller airlines.
The two rules provide essential protection for consumers and airlines that are not affiliated with CRSs (particularly smaller airlines) from competition-distorting behavior that is likely to occur absent regulation (and in fact did occur prior to enactment of the rules). Mandatory participation rules preclude airline owners1 of CRSs from withholding participation in, or inventories from, competing CRSs in order to disadvantage these CRSs in competition for travel agent subscribers. Non-discriminatory pricing rules preclude airline owners of CRSs from charging rival airlines higher fees for bookings and preclude major airlines from negotiating such arrangements with CRSs to the comparative disadvantage of non-owner airlines, particularly smaller airlines. Because the potential for discriminatory and anticompetitive conduct continues, these rules remain necessary.
Elimination of the mandatory participation and non-discriminatory pricing rules would pose substantial risks to competition. Their elimination would provide opportunities for the resurgence of higher charges for smaller airline competitors, which would increase their costs relative to those of larger airlines and disadvantage them in competition with larger airlines. Moreover, elimination of mandatory participation rules could provide opportunities for airlines affiliated with CRSs to withhold inventories from competing CRSs, thereby potentially reducing inter-CRS competition to the detriment of consumers and airlines.
The competitive risks identified by DOT in its initial imposition of these two rules remain, and indeed may be somewhat enhanced by current marketplace developments. Marketplace changes have reduced neither the incentives nor the ability of affiliated CRSs and airlines to engage in anticompetitive behavior. Rather they may have increased the ability of airline-owned CRSs profitably to withhold inventories from competing CRSs. These competitive risks relate both to current CRS arrangements as well as to prospective ones, particularly those that involve airline owners.
Practical experience demonstrates that these two rules have not inhibited the ability of major airlines effectively to negotiate and obtain both new services and improved pricing from CRSs. CRSs that account for over 60% of bookings in the U.S. have announced substantial reductions in booking fees as a result of recent negotiations with major airlines.
While some larger airlines have argued that elimination of these two rules is required to stimulate inter-CRS competition on booking fees, empirical evidence supports the conclusion that with these important protections in place, competition for and reduction of booking fees are occurring in the marketplace at the present time. CRSs, travel agents, and airlines have begun to develop pricing mechanisms that alleviate the structural issues in the industry that historically may have inhibited the effectiveness of price competition in the setting of booking fees. Moreover, the benefits of successful negotiations by the large airlines are available to all airlines-including smaller airlines-because of the non-discriminatory pricing provision.
Claims about high booking fee levels or the relative costs of distribution through CRSs as compared to online channels should not be used as a basis for elimination of the mandatory participation or non-discrimination rules. In particular, estimates of changes in booking fees over time tend to overstate the increases in fees relative to system functionality, and, specifically, do not account for underlying improvements in CRS services and technology or the increasing complexity of fares. Examination of trends also shows that booking fees are constrained substantially by non-discrimination regulation and competitive pressures.
While some airlines have alleged that significant increases in booking fees have occurred since the 1980s, the statistics typically cited fail to take into account that booking fee levels and changes are driven by a number of factors, including changes in the services offered and purchased by participating airlines. As increasingly enhanced services are offered and purchased by more airlines, the average price paid for these services will increase (although not all service enhancements have been accompanied by fee increases). Content and processing have changed dramatically in recent years with the dramatic proliferation of fares in the CRS databases (including special fares for corporations and web fares) and the expansion of suppliers. In addition, CRSs have substantial investments in technology and service enhancements. Review of recent negotiations and the fees charged to both larger and smaller airlines shows that booking fees are subject to important competitive constraints. Finally, comparisons of pre-regulation and post-regulation booking fees are inherently flawed because pre-regulation, airlines that owned CRSs were likely able to earn supracompetitive profits on their sales of air transportation and thereby subsidize their booking fees.
The DOT should not prohibit or regulate productivity payments. On balance, these payments are serving as an important means of competition among CRSs for travel agent subscribers.
Review of productivity payments practices shows that productivity payments are, on balance, pro-competitive and provide an important means by which CRSs-particularly non-airline owned CRSs-can expand market share. Productivity payments do not appear to decrease travel agents’ use of the Internet or other alternatives to CRSs. Moreover, there is no supporting evidence for certain airlines’ allegations that productivity payments have adversely affected the level of booking fees.
During a period of dramatic change, development of new technologies, and formation of new business ventures, it is particularly important that entities that are performing the functions of a CRS be included in the regulatory structure and be regulated by the same standards as traditional CRSs. There is no basis for, and indeed substantial competitive risks associated with, not regulating such entities.
The CRS rules are crafted as a set of competitive principles of conduct that apply to entities that meet the specific criteria for regulation. This has served well over the course of 20 years of regulation to adapt to a wide variety of marketplace changes and to preserve and promote airline competition to the benefit of consumers. In some ways new technologies may exacerbate, not reduce, the competitive issues underlying the need for regulation in the CRS industry. In addition, differences in technology may require that the DOT examine carefully how best to apply particular regulations to different technologies to achieve the common goals of the regulation, including unbiased displays, access to comparable functionalities, and non-discriminatory treatment of unaffiliated airlines, particularly, smaller airlines.
The announced sale of Worldspan to non-airline owners does not fundamentally alter the need for continued CRS regulation or mitigate the need for maintaining regulations such as mandatory participation and non-discriminatory pricing. The Worldspan transaction, if successfully concluded, would result in the divestiture of Worldspan from its airline owners. However, there remains the prospect that affiliated airlines-i.e., those having marketing or other financial or operating affiliations with a CRS-would have the incentive and ability to engage in actions that would distort airline competition if unregulated. This potential increase in affiliations, in fact, strengthens the need to extend mandatory participation to affiliated carriers.
Review of marketplace conditions and the rationale for regulation demonstrates that no fundamental changes should be made in the CRS rules. Basic regulations continue to be required to protect both consumers and non-owner (unaffiliated) airlines. Airlines have recently demonstrated their ability to negotiate reduced booking fees from CRSs under the current regulatory scheme, including the mandatory participation and non-discrimination rules. The fundamental principles of regulation should continue to govern traditional CRSs and their relationships with other market participants and should also be applied to evolving entities that are the functional equivalent of CRSs and therefore have the capability to engage in the types of anticompetitive behavior that the CRS regulations seek to deter.”