[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
ISSUES IN THE TRAVEL AGENCY BUSINESS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON REGULATORY REFORM
AND OVERSIGHT
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
WASHINGTON, DC, MAY 2, 2002
__________
Serial No. 107-55
__________
Printed for the use of the Committee on Small Business
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79-992 WASHINGTON : 2002
________________________________________________________________________
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COMMITTEE ON SMALL BUSINESS
DONALD MANZULLO, Illinois, Chairman
LARRY COMBEST, Texas NYDIA M. VELAZQUEZ, New York
JOEL HEFLEY, Colorado JUANITA MILLENDER-McDONALD,
ROSCOE G. BARTLETT, Maryland California
FRANK A. LoBIONDO, New Jersey DANNY K. DAVIS, Illinois
SUE W. KELLY, New York BILL PASCRELL, Jr., New Jersey
STEVE CHABOT, Ohio DONNA M. CHRISTENSEN, Virgin
PATRICK J. TOOMEY, Pennsylvania Islands
JIM DeMINT, South Carolina ROBERT A. BRADY, Pennsylvania
JOHN R. THUNE, South Dakota TOM UDALL, New Mexico
MIKE PENCE, Indiana STEPHANIE TUBBS JONES, Ohio
MICHAEL FERGUSON, New Jersey CHARLES A. GONZALEZ, Texas
DARRELL E. ISSA, California DAVID D. PHELPS, Illinois
SAM GRAVES, Missouri GRACE F. NAPOLITANO, California
EDWARD L. SCHROCK, Virginia BRIAN BAIRD, Washington
FELIX J. GRUCCI, Jr., New York MARK UDALL, Colorado
W. TODD AKIN, Missouri JAMES R. LANGEVIN, Rhode Island
SHELLEY MOORE CAPITO, West Virginia MIKE ROSS, Arkansas
BILL SHUSTER, Pennsylvania BRAD CARSON, Oklahoma
ANBAL ACEVEDO-VILA, Puerto Rico
Doug Thomas, Staff Director
Phil Eskeland, Deputy Staff Director
Michael Day, Minority Staff Director
------
Subcommittee on Regulatory Reform and Oversight
MIKE PENCE, Indiana, Chairman
LARRY COMBEST, Texas ROBERT A. BRADY, Pennsylvania
SUE W. KELLY, New York BILL PASCRELL, Jr., New Jersey
SAM GRAVES, Missouri CHARLES A. GONZALEZ, Texas
ROSCOE G. BARTLETT, Maryland DAVID D. PHELPS, Illinois
TODD W. AKIN, Missouri JAMES R. LANGEVIN, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ANIBAL ACEVEDO-VILA, Puerto Rico
Barry Pineles, Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on May 2, 2002...................................... 1
Witnesses
Foley, Hon. Mark, U.S. House of Representatives.................. 5
Fenech, Lou, General Manager, Royal Holiday Travel............... 7
Siemsen, Celeste, President, Empress Travel of Coram............. 9
Morse, Stan, President and Owner, Marstan Travel................. 12
Alton, Jacquelyn, Owner, CWT/Almeda Travel, Representing Society
of Government Travel Professionals............................. 14
Doernhoefer, Gary, Vice President & General Counsel, Orbitz...... 16
Thomas, Michael, President, OneTravel.com........................ 19
Appendix
Opening statements:
Pence, Hon. Mike............................................. 43
Grucci, Hon. Felix........................................... 46
Brady, Hon. Robert A......................................... 53
Prepared statements:
Foley, Hon. Mark............................................. 54
Fenech, Lou.................................................. 56
Siemsen, Celeste............................................. 65
Morse, Stan.................................................. 76
Alton, Jacquelyn............................................. 80
Doernhoefer, Gary............................................ 89
Thomas, Michael.............................................. 102
Additional material:
Prepared statement of Mark Ferguson, Aqua Software Products,
Inc........................................................ 115
Prepared testimony of Nancy Budget Travel.................... 116
Prepared testimony of Bernadette Cairns, Budget Travel....... 119
Prepared testimony of Ellen Knapp, Business Travel
Specialists, Inc........................................... 121
Prepared testimony of Marianne McInerney, National Business
Travel Association......................................... 123
Prepared testimony of Dale Colson, Women Impacting Public
Policy..................................................... 131
Prepared testimony of Kevin Iwamoto, National Business Travel
Association................................................ 139
Letter to Committee from Buffalo Travel & Tours, Inc......... 144
Letter to Committee from Jonathan Zuck, Association for
Competitive Technology..................................... 147
Letter to Committee from Competitive Enterprise Institute.... 148
Letter to Committee from Robert Rowen, Vanguard Airlines..... 152
ISSUES IN THE TRAVEL AGENCY BUSINESS
----------
THURSDAY, MAY 2, 2002
House of Representatives,
Committee on Small Business,
Subcommittee on Regulatory Reform and Oversight,
Washington, DC.
The committee met, pursuant to call, at 10:00 a.m. in room
2360, Rayburn House Office Building, Hon. Mike Pence (chairman
of the committee) presiding.
Chairman Pence. I would like to call the Subcommittee on
Regulatory Reform and Oversight, the Committee on Small
Business, into session.
This hearing is entitled Issues in the Travel Agency
business, and the Chair has a brief opening statement. We will
also recognize the gentleman from New York, and also the
ranking member for opening statements before we recognize the
distinguished gentleman from Florida for our first panel, and I
appreciate very much his attendance.
Travel agents provide a service that most Americans take
for granted. Unlike many other businesses, most Americans do
not have daily contact with travel agents. We often forget that
travel agents play a vital role in ensuring that Americans
reach their intended destinations. They are a critical small
business in many American communities.
The necessary role that they play in the American economy
was evident in the aftermath of the events of September 11.
Riveting testimony provided by Bonnie Adams before this
subcommittee on October 11 demonstrated the necessity of having
a healthy and viable travel agency business in the country. As
Ms. Adams testified, ``Travel agents were in their offices
trying to help the many thousands of people stranded by
nationwide airport closures. Many of them provided free
assistance to people who had bought their tickets on the
Internet and had no one else to contact for help.''
Today's hearing exams issues that are affecting the
financial viability of the travel agency business. Technology
has progressed to the point where many consumers are no longer
using travel agents to purchase tickets or plan their holidays;
rather they are using the Internet to investigate fares, see
pictures of resorts and make reservations. New companies such
as OneTravel.com and Orbitz were formed to take advantage of
this new technology. This new technology even has affected how
the federal government contracts for the provision of travel
agency services.
If there are cheaper and better ways for businesses to
provide services than through travel agents, then the market
has spoken. Travel agents will have to adapt to the changing
economy just as many other small businesses have in the
information age.
However, the changes brought in the distribution of travel-
related services, especially airline tickets, must at the end
of the day be fair, particularly in light of the extraordinary
commitment that this Congress made in the fall of 2001 to the
airline industry itself. These changes cannot come as a result
of unfair competitive practices by companies interested in
extending their market power in the provision of air travel to
new businesses or regulatory decisions that bias the
marketplace in favor of certain interests.
Before Congress takes any action, it is important that we
understand the economic and regulatory problems faced by
existing travel agents. We must also comprehend how new
technologies and organizations are providing innovation in the
delivery of travel services. Solutions to problems facing
travel agents cannot stifle innovation, nor should the
government favor new ways of doing business if they are based
on unfair or unjust competition. The new system for selling and
distributing airline tickets is not necessarily better if the
system unfairly capitalizes on the existing market power and
substantial federal assistance provided to the airlines.
The issues being addressed in today's hearing are important
as evidence by the appearance of good friend, Mr. Foley, the
Co-chair of the Congressional Travel and Tourism Caucus, who
has my taken time to speak on this issue in this panel today.
If, in my estimation, unfair practices are endangering
America's small travel agents, I will do my part to ensure that
those unfair practices should be corrected. However, if the
changes facing the travel agency business are the natural
evolution of this sector of the economy, then I as a
conservative would be loathe to take action.
So I am here to learn about the industry and the changes in
the agency business and its challenges for the future.
And before recognizing several of my colleagues, let me
specifically welcome Mr. Grucci from New York to our
subcommittee. He will have the opportunity to make a statement
after the ranking member if he should arrive. I also want to
credit Mr. Grucci for his unique role in encouraging this
hearing, and calling this issue to the attention of this
subcommittee.
I also want to thank and appreciate the former Chairwoman
of this subcommittee, Mrs. Kelly, also from New York, who will
be joining us as the morning proceeds. Your leadership has been
an encouragement to the Chair and is largely responsible for
our work today.
With that, let me begin, as the ranking member is not here,
by recognizing Mr. Davis from Illinois if he would have any
opening statement at all.
Mr. Davis. Thank you very much, Mr. Chairman, and I
appreciate the opportunity to be here and to participate in
this hearing, and I certainly want to welcome Representative
Foley and look forward to the testimony of all those who have
come and will participate.
I am not a member of this subcommittee, and I had not
intended to necessarily have any comments other than to suggest
that I am seriously interested in the viability of the
industry. I come from Chicago, which is transportation center
of the universe as far as I am concerned, and as far as many
other people are concerned. And so there is a great deal of
activity, there is a tremendous amount of interest, and we have
a great deal of concern that the industry remains viable,
healthy and alive. And so I came to learn, to hear what is
taking place, and I appreciate the opportunity to make those
comments.
Chairman Pence. We thank the gentleman from Illinois and
appreciate his time in participating.
Also, as I mentioned before she arrived, I want to
recognize for any remarks the former Chairwoman of this
subcommittee who sent a pace in the previous Congress, one that
we have tried to keep up in the regulatory reform area of small
business, and recognize Mrs. Kelly from New York for any
opening comments.
Ms. Kelly. Thank you, Mr. Chairman.
I simply am delighted that you are holding this hearing. I
think it is something that we very much need to address because
the travel and tourism industry is one of the things that forms
the heart of our small business network across this nation, and
anything affects them adversely is likely to affect the economy
of the nation. So I appreciate your holding this hearing, and
look forward to the testimony from our witnesses today.
Chairman Pence. And thank you.
And lastly, the gentleman who first called this issue to
the Chair's attention, and is largely responsible for having
been the genesis of the hearing today, the gentleman and fellow
freshman from New York, Mr. Grucci.
Mr. Grucci. Thank you, Mr. Chairman, and I too would like
to associate myself with your remarks. I do not believe that
this is a hearing today to determine whether or not an industry
should or should not survive because of how competition
functions.
Mr. Chairman I am outraged that there is not one airline
representative at this meeting and I know they have been
invited to be here. I think it is a disgrace that they have
completely ignored Congress and its invitation to join in to
understand what is going on because the bottom line here is
that the airline industry had come to Congress with a
legitimate problem, and had asked for help. And the taxpayers
of this country rose to that occasion, to the tune of $15
billion. And we in Congress, and myself included, voted to
support the airline industry, recognizing the huge impact that
the airline industry had on traveling America--all the
associated businesses that went along with our airline
industry, our hotels, our restaurants, our limousine services,
our taxi companies, and yes, our tourism, and the travel agents
who play a big part in making tourism possible.
They came to us and they said with a $15 billion package,
we would be able to stay in the air. We would be able to
continue to fly people around, and as a result all of the
industries that depend upon airline travel will be able to
survive, stemming off hundreds of thousands of job losses
throughout the country as a result of the grievous attacks on
September the 11th.
Well, shortly after Congress stepped up and did what it
felt was the right thing to do, the airline industries withdrew
its commissions to the travel agencies all across the country,
not with any advanced warning, not by sitting down with them
and trying to negotiate a different rate schedule, but simply
through their fax machines they received a document that said
as of a certain time on a certain date you will no longer be
receiving commissions, of which travel agencies probably close
to 75 percent of their business revolves around commissions.
Now, again, this is not to determine whether or not the
airline industries ought to pay the commission, but certainly
the airline industries, in my opinion, made very strong
representations that with that $15 billion no one would suffer
further; that they would be able to keep moving and keep the
economy going strong.
Well, not only did they not live up to their obligation and
their commitment, in my opinion, they have also now duped the
consumer who no longer will have the ability to deal with a
human voice unless they want to pay additional fees, but the
consumer is not seeing the benefit of the reduction in the
commissions that are being saved by the airline industries.
Those commissions are still embedded in their ticket price, but
what is happening is the airline industries are pocketing that
commission.
Our travel agencies are being asked to take on a burden of
dealing with the general public and not getting compensated by
the airline industries, all at a time when an organization and
a company known as Orbitz is receiving commissions and
continuing to flourish, and ironically is sponsored and funded
by the five major airlines in the United States. They are under
an investigation by the Justice Department, and I am going to
be following that investigation very closely.
But the thing that really irked me the most was when it was
brought to my attention that it is only American travel agents
that have lost their commissions. There is still a nine percent
commission being paid in Australia, the Bahamas, Brazil, the
Czech Republic, Greece, Hong Kong, Hungary, Ireland, Indonesia,
Israel, Italy, Jamaica, Jordan, Korea, New Zealand, Poland,
Portugal, Saudi Arabia, and Zimbabwe. And a 10 percent
commission is in Bermuda, Colombia and Peru. And what do we get
in America for our hard-working, small business people from the
airlines? Zero.
And what do we get today from the airlines? Zero
representation here at this hearing. Mr. Chairman, I am
outraged that they are not here, and I think this committee
ought to do all that it can to empower them to be here to
testify at a subsequent hearing, including but not limited to
the power that we have of subpoenaing.
I have a written testimony that I will submit to the
Chairman for purposes of incorporating in the record today. I
am interested in hearing from our travel agents. I think that
they will have a story to tell that will be very compelling,
and I welcome our colleague, Mr. Foley, who will be testifying
in just a moment.
Thank you, Mr. Chairman, and I yield back the remainder of
my time.
[Mr. Grucci's statement may be found in the appendix.]
Chairman Pence. Thank you, and the Chair recognizes the
ranking member for this subcommittee from Pennsylvania, Robert
Brady, for any opening remarks.
Mr. Brady. Thank you, Mr. Chairman. I apologize for being
late, and because of my tardiness I will not bore you with an
opening statement. I will just submit it for the record, and I
am interested to hear what my colleague and friend, Mr. Foley,
has to say.
Thank you.
[Mr. Brady's statement may be found in the appendix.]
Chairman Pence. Thank you, and the Chair is pleased to
welcome to this hearing today as our first panel the Co-chair
of the Congressional Travel and Tourism Caucus, a man very,
very familiar with these issues as they bear both on small
business and the economy at large.
The gentleman from Florida, Mr. Foley.
STATEMENT OF THE HONORABLE MARK FOLEY, REPRESENTATIVE FROM THE
STATE OF FLORIDA
Mr. Foley. Thank you very much, Chairman Pence. I feel like
just revising and extending Mr. Grucci's remarks and calling
them my own because they really hit on a number of topics that
I wanted to discuss.
Mr. Chairman, Mr. Brady, Mrs. Kelly, Mr. Davis, and Mr.
Grucci, I appreciate and thank you for the opportunity to speak
regarding the state of travel and tourism, and travel agents in
the current economic environment.
The termination of the pay-based commission structure to
travel agencies should serve as a warning light--much like the
low oil light in your car. While eliminating commissions for
travel agents does not appear from the outset to have an
immediate impact on travel, this small change has the potential
to lead to a seizure of parts of this economic engine if
ignored.
As a former travel agent and now the Co-chairman of the
Congressional Travel and Tourism Caucus--along with Congressman
Sam Farr--the news of this removal of the pay structure by the
airlines hit especially close to home. In fact, last month I
sent to a letter to Attorney General John Ashcroft to review
the actions of the airlines questioning the timing of the
airlines dropping commission payments within days of each
other. I would like to submit that letter for the record.
Travel agents play an important role as a filter, an
educator, a promoter and feeder to the purchasing public. In
bad times, the airlines have relied on travel agents to bolster
sales, but with the advent of the Internet airlines are
expressing more hubris. In fact, during those bad times they
are often referring to us as their partners in the travel and
tourism industry. In good times, we are ignored and neglected.
In fact, the airlines have entered in the online travel market
in force--something that in itself reflects our changing times.
Let me say for the record that I believe in a robust market
economy, as does the Chairman. And in my last seven and a half
years in Congress as a frequent, frequent flyer I can attest to
the special role that the airlines play in the United States.
However, our efforts to promote the airlines, including the
$15 billion bailout of the airlines, carries a responsibility
from the airlines to the American public. That $15 billion
payment from the taxpaying public makes them, in a sense, de
facto shareholders in the major airlines.
In my meetings with virtually every segment of the travel
and tourism industry in the wake of September 11, I heard
various proposals to buoy the second largest industry in the
United States. I, too, share Mr. Grucci's dismay at the fact
that no airlines chose to appear. During the discussion of the
$15 billion bailout, I could not get through the hallways
because of the clutter of airline representatives that were
there begging and asking for salvation.
One of my personal concerns with the airline bailout was
that it would not filter down, and I said this at the time,
through the airlines to the family-owned travel agencies, the
baggage handlers, the taxi cab drivers, and other related
interests.
And the decision to drop travel agent commission seems to
bear that concern out.
When a consumer walks into a travel agency, the airline
ticket they purchase are often just a part of the overall
travel package. By the airlines undercutting commissions, they
are undercutting potential ground transportation,
accommodations, and entertainment service sales offered to the
traveling public by travel agencies. While it has been
suggested by some that this latest round of commission cuts is
the result of September 11--and I sincerely hope this is not
being spread by the airlines--the truth is that airlines have
been ratcheting down commissions for a number of years, and
this has been a final blow that travel agents have been
predicting for years.
Mr. Chairman, it is critical that the traveling public
continue to have free market access to an assortment of travel
services and fares provide by travel agents.
I thank you for calling this hearing, and I appreciate the
members' interest in this subject.
[Mr. Foley's statement may be found in the appendix.]
Chairman Pence. I thank the gentleman for his comments, and
in the midst of a very busy schedule your passionate remarks
are a very important commencement for our hearing today.
I want to recognize the gentleman from Puerto Rico who has
joined us, if you had any opening remarks on this before we
begin our next panel.
With that, I will invite anyone on the panel that may have
any specific questions or wish to amplify the comments made by
Mr. Foley, and would begin with the ranking member.
Mr. Grucci.
Mr. Grucci. No. No, thank you, not at this time, Mr.
Chairman.
Chairman Pence. Ms. Kelly? Anyone?
Ms. Kelly. No.
Chairman Pence. Okay, with that, we will----
Mr. Foley. Thank you, Mr. Chairman.
Chairman Pence [continuing]. Dismiss the witness, and again
thank you.
And our second panel, if you could take places at the
table, we will begin very quickly.
[Pause.]
Chairman Pence. I would like to thank you for coming to
this hearing of the Subcommittee on Regulatory Reform and
Oversight, and we thank you for your commitment to good
government, your willingness to dedicate time and appropriately
travel to participate in this discussion.
I want to let you know the ground rules. There are little
light boxes in front of you. Those of you that are veterans are
already familiar with the system. Each of you will be
recognized for five minutes, and the green light means go, and
yellow will come on about a minute before your time is up, and
the red light, we ask you to respect, knowing that your full
statement, if you do not waiver from your prepared statement,
and we can add the balance of your statement to the record for
the hearing and you need not be concerned about that being
added.
And we will, in the interest of time we will hear from all
of the witnesses, and then proceed with questions from the
members in attendance if that meets with the approval of
everyone on the panel.
And the Chair now recognizes the gentleman from New York,
who will introduce our first witness.
Mr. Grucci. Thank you, Mr. Chairman.
It gives me great privilege to introduce Lou Fenech. Lou
opened Royal Holiday Travel in Glen Cove, New York, in 1976,
and worked as the general manager. The company was expanded in
1984, with a branch office in Sayville, New York, where it is
currently.
He is the president of the company. Lou is a graduate of
Georgetown and received an MBA from Long Island University. It
is also important to note that Lou is currently a deputy
squadron commander of the Civil Air Patrol.
Lou came to me in March to discuss the impact of the
elimination of commissions to travel agencies, and has educated
me on the problems travel agencies are facing regarding access
to fares.
It gives me great privilege to introduce to you Lou Fenech.
STATEMENT OF LOU FENECH, PRESIDENT, ROYAL HOLIDAY TRAVEL
Mr. Fenech. Thank you, Mr. Grucci.
Chairman Pence, Congressman Grucci, and members of the
subcommittee.
My name is Lou Fenech. I am president of Royal Holiday
Travel of Glen Cove and Sayville, New York. We are a 26-year-
old travel company.
Mr. Chairman, thank you, and Congressman Grucci, for
providing this opportunity for me to testify today. The main
reason for my appearance before this esteemed committee is to
provide information that will help you focus on the current
state of the travel industry.
The majority of travel agencies are small companies,
specializing in leisure travel. Over 52 percent of them are
owned by women. We are active members of our local downtown
business communities, members of our local chambers of
commerce, and are taxpayers. We support our local schools,
sports teams, charities and places of worship. We are your
neighbors, your relatives and your friends.
We are also in trouble. For many years our company and many
companies just like us have relied on the sales of airline
tickets as a major component of our income picture. When you
stop to think about it, wherever a client may decide to go most
trips begin with a trip on an airplane. Now, under the guise of
survival the airlines have decided to change their distribution
system and discard the sales force that has kept them in
business and helped them to grow over these past five decades.
We all know the toll of the tragedy of the September 11th
has taken on this country. I believe that the travel industry
has been the hardest hit of all. I also believe that when a
major industry appears before Congress and is granted a
generous aid and assistance package funded by our taxes it
should be incumbent on them to ensure that this largesse not be
used only for their own survival, but also for that of the
countless small businesses that rely on them. Failing that, at
least not make the situations of these small business any
worse.
This was not the case with the airlines. Not only did they
received a $5 billion grant and up to $10 billion of loan
guarantees, they turned right around and cut our commission to
zero. They claim that the consumer should have to choose
between paying for our expertise and buying directly from them.
They also told both Congress and the travel public that it
was our fault that they were not profitable. Yet airfares have
actually increased since our commissions were cut.
The reality of the situation is plain to see. The airlines
have been hemorrhaging money since the advent of deregulation
when they undertook a campaign of global expansion. The cost of
this expansion were staggering. So too were the loans that they
took out to pay for it. The problems arose in late 1980s and
early 1990s, when their loans came due at precisely the time of
an economic period of slowdown, extended period of economic
slowdown. Airlines began to go bankrupt, there were many
mergers and acquisitions, and the number of airlines dwindled
to the few that are left today.
Now faced with reduced competition, the airlines, led by
Delta Airlines, began a campaign for the systematic destruction
of the travel agency distribution system. Over a seven-year
period they took our commission from 10 percent to zero, an
agonizing bit at a time. It is interesting to note that the
only major carrier not to take this path has been Southwest
Airlines, who to date have supported the travel agency
distribution system, and seems to be the only carrier to remain
profitable.
This cut to zero only affected travel agents in the U.S.
and Canada. Travel agencies in countries around the world in
places like the Persian Gulf, including Yemen, are still paid
nine percent or more by these various same airlines.
Old-timers in our industry tell stories about the first
commercial airplane flights and how much trouble they had in
converting their steamship clientele to airline passengers. I
can tell you stories from my 26 years in business how difficult
it was to sell an air ticket after a DC-10's engine fell off or
after someone blew up an airport half way around the world.
Even now, over seven months after the 9-11 tragedy, and with
all the billions of dollars that were spent to make our airport
secure, we still have a hard time convincing clients to fly. We
have always felt that this was just part of our job. It was
part of what we were being paid to do--until now.
The major airlines' elimination of the commission
traditionally paid to travel agents on the sale of domestic
airline tickets is anticonsumer and anticompetitive. It
threatens to deprive consumers of their access to their
preferred source of travel information, and tickets. It
threatens to deprive the public of their only source of neutral
and objective comparative information. It relegates consumers
to the airline-controlled distribution channels where they will
inevitably be directed to choices serving in the airlines own
bottom lines.
Congress has expressed its interest to continuing the
availability of travel agent services. Your holding this
hearing is indicative of your desire to help.
In light of the actions being taken by the airlines, we
respectfully request the following actions:
Please pass HR 1734, giving travel agents access to all
fares. Please urge the DOT to aggressively investigate Orbitz.
Press the DOT to complete the appointments to the national
commission to ensure consumer choice and information in the
airline industry. Finally urge the DOT to launch an
investigation to review the actions of the airline industry
specifically relating to the appearance of collusion and the
imposition of zero commissions and their concerted effort to
eliminate the travel agency distribution system.
I thank you very much for your attention.
[Mr. Fenech's statement may be found in the appendix.]
Chairman Pence. Thank you, Mr. Fenech. We will come back to
you after the panel is done testifying for questions.
I think our next witness is also to be introduced by the
gentleman from New York, Mr. Grucci.
Mr. Grucci. Thank you, Mr. Chairman.
Yes, and indeed I would like to introduce our next witness,
and I think it is indicative that she is here to testify today
because over 50 percent of the travel agencies are owned by
women, and 82 percent of the workforce are women, and we can
see who will be impacted most by these airlines' decisions.
Celeste is the owner of the Empress Travel in Coram, New
York, a small neighborhood mom and pop full service travel
agency. She has been a travel agent owner since she entered the
business in March 1978. She volunteers currently as president
of New York State Chapter of the Association of Retail Travel
Agents, ARTA, the largest nonprofit trade group representing
travel agents exclusively. She serves on the ARTA's board of
directors.
Welcome, Celeste.
STATEMENT OF CELESTE SIEMSEN, PRESIDENT, EMPRESS TRAVEL OF
CORAM
Ms. Siemsen. Chairman Pence, members of the subcommittee,
good morning.
I thank you very much for inviting me here this morning to
speak at this hearing. My name is Celeste Siemsen, and I am
very proud to appear today as a small business owner in New
York's First Congressional District.
I would like to take this opportunity to thank Congressman
Grucci, who is our congressman, for having these meetings
arranged. It is very important to small business and the travel
agency community that our voices be heard in Washington at this
time.
I make my living as the owner of Empress Travel, a full
service neighborhood mom and pop agency, which I opened up 24
years ago, seven months pregnant with a three-year-old in the
back room. It is located in Coram, New York, and with the
little spare time that I do have raising a family and running a
business, I do volunteer as the president of New York the
Association of Retail Travel Agents. I am also the past
presidents of Travel Agents of Suffolk County, TASC, and
currently the legislative chairperson.
Today, I closed my agency to travel at my own expense to
Washington for one reason and one reason only--survival.
Thousands of other small business owners around this country
like me need your help to defend our business against the
unfair practices of the major U.S. airlines. We are facing
these threats in two key areas: One, unfair commission
policies; two, unfair restrictions on selling airline tickets
over the Internet.
First, let me speak about the airlines' commission
policies. After September 11th, Congress was hit immediately by
a powerful, multimillion dollar airline lobbying bailout
package, five billion in direct cash gifts, 10 billion in
guaranteed federal loans. Less than 72 hours after the first
plane hit a target in New York City the airline lobbyists had
drafted this legislation and started lining up support in
Congress.
On September 22, President Bush signed the Air
Transportation Safety and Stabilization Act, guaranteeing this
money for this airlines. Throughout the hearings and
discussions on Capitol Hill from September 11 to September
22nd, the message was the same. Congress wants to help the
airlines. The airlines promise in turn that helping them would
naturally assist the other related industries.
That is not true in the case of travel agencies. What
happened is that the airlines took the $5 billion taxpayers'
dollars, mine included, and six months later they steamrolled
over small businesses like mine in a direct attempt to put us
out of business.
Here is what they did. With these tax dollars in hand, they
cut the commissions paid to travel agents like myself for
selling airline tickets to zero. That is correct, zero. In
other words, the airlines want the travel agents to work for
free, and in serving our customers who want to buy airline
tickets.
What makes the situation even worse is that the airlines
have attacked only the American agents, and as Congressman
Grucci has already stated to you, the chart that I have here
shows that the major carriers, like Delta Airlines, continue to
pay full commission to travel agencies in the Bahamas, Egypt,
The Caymans, and other overseas countries while the U.S. agents
get paid zero.
What does this say about the trust Congress has put in the
airlines after September 11, when travel agencies in Korea, the
Persian Gulf, and even Afghanistan get full commission by the
U.S. airlines, while hard-working American travel agents like
myself get paid zero?
The zero pay policy has hit our industry hard. Four out of
five travel agents are women. We own most of half of all the
U.S. travel agencies. Most U.S. agencies get paid less than $2
million in annual volume sales, averaging salaries of $28,000
for front-line agents, and $35,000 for agency owners.
Unlike the airlines last fall, I am not here to ask for a
bailout. I am asking for fairness. Why should these airlines
receive federal bailouts, guaranteed loans, antitrust immunity,
or any other taxpayer-funded benefits, when they are competing
unfairly in the marketplace?
In other words, we are asking for a level paying field. If
Delta Airlines, American Airlines, United Airlines, and other
carriers want to pay overseas travel agents while they put U.S.
travel agents out of business, well, that is their business--
but not very patriotic where I come from. But they do not need
to have anymore help from Congress to do this in their plan.
I would like to also address the second thing that is very
important to the travel agent community, and at least maybe--we
could at least get a start in granting the travel agent
community antitrust immunity as the airlines enjoy right now.
This will give us the same privilege that the airlines have to
cooperate with each other.
Thank you once again, Chairman Pence, and the members of
the committee, for your time and attention this morning.
[Ms. Siemsen's statement may be found in the appendix.]
Chairman Pence. Thank you, and having started a small
business in my basement when I was not seven months pregnant, I
appreciate your success.
I want to recognize the gentlelady from New York who will
introduce our next witness.
Ms. Kelly. Thank you, Mr. Chairman.
I am very pleased to find Stan Morse here this morning. It
is my pleasure to introduce him. Stan and I have been working
together for a long time. He comes from a small town, like many
travel agents. Millbrook, New York is a place where people go
into Stan's business because the trust Stan. They know if they
walk in to Stan's office and say they say, ``Stan, I want to go
to a particular place, can you help me? Can you help me find
not only plane reservations but can you tell me where the best
hotel is, and is there shopping?'' Stan gives a full service to
the people who come into his office. This is what travel agents
do.
And I also sit on the air subcommittee in Congress. I heard
the testimony of the airline industry, and I voted to give
them, I am somebody who voted willingly to give them the money
to help them get the bailout that they needed following 9-11.
However, I find it extremely troubling that that money that
we voted to give them did not go anywhere except into the
airlines' personal pockets, so that the airlines, they said,
would continue to run. They, I believe, used the public's
concerns about safety in the air, and at this point it is, as
we see repeatedly in the newspapers, somewhat in question, but
they used that concern about safety to gain money from the
Congress, and it was our intention that some of that would go
on into travel agents fees to help the travel agents survive
the terrible impact that 9-11 had on their businesses. In fact,
that did not happen.
I know of two other people that I represent who have sold
their travel agencies in the last year simply because they feel
they can no longer survive and provide the quality of service
that they have been able to do in the small towns that I
represent because of the squeeze that they are experiencing
from the large airlines because of the lack of commissions.
If we in America value the quality of our small town life,
if we value the people who are there helping us get our travel
plans and having an individual, a face that we know that is
helping us travel, I believe very strongly we have to support
people like Lou and Celeste and Stan Morse, my constituent. And
I am very proud to have Stan here today because Stan is not
only a small leisure travel agency in Millbrook, New York, but
Stan is the president of the Hudson Valley Chapter of ASTA, the
American Society of Travel Agents, and we have a lot of those
members in my district.
So, Stan, I am glad to have you here speaking for them, and
speaking for so many of the people who are members of your
organization. Welcome.
STATEMENT OF STAN MORSE, PRESIDENT AND OWNER, MARSTAN TRAVEL
Mr. Morse. Chairman Pence, Congressman Davis, Congressman
Brady, Congressman Grucci, and Congresswoman Kelly, thank you
sincerely for allowing us to speak at this hearing today.
I am co-owner of Marstan Travel of Millbrook Limited, a
small leisure travel agency in New York State. I am also
president of Hudson Valley ASTA, with 200 members.
The purpose for appearing here today is to provide some
factual data on travel agencies in the United States. For
reference, the data are from the 10-year period 1991 to the
year 2000. The year 2001 was a unique year for the travel
industry and for the most part deserves special attention,
particularly due to the events of September.
During the 10-year period from 1991 to the year 2000, sales
of airline tickets in the United States rose from $48 billion
to a whopping $83 billion, an increase of 73 percent. For the
same 10-year period of time, the number of air tickets rose
from 150 million to 200 million, an increase of 33 percent.
These data show America likes air travel, and has cultivated
that liking.
Travel agents were critical to this increase in air travel
for we produced over 80 percent of the airline tickets for the
traveling public from 1991 to 2000. And despite the
introduction of Internet tickets in the late nineties, agents
still produce about 75 percent of all airline tickets in the
U.S. today. Only approximately 10 percent of air tickets are
done online today, and it is apparently that the great majority
of American travelers still want to use travel agents over the
alternatives of ticketing on the Internet or by calling the
airlines directly.
But from a travel agent's perspective, the airlines have
nearly done everything they can to push us out of air
ticketing. During the period of 1991 to the year 2000,
especially as the fallout of five successive commission caps
and cuts starting in 1995, the number of U.S. travel agencies
has dropped from 23,000 to 18,000, a decrease of about 21
percent. Just one year later, a few short months ago at the
year end of 2001, the number of travel agents dropped further
to the 16,000 range, a drop of nearly 30 percent since 1991.
And on March 14, this year, just six weeks ago, all commissions
were eliminated for all small U.S.-based travel agencies. And I
believe everyone in this room understands the words ``zero
commissions.''
And where there is zero dollars coming in, over 95 percent
of the small agencies nationwide now charge service fees. The
average service fee for a small travel agency today is 20 to 25
dollars. My agency, for example, has been forced to charge an
average fee of $40 per airline ticket, and as a result we have
seen a sharp drop in airline ticketing since its starting fees
five years ago.
With fewer tickets, our computer contracts are in question
since we are required to produce a minimum number of tickets to
avoid severe penalties for shortfalls.
Now, on top of all of this is Orbitz, the consortium of
five of the six major airlines, which offers low-fare tickets
online. The only major U.S. carriers not signed onto Orbitz is
Southwest Airlines. The major airlines behind Orbitz, that is,
American, Delta, United, Northwest and Continental, carry over
75 percent of all air passengers today. And since small travel
agencies are out of the commission picture, the major airlines
through Orbitz have set their sights on limiting Travelocity
and Expedia, their two biggest competitors.
At first blush, the low fares offered by Orbitz appear to
benefit the traveling public, but once Expedia and Travelocity
are gone, the sky may be the limit for what the airlines can
charge for air tickets. And with drastically lower airfares
available online, fares which are not available to travel
agents, the airlines have delivered the second blow to travel
agency.
First it was commission elimination. Now it is low fares
not available to travel agents and available on the online.
One year ago there were seven major airlines, and now there
is six; five of which have banded together in Orbitz. Travel
agents feel we have passed through oligopoly to the early
stages of airline monopoly. Clearly, it is a bad position both
for travel agents and the traveling public in general. What we
both need is a level playing field in air ticketing.
Thank you.
[Mr. Morse's statement may be found in the appendix.]
Chairman Pence. Thank you, Mr. Morse.
Our next witness that the Chair will recognize is Jacky
Alton, who is the president of CWT Travel and Almeda Travel.
In addition to having a master's in education from Howard
University, she got a B.A. from Fisk University, and currently
is responsible for the overall management of government,
military and corporate operations nationwide for CWT and
Almeda. She manages the overall operation of six locations in
defense travel region five, two locations in defense travel
region one, three locations in region four, as well as a home
office in Houston Texas, and is another great example of the
role of women in this industry, and the successful role that
women play in the travel industry as well, as well as, I might
add, minority women.
And so we recognize Jacky Alton for five minutes, and thank
you for being here.
STATEMENT OF JACQUELYN ALTON, OWNER, CWT/ALMEDA TRAVEL, ON
BEHALF OF THE SOCIETY OF GOV'T TRAVEL PROFESSIONALS
Ms. Alton. Thank you, Mr. Chairman, and thanks to this
subcommittee for inviting me.
I would also like to tag onto Celeste. I will have been in
business 25 years June 1, and raised both of my children in the
travel agency industry, and my son is working in it now. I am
very disturbed because I do not know if he has a future or does
he need to look for another position outside of this industry,
with what is happening.
Although there are some positive signs of improvement, I am
speaking in regards to government travel specifically though,
there are positive signs of improvement in the $20 billion
government travel market, much will depend on a win/win
relationship of government contracting officers and the travel
industry in the months ahead.
The Airlines Reporting Corporation as of March 2002, as has
been stated, shows a very large decrease in the past 12 months
of travel agencies. For every new travel agency location on an
annual basis, we estimate 13 closed their doors. Regrettably,
one of these casualties happened in Indiana, of one of our
members who was a federal government subcontractor.
Small businesses have insufficient opportunities to bid on
and retain federal government contracts. In a typical travel
management relationship, we see four major hurdles faced by
these small businesses.
The first one is the RFP and contracting phase. Small
business set asides are few. DOD plans to bid out approximately
28 travel management contracts as small business set asides,
8.6 percent of DOD's estimated total air volume. That is a long
way before the 23 percent federal small business goal is
reached.
A second one is bundling of travel management into IT and
other contracts.
A third is the A76 studies which have been brushed aside.
And then we have incomplete RFPs; RFP writers should be
required to respond to their own work. Requiring past
performance in similar work areas. GSA and DOD propose that the
government procure travel management technology in many cases
from a single Global Distribution System vendor, and that all
travel agents would be required to use the same GDS system.
Another obstacle is the unreasonable contract length of
time, that this travel system is requiring 60 days or no
notice, to cancel contracts that roll into the new round of
reprocurement, at no cost to the government.
Zero commission, as others have stated, is a very large
obstacle. Small travel agents are less competitive in RFP
financial evaluations.
The last one is the improper use of size standard codes. An
example is Peterson Air Force Base using NAICS 561599 of $5
million income, and then Wright-Patterson Air Force Base at the
$5 million level as published in Commerce Business Daily. Many
disaster relief loans are being made at the $3 million level,
but the basic services contracting remains at $1 million for
the travel agent.
Increasingly, micromanagement by the government poses a
problem. The travel industry has experience in negotiating and
operating best value programs. Wage determination by the U.S.
Department of Labor. End-to-end travel solutions currently
being developed by DOD and other have placed must of the
responsibility of a trip planning and sort out of options on
the traveler.
Lastly, leave the travel arrangements to those who are
trained, proficient and knowledgeable about government travel,
and industry regulations.
Financially, equity value of travel agency ownership has
plummeted the past several years with parallel cuts in
available levels of bank lines of credit. Many government
receivables are in the 90-day column versus the Federal Prompt
Pay Act.
Last year we had $40,000 of federal receivables, and I am a
small business, that were outstanding for one year. That is
very hard for me to have to deal with.
Small travel agency owners and managers basically worked
without compensation in the months following September 11th.
Layoffs of long-term and family employees have been
particularly painful. I personally had to not take a salary
from October to January so that I did not have to lay off the
majority of my staff.
There is still a delay in waiting for policy directives,
especially at DOD. Failure to provide equitable adjustments on
an objective and timely basis. For rebid, the large size of
some small business set aside contracts and the low-size
standard can force an incumbent into the position of not being
able to rebid. I am in that position now. I am being penalized
for growing and working hard.
In conclusion, Mr. Chairman, the answer to your basis
question is that small travel agencies remain at a disadvantage
in bidding on and operating government travel contracts at a
reasonable profit. That disadvantage is growing as government
priorities favor technology investments for the basic service
of travel management, and lessen its commitments to small
business and free enterprise.
Thank you very much.
[Ms. Alton's statement may be found in the appendix.]
Chairman Pence. Thank you, Ms. Alton, for being here and
for that presentation.
Gary Doernhoefer is a man with an extraordinary background
both in the area of airline work as well as being an
accomplished author and researcher in the area of antitrust law
while at American Airlines. As an attorney, he completed the
successful settlement of the ATPCO antitrust litigation with
the Justice Department and private class action lawsuits. He is
the author of a case study on the unsuccessful regulatory
efforts to gain approval of the American Airlines/British
Airways alliance, and he published a book with the Brookings
Institute entitled ``Antitrust Goes Global.''
In 1998, Mr. Doernhoefer became senior counsel, government
affairs, for American Airlines, working full time here in
Washington. He represented American Airlines here on Capitol
Hill, and became a widely respected voice for the industry and
antitrust law.
In September of 2000, he accepted a position as vice
president and general counsel for Orbitz, LLC, the name of
which has come up in some comments already. And it is a
technology development company supported by what has been
described as a consortium in the airline industry to create a
new website to distribute air and other travel services over
the Internet.
Inasmuch as Mr. Grucci pointed out, the lack of a presence
of a representative of the airlines here, we are especially
grateful, Mr. Doernhoefer, that you would be willing to join us
for the subcommittee representing the company with which you
are affiliated, and address many of these issues, and you are
recognized for five minutes.
STATEMENT OF GARY DOERNHOEFER, VICE PRESIDENT AND GENERAL
COUNSEL, ORBITZ
Mr. Doernhoffer. Thank you, Mr. Chairman, and members of
the subcommittee, and Congressmen Grucci.
On behalf of Orbitz, the online travel agency, and its 180
employees that go to work every day in downtown Chicago, let me
express my appreciation for the opportunity to be here and talk
about some of these issues.
It is well known that there is a wave of change sweeping
across travel distribution systems, and change is always a
frightening thing. Orbitz believes, however, that while these
changes bring new challenges to travel agents, many industry
observers underestimate the skills and value that professional
travel agents have and their ability to adapt to new business
conditions.
Most importantly, however, the changes in the industry are
bringing about needed relief to a distribution system that is
broken; a system that for years has boasted leading edge
technology in the form of computer reservation systems, or
CRSs, but that were deployed in a tragically inefficient and
unnecessarily costly structure.
Let me talk about the structure for a moment. Textbook
economics would state that any marketplace operates best when
the consumer pays directly for the service or good they buy. An
educated consumer can weigh a product's benefits and costs and
make reasonable decisions. Over time, in a competitive market,
this simple structure will force all sellers of the service or
good to compete to offer superior quality at a reasonable
price.
Travel distribution is not so simple. Historically,
airlines sold most of their seats through a distribution chain
with many steps. A consumer calls a travel agent, the travel
agent uses a CRS to find fare and schedule information, the CRS
taps into the individual airlines' systems to determine whether
there are seats still available, and to place the booking.
This distribution chain has not followed the simple market
I just described because at two points in the chain the party
receiving the service is not the one that pays for it. Travel
agents provide a service to the consumer, but they were paid a
commission by the airline.
Likewise, the CRS provided information and booking services
to the travel agent, but again the CRS was paid a booking fee
by the airline, not the travel agent. These distribution costs,
travel agent commissions and CRS booking fees, became part of
the airlines' marginal cost for selling each ticket. As these
costs went up, fares had to go up as well.
The consumer was ultimately paying for these distribution
services indirectly through hidden costs driving higher
airfares. Eventually, this inefficient structure led to
distribution costs becoming the third highest cost category for
the airline industry, behind only labor and fuel.
Not surprisingly, this system could not last. As airlines
faced pressure to reduce costs, they lowered what they could--
travel agency commission--starting in 1995. But the overall
system adjusted, just as you would expect. To make up for the
lost commission revenue, travel agents began charging their
customers directly for the knowledge, expertise, and
professional service they provided. And where the agents earned
the fee with good service, customers have been willing to pay
it.
The latest round of commission cuts is nothing more than
the logical conclusion of this seven-year process. Finally, the
cost of the professional service offered by the travel agent to
the consumer is now transparent to the customer, because it has
been removed as a buried element of airline marginal costs and
put squarely on the table for the consumer to see and evaluate.
The travel agents' concerns are still legitimate however,
and should not be minimized. Travel agents are still caught in
a paradox. Although the small travel agent may now collect
nothing from the airline, they nevertheless appear to the
airline to be an expensive means of distribution.
Ending commission payments eliminated only one of the two
costs borne by the airlines when a travel agent sells a ticket.
The airline must still pay a CRS booking fee for every travel
agent transaction. Although the airlines have unbundled the
cost of travel agent commissions from their other marginal
costs, the CRS booking fee incurred on every transaction
remains obscenely high and obscured from competitive pressure.
The CRSs, originally built and owned by the airlines, are
now largely independent. Each of them has thousands of travel
agents locked into using their system and thereby generate
booking fees that the airlines must pay. For years, nearly
every airline has had to keep paying spiraling CRS costs or
risk losing sales to the thousands of travel agents if the CRS
removed that airline from the computer displays. And the travel
agents that contracted for CRS service had no incentive to
bargain for lower booking fees, because they did not have to
pay them--they were charged directly to the airlines.
Only Southwest Airlines, and more recently and to a lesser
degree, JetBlue, have successfully avoided this trap, largely
shunning travel agency distribution while conditioning its
customers to book directly with the airline.
Unable to subject the CRS booking fees to competitive
pricing pressures, the airlines seized on the Internet as a
lower cost alternative. Each developed their own website and
for the last five years encouraged customers to book there by
making some of their lowest fares available exclusively on
their own sites.
The in June, 2001, Orbitz was launched as a lower cost
alternative to the two dominant online travel agents,
Travelocity and Expedia. Just as the airlines had reserved
their webfares for their own low cost websites, Orbitz earned
access to the webfares by offering the airlines much lower
distribution costs than any of its competitors, including a
rebate of the booking fee.
The key to understanding the business model of Orbitz is to
understand that it offered the airlines--all airlines--a deal;
lower distribution costs, including a rebate of a portion of
the CRS booking fee, in return for a promise to let Orbitz sell
all of their inventory, including webfares.
It is not an exclusive offer and competitors have finally
begun to lower their costs and gain access to the webfares as
well. But it is a trade, lower costs for access to inventory.
And if the government were to require airlines to give everyone
the same access to fares regardless of the cost of sale, there
would be no point in Orbitz or anyone else offering to lower
costs of distribution for its service. We would quickly return
to the same broken system that existed before we launched.
Orbitz is no more threatening to traditional travel agents
than Travelocity or Expedia. Today, only 12 to 14 percent of
total travel is purchased via the Internet. Of that, roughly
half is sold by individual supplier sites like AA.com or
Hilton.com. The rest, only five to six percent, or six to seven
percent of total sales, is split among third party sites like
Expedia, Travelocity and Orbitz. Orbitz is still the smallest
of the three in total travel sales. Thus, Orbitz' market share
in the total distribution market is less than two percent.
Mr. Chairman, I have one conclusion that will help, I
think, shed significant light on this if I may continue.
There is a way out of the travel agents' paradox. Given
time, there is little doubt that the Internet will develop a
direct substitute for the CRSs and their high cost. Many travel
agents already make bookings directly on airline websites or
other Internet agencies, thus accessing the webfares for their
customers.
Today, that is cumbersome. Tomorrow, we hope it is not
going to be. Other companies and Orbitz are all working on
better technology to help the travel agent place bookings
around the CRSs and have access to the webfares. If we let the
market work, the solution is near. In the meantime, we really
should avoid rushing into government regulation that may in
fact cut off the market's first healthy response in ten years
to mend a broken distribution system.
Thank you, and I appreciate your allowing me a few extra
moments.
[Mr. Doernhoefer's statement may be found in the appendix.]
Chairman Pence. Thank you.
Our last witness is Michael Thomas who is the president and
CEO of OneTravel.com. He is the founder of that Internet travel
company. He is recognized in the industry for creativity and
innovation. Graduate of both Dover College and Exeter
University in England; recognized in the Travel Agent Magazine
as one of the 100 rising stars. Recently he has been profiled
in New York Times and Success Magazine.
He is near and dear to my heart because he is the very
imagine of a entrepreneur with very little gray hair.
Mr. Thomas. More every day.
Chairman Pence. We appreciate very much your willingness to
be here and to give us your perspective on these issues.
Michael Thomas is recognized for five minutes.
STATEMENT OF MICHAEL THOMAS, PRESIDENT, ONETRAVEL.COM
Mr. Thomas. Thank you, Mr. Chairman.
I am Michael Thomas, President and Chief Executive of
OneTravel.com., an online travel agency based in East
Greenville, Pennsylvania. I appreciate the opportunity to
appear before the committee this morning to discuss critical
issues relating to the online travel distribution systems and
our inability to access and sell the best fares.
I founded OneTravel in September 1995, in a barn on a sheep
farm in rural Pennsylvania just as the online travel agency was
developing. The barn reinforced the culture I wanted to create
for OneTravel; one of thrift and creativity.
The launch of Orbitz in June 2001 marked a major turning
point in the distribution of travel services since Orbitz was
formed by and is wholly owned by the five largest U.S. airlines
who collectively control about 80 percent of the domestic air
travel market. Orbitz was structured by its airline owners so
that it would inevitably dominate the distribution of air
travel. This domination results from two provisions in the
contract that airlines must sign in order to participate in
Orbitz;
First, a most-favored nation or MFN provision under which
an airline must offer to Orbitz any fare that it offers
anywhere else as well as its webfares posted on its own site.
This provision has the effect of eliminating the incentive for
airlines to negotiate special deals with other travel
distribution outlets, thus ensuring that Orbitz alone receives
the best fares.
Second, the Orbitz agreement provides that airlines must
fulfill annual promotional support for the benefit of Orbitz,
and that one of the means of meeting that promotional
obligation is to provide fares exclusively to Orbitz.
These two contractual provisions have resulted in Orbitz's
dominance in the offering of exclusive discounted webfares for
domestic airline travel, and we find ourselves unable to
effectively compete against Orbitz.
It is no surprise that in the period since its launch in
June 2001 Orbitz is now as large or larger than Travelocity and
Expedia, and on a course to dominate the online distribution of
airfares. It has already attained booking revenue in excess of
over $1 billion.
Ironically, while the number of users of online services is
growing, we and other agencies are effectively being foreclosed
from the sale of domestic airline tickets and being forced to
do as best we can on refocusing on tours, cruises and vacation
packages.
Our experience has shown that a difference of only a few
dollars between competitive airfares is frequently sufficient
to determine a consumer's choice of websites for purchasing
tickets. The impact of the Orbitz only webfares on our business
is clear. While the total number of unique visitors to the site
has increased substantially during the past year, the look-to-
book ratio has declined 45 percent, to a mere 0.63 percent of
all unique visitors. This means that while OneTravel is
experiencing some of the same general increase in interest by
the public as the large online travel agencies are now
experiencing, fewer customers are actually booking on OneTravel
because it does not offer competitive pricing in many markets
due to its lack of webfares and special deals with Orbitz owner
airlines.
OneTravel's total monthly revenue from domestic air
bookings has declined substantially since Orbitz's launch. I
attribute this loss of revenue in large measure to Orbitz's
ability to use the joint powers of its owners to restrict fare
access and thus competition. In fact, this marks the first year
since the launch of the company that we experienced a
significant reduction of revenue in one of our key business
segments.
Naturally, this loss in domestic airline booking revenue
has also made it more difficult for us to diversify our
business into other travel areas. And the same, of course,
holds true for the many off-line travel agencies that are small
businesses and that are also suffering as a result of the
unique ability of Orbitz to offer the special discounts
reserved for it by its airline owners.
Orbitz claims that its growth is not due to these
anticompetitive clauses in its contract, but because it uses
superior search technology. This is not accurate. Orbitz uses a
search technology called ITA, which it licenses and is
available to others, including OneTravel. Orbitz's growth is
due instead to its exclusive access to low-cost webfares.
According to a Sabre recent filing with DOT, on any given
day up to 75 percent or more of the first 10 options displayed
on Orbitz in response to a specific city pair request are
webfares that are not distributed to independent travel
agencies like OneTravel.
Orbitz claims that it is unbiased and that it is the only
neutral travel website. However, the truth is that Orbitz is
heavily biased in favor of its owner airlines which reserve
their best fares for Orbitz alone. This not only disadvantages
other online travel agencies, it also disadvantages small
airlines.
According to a Sabre recent filing with DOT, from the
period of July 1, 2001 to February 28, 2002, 71.6 percent of
the airline bookings made on Orbitz were for flights on
Orbitz's owner airlines. This compares to 51.3 percent big-5
bookings on OneTravel, a 40 percent difference.
The airline owners of Orbitz claimed that they formed
Orbitz in response to the alleged high cost of distributing
airline travel through CRSs. It is now, however, more expensive
for airlines to sell tickets through Orbitz than through
OneTravel.
The major airlines have eliminated commissions to all
travel agents, including OneTravel, but Orbitz requires its
airline participants to pay transaction fees of about $7.50 per
ticket to Orbitz. The total cost to an airline of an Orbitz-
issued ticket is about $14. In contrast, on OneTravel there is
no commission, so the same ticket would cost about $7.50, about
half as much.
The data established that Orbitz's claims that it would
provide a lower cost alternative to travel distribution by
other outlets is not well grounded in the fact.
To address these consumer harm and competition concerns,
and preserve the role of small business and travel
distribution, this committee should urge the department to
prohibit Orbitz by virtue of its joint airline ownership from
enforcing its MFN clause, and from entering into arrangements
that allow it exclusive access to webfares.
Thank you for your consideration of my testimony. I would
be more than happy at this time to answer any questions.
[Mr. Thomas' statement may be found in the appendix.]
Chairman Pence. Thank you, Mr. Thomas, and I want to thank
all of the witnesses for very compelling and very challenging
presentations. The Chair will ask a couple of questions to get
things started, and then we will yield to the ranking member,
and Ms. Kelly and Mr. Grucci, Mr. Davis, respectively, as their
time permits them to remain, although I will reserve a few
questions for later in the hearing in the interest of my
colleagues' time.
Let me begin with Mr. Fenech and Ms. Alton and those that
are involved directly in the industry on a day-to-day basis.
Mr. Fenech, you said that seven years ago the airlines
began to cut commissions, and we heard testimony from Mr. Morse
about the decline of agencies during that period of time; 1991,
23,000 agencies, and then today down to 16,000 agencies. We
have heard testimony today that there is a wave of change that
is productive and good for the consumer and for the industry.
What I would really like, if you could just limit your
comments to maybe a minute, the agents in the room to address
the issue for the committee of the criticality of the
commission structure in particular to your business given the
fact that we have acknowledged that there have been changes,
the travel agency business has changed and evolved, and added
service fees.
But what is the long-term prognosis, beginning with Mr.
Fenech, and we will just go in order, if this is not in some
way addressed or if there is not balance restored to that
relationship, in your view?
Mr. Fenech. Thank you, Mr. Chairman.
Chairman Pence. And I guess I would ask, the ultimate
question would be, is the industry essentially--is the small
business industry of travel agencies destined to go away or is
it simply going to continue to winnow?
Mr. Fenech. I would like to answer that question and also
give you a little other information as well on that point.
To ask whether we are going to go away, it depends. If all
of our suppliers follow the airlines' lead as already Hertz,
Avis and some of the major car companies have done, yes indeed
the travel agency industry is doomed. We are an agent just as
if we were a sports agent. We get paid a commission for doing a
service for a client. We have always been agents of the
airlines, okay. We have not been agents of the consumer. The
airlines have made that very clear to us by the fact that they
have made us sign an agreement with no negotiations whatsoever.
It is a take it or leave it agreement.
They make a change to it. They send us the change and say
here it is. It is effective immediately. No bargaining, no
negotiation.
Whenever we have attempted to gain the right to bargain we
have been told that we are in antitrust--against antitrust
laws. We are not allowed to--we are not allowed to be together
to bring this 75 to 90 percent of the distribution to bear.
Companies, large travel companies, notably the American
Automobile Association, and those companies were not as
affected by these cuts because they have the right within their
own organizations to stop the sale of a specific airline
offending or whatever.
Chairman Pence. Let me interrupt you if I can, and go to
Ms., is it Siemsen?
Ms. Siemsen. Siemsen, yes.
Chairman Pence. Siemsen, thank you.
Pretty powerful statement there. Is it your understanding
in your career, and I will ask this of the others, that you
were agents of----
Ms. Siemsen. The airlines.
Chairman Pence [continuing]. The airlines.
Ms. Siemsen. Right.
Chairman Pence. When a person came through the door, you
were not the agent of the customer. It was always your
understanding and so the breaking of a compensation
relationship there fundamentally changes your----
Ms. Siemsen. Definitely, and also you have to realize that
in order for me to sell airline tickets, the airlines have to
supply us with the information which in the beginning we were
done through a CRS system, which was initially set up by the
airlines themselves. They themselves set the rules about it.
Now, a discussion was made about paying for the CRS system.
I have had a CRS system in my office for over 15 years and I
pay a monthly fee for my CRS system. Those agencies that are
larger than myself that can make the segment count on those
CRSs were able to negotiate a fee to be able to come out with
zero cost to them for a CRS. But I have a $350 a month fee that
I have to now pay to keep an airline system in my office, and I
am not getting paid to sell their airline tickets anymore.
My whole concept of figuring out my budget was based on I
was expecting to get X amount of money. And I have to tell you,
I did not start charging service fees, I come from an area
that, unlike so other areas, my clients cannot afford to spend
an extra $25–$30 for an airline ticket. They just do not
have that kind of money. They are the same kind of clients that
do not have the money to go and buy a computer, and a majority
of them do not even have a credit card. They come in with cash
to buy an airline ticket.
So now they are going to be penalized, spending more money
for an airline ticket because in order for me to stay in
business I have to now charge him a fee to be able to purchase
an airline ticket because they do not have a credit card, they
do not have a computer.
Chairman Pence. Let me go to Mr. Morse if I can with the
same question. You were the one that threw out these statistics
that describe an industry that is imploding because of this
broken relationship.
I am intrigued by Ms. Siemsen's comment that, particularly
for small businesses the CRS system becomes now not only not a
profit center but it is a drag on the system.
Ms. Siemsen. I called it an albatross around my neck.
Chairman Pence. Forgive me for interrupting, but let me let
you address that for just a minute.
Mr. Morse. Well, back in 1995, just before the commission
cuts and caps occurred, our agency was selling about 900
segments of air a month. A segment is an individual flight
somewhere point to point. As of this last week, we were down to
below 300 segments. My contract calls for 300, and if I am on a
shortfall for any length of time it is a fine flat out. It is a
cost to doing business.
We introduced fees over this year, this period of time. We
started out with a $10 fee, went to 15, went to 25, and with
going to zero, we now have to charge $25 plus five percent of
the air ticket. That just covers basic costs, Congressman, just
basic costs. We do not make a penny on this dog-gone thing.
Now, the problem is that that differentiates the cost to
the customer by a 40 to 45 dollars cost for going directly to
the airlines.
Chairman Pence. Right.
Mr. Morse. They are coming less and less to us.
Now, my agency is located in a good position. We will
probably survive even though we are doing less and less air
ticketing, and do not forget, the air ticketing is critical to
any vacation travel outside of your geographical area that you
cannot drive. You must use the air. And yet it is being cut off
and we are being cut off.
We have had five agencies in three other local communities
near Millbrook, New York that are going out of business.
Chairman Pence. Let me interrupt if you if I can.
Mr. Morse. Yes, sir.
Chairman Pence. And we will have more time.
But, Ms. Alton, how central is specifically the issue of
commissions to the small business travel agency industry going
forward?
Ms. Alton. For me, like others, lots of people do not have
computers, especially minorities and senior citizens do not
have the access to computers and the ability to deal with that.
So consequently, they want to come to a travel agency. But when
they find that we have to charge a fee, then they get on the
telephone, or something else but that very much impedes travel
because people try to say everyone has a computer these days.
That is exactly not true. Everyone does not have a credit card
either, and I find that a lot with my constituency. They come
and pay by cash, so they do not have the opportunity to pay--
even if they had a computer, they would not be able to go
online and do that.
Chairman Pence. Can you continue to provide that service
though if there is not some correction in the commission
structure?
Ms. Alton. No, we cannot continue to provide it because
some people just cancel trips. They just cannot afford to pay.
I have so much allotted for that. But at zero commission, it is
like we are working on piece work and however many tickets we
sell per day, and whatever the service fee is, that is how much
we make. And if we do not sell any tickets that day, then we
have to start sending people home because we do not have any
form of payment.
Chairman Pence. All right. Thank you.
Let me just ask one more question to Mr. Doernhoefer. You
obviously have a great expertise in antitrust law, and there
have been some terms thrown around in this hearing that I am
sure are defined terms for you, and there has even been calls
for DOT to investigate the possibility of collusion between the
airlines and Orbitz.
And explain to this committee how we should not view Orbitz
in the way that has been characterized by some of the witnesses
today; that we should not view it as a collusion of half a
dozen major airlines that are simply trying to essentially
eliminate the current distribution system and replace it. And
in a free market environment that would not be wrong, but the
possibility of unfair competitive practices and the possibility
of collusion is obviously a very serious allegation.
How is it not that case, in your judgment?
Mr. Doernhoefer. Well, Mr. Chairman, there are published
guidelines from the antitrust division of the Justice
Department and the Federal Trade Commission specifically on
this topic of collaboration among horizontal competitors, and
Orbitz was designed with a very careful eye to meet the issues
that are raised by those.
But my best answer to your question is to give you an
analogy. I liken what Orbitz is and does to a farmer's market.
If you had 20 farmers in rural Ohio where my family lives, each
of whom have a roadside stand to sell their product, and they
sell their product through major distribution centers like
grocery stores and so forth, very much like the travel agency
community. And one day five of those farmers decided to buy
some land along the highway and set up some tents, and then
went to all of the farmers in the community and said, I will
rent you space. I will charge you a fee for selling your
produce in my farmer's market, but I will charge everyone
exactly the same. And those 20 farmers came to that farmer's
market and sold those produce in the farmer's market, and are
still in their own roadside stands for less money than they
sold the same product in the grocery stores and so forth. That
is an exact parallel to what Orbitz is. We are the farmer's
market of the travel distribution industry, created by five;
same offer made to every airline in the United States,
including the small airlines, and I have entered for the record
a letter from National Airlines that talks about how much we
have benefited their ability to distribute their product; a
small airline that finds our offer and our resource a very
valuable resource.
Chairman Pence. Thank you. I am going to do two things here
very quickly before I recognize the ranking member for any
questions. I am going to do that, but simultaneously excuse
myself very briefly as I am involved in the farm bill debate on
the House floor that just began a few moments ago. Using your
farm analogy, you reminded me. And I am going to ask the former
Chair of this subcommittee if she would be so gracious as to
take the gavel in my absence, and while she moves her chair I
will recognize the ranking member for any comments or questions
that he might have for the panel.
Mr. Brady. Thank you, Mr. Chairman.
Mr. Morse, how long have you been in the travel business?
Mr. Morse. We have had our agency now for 18 years. I have
been a front-line agent for nine.
Mr. Brady. Eighteen years.
Mr. Doernhoefer, the airlines that deal with you and deal
with Orbitz, they save money by doing that?
Mr. Doernhoefer. Yes, sir. They do. When we first entered
in these agreements, we took what was then the market price of
commission that was being paid to online travel agents, like
Expedia and Travelocity, people who were there before us. We
offered the airlines a declining cost schedule over the
subsequent years so that every year that payment, we would
start lower than they were then, and we would get lower every
year. We addressed this CRS problem and worked out an
arrangement by which we could give the airlines back some of
the money that they were paying to the CRS to lower both the
commission fees and the CRS fees, and it was an offer that was
wildly successful. We have 44 airlines, not just our owners,
but 44 airlines that accepted that agreement, and we sell all
airlines. In contrast to the testimony that was presented a
moment ago, any airline, every airline is sold on Orbitz except
Southwest, and that is at their choice, not ours.
Mr. Brady. Okay. So I am trying to get this in my own mind
that we have people here with 18 years, 24 years, 26 years, 25
years of experience in business, respectfully, and we are--to
elaborate on my new Chairperson's comments--we are bailing out
our airlines to the tune of billions of dollars, and they are
now trying to save a little bit of money at the expense of
these people that are in small business for all these years.
And this lady here has to lay off her son, and I am
wondering--I mean, they had to sit with a proverbial barrel
when that happened. But I am wondering where we are going here
as a Congress that we are bailing out billions and billions of
dollars so they can get money to put people out of business
that have been in business for 20 some years. I just have a
problem with that, and I think I am going to have a problem
with that for a long time to come, especially if there is
anymore of the bailouts that are going to come in front of us.
Madam Chairman, that is all I have.
Ms. Kelly. Thank you very much. Mr. Grucci.
Mr. Grucci. Thank you, Madam Chair.
Before I start in my questioning, I mentioned in my opening
remarks that there were no one here from the airline industry.
Let me just give them an opportunity to identify themselves if
indeed they have arrived since my opening comments.
Is there anyone here from the airline industry? Any
representative from the airline industry? I know they are not
at the panel, but is there anyone in the audience? [No
response.]
Mr. Grucci. No, not one representative from the airline
industry chose to come to this hearing today. I think that in
itself speaks volumes of what is going on in the airline
industry. I want to ask a question regarding Orbitz. You had
indicated that Orbitz--does Orbitz get a commission from the
airline industry?
Mr. Doernhoefer. Yes. I mean, effectively, yes. There is a
fee. It never happens to be called a commission in the
agreements, but they receive a payment.
Mr. Grucci. You receive some kind of reimbursement for your
service?
Mr. Doernhoefer. Yes, sir.
Mr. Grucci. Who started the--who started Orbitz?
Mr. Doernhoefer. Well, the long history of Orbitz is that
it initially was an effort by the entire industry, the Air
Transport Association. That effort sort of failed and fell
apart, and was resurrected by Delta, United, Continental and
Northwest, and they made the initial investment, and American
Airlines invested later.
Mr. Grucci. Are they still the major investors in Orbitz?
Mr. Doernhoefer. They are.
Mr. Grucci. Are those the same airlines that you get
commissions from?
Mr. Doernhoefer. We get commissions----
Mr. Grucci. Fees.
Mr. Doernhoefer. We get fees, essentially a commission,
from all of the airlines--from all airlines that sell through
us. A couple of airlines have recently, who had not signed our
agreement, our charter associate agreement, but we were
nevertheless selling their product have come to us and said no
more, they are not paying those fees anymore.
Mr. Grucci. What is the return on the airlines' investment?
Do they get a percentage of the profits of Orbitz?
Mr. Doernhoefer. We are still a private company and we have
yet to turn a profit, so there has been no return.
Mr. Grucci. So there is no reimbursement. What is the
anticipated return of investment for the major airlines that
funded Orbitz?
Mr. Doernhoefer. That would be far too speculative for me
to be able to even guess at at this stage in our life. We have
been up and running less than a year.
Mr. Grucci. Is it fair to assume that they are getting a
benefit currently?
Mr. Doernhoefer. Well, the entire industry, the entire
airline industry is getting a tremendous benefit in that we
entered the market and started putting pressure on all aspects
of the distribution channel, both--particularly Expedia and
Travelocity, our competitors in the online market. We have
forced them to match some of the offers that we made. They have
lowered their payment schemes, and we put pressure on these
Computer Reservation System fees, and we will continue to do
so----
Mr. Grucci. Does any member of the airline industry sit on
the board of the directors of Orbitz?
Mr. Doernhoefer. Yes. All of the members, all of the
current members of the board of directors are from the five
airlines that still own us, plus our CEO.
Mr. Grucci. Where did your CEO come from?
Mr. Doernhoefer. Well, his background is he was once at
American, then at Sabre, the largest of the computerized
reservation systems. Then he ran--he was chief executive
officer of Swiss Air for a number of years, and came from Swiss
Air to Orbitz.
Mr. Grucci. So with the exception of the CEO, the rest of
your board of directors are comprised of the five airlines that
have funded Orbitz?
Mr. Doernhoefer. Yes, sir.
Mr. Grucci. I do not have a quarrel with Orbitz. I do not
wish to think that Orbitz, and I am not going to get involved
in the Justice investigation that is underway, what are they
investigating you for? Is it an Antitrust investigation that is
underway.
This hearing today is to understand if the travel agents
that have appeared before me in my district and now here have a
legitimate beef, and it seems to me that they do. It seems to
me that there is some discrimination that is taking place by
the airline industries against an industry that has serviced
them for so many years, and it appears to me, and I am not an
attorney and I do not wish to engage you on the battlefield of
legal scholarly discourse, but I believe that there is a
benefit coming back to the airline industry as a result of
owning an agency that pays itself a commission. Since the
airline industry is the board of directors, one could argue
that they own the company. And as a result of that, not only
through their investment, but through their management of the
company they are paying themselves a commission that they may
not be realizing currently, but in doing so they are not paying
commissions to other American travel agents, but are paying
commissions around the world.
I guess one can make an argument that that those who came
here to do such terrible evil to us has bought a ticket from an
agent in Saudi Arabia or some other Middle East country, and
that agent got paid a commission. Here in this country that
cannot happen. To me, that is wrong.
And so my issue here very clearly is that we stepped up at
the request of the airline industries, and as mentioned earlier
by the ranking member, you could not walk down these halls
without getting bombarded by airline people, whether they were
the lobbyists, the CEOs, the people who had a legitimate
problem were here walking these halls, camping out on our
doorsteps, asking us for the kind of support that they needed
to keep an industry alive.
And I really do not have question for any of you because
none of you can answer this question because nobody from the
airline industry is represented here today. So you know, you
are going to have bear with me while I vent a little bit.
The issue that now comes up is the CRS. My understanding is
that the CRS was established by the airline industries. Would
any other travel agent--want to comment on that? Lou, do you
have any----
Mr. Fenech. Yes, sir.
Mr. Grucci [continuing].--Knowledge of the CRS, its
formation, who formed it, how it came about and what it does?
Mr. Fenech. Yes, sir. I have been involved with the CRSs
since 1979, when we were first automated.
Basically, at the time you had to show a certain volume of
sales before an airline would automate you. The original
airline automation services were done by TWA, which was PARS,
Eastern, which is now defunct, United and American. American
Sabre is still the number one CRS, and a number of agencies
subscribe with Amadeus, which is now the derivative of the
Eastern Airline system, having gone back and forth between
Continental and their ownership, and mergers and acquisitions.
Truthfully, the way this all comes down to it, at the very
base, if you boil it all down, the CRSs are the airlines. The
CRSs--the airlines have been forced to divest themselves of the
majority interested in the CRSs. However, they still maintain
an interest in the CRSs. So in effect, they are charging
themselves booking fees.
They have always set those booking fees, and then what they
do is they turn around to use and say you will now make these
bookings utilizing our system. We will then either give it to
you if you can generate enough income for us via the segments.
You will then be given a system for free to operate. We still
have to pay to have our ticket stock sent to us. We still have
to pay for the security of that ticket stock and the system.
In addition to that, now they are telling us, most of these
CRS companies are switching over to an Internet-based product
which is saving them money again. The cost of the CRSs has
always been borne by the travel agent. We are the ones that are
using the system.
The other question I have about CRSs and the Orbitz issue,
the whole thing is owned by the airlines, again. So if they are
asking us to pay for the internal development and the losses
that they have been sustaining all the way along, where are
they getting this money from? It is coming from our commissions
again. They are not paying us the travel commission because
they say that they are losing money. That money is being lost
basically as a part by the amount of research and development
money that they have had to pay to inaugurate these systems.
Mr. Grucci. Thank you.
I have one more question if I may, Madam Chair, and it's to
Mr. Thomas.
If the move is to online ticketing, which I guess the
argument from the airline industries would be that is in the
best interest of the general public because now they can
receive cheaper airline fares even though it puts an agency and
an industry out of existence, which I do not believe is the
right thing to do, but that is a second issue. The issue is why
are you not applauding this move, why are you at a competitive
disadvantage with colleagues of yours who are online service?
Mr. Thomas. Congressman Grucci, it is an unfortunate
reality that the airlines through the creation of Orbitz and
the fact that they have put two measures in--contractual
measures in place to provide themselves an effective monopoly
position, the MFN clause, as well as exclusivity provisions,
that they have access. The sole access to all the webfares and
the webfares make up an increasing, increasingly great part of
the fares that are out there, and these fares are typically
lower than the fares that are put into the CRSs, and therefore
provide a competitive advantage to Orbitz. These are fares that
are oftentimes--sometimes five to 10 dollars cheaper even when
you count the service fee that Orbitz puts on their tickets,
and sometimes hundreds of dollars.
The other day I did a search and I found the cheapest fare
one travel, and ITA software, which is the technology that
Orbitz uses, in the several hundred dollar range, it was five--
six hundred dollars, and the lowest fare on Orbitz was $200. So
the discrepancies are sometimes striking and very significant.
Mr. Grucci. So if I could just understand this correctly.
Even online service get two different prices? Orbitz gets one,
and you get another notwithstanding the issue that the travel
agents get even a third because they now have to tack on a fee
to the ticket price.
So you are not on a competitive basis with other online
servers, namely, Orbitz, because the airlines give them a
favorable, a favorable rate versus one that they give you?
Mr. Thomas. That is correct, and essentially I view that as
a subsidy by the airline industry to Orbitz given that they are
allowed to sell tickets at a lower price than are generally
made available to other travel agents and/or online sites such
as OneTravel.
Mr. Grucci. Thank you. I yield back the remainder of my
time, Madam Chair.
Ms. Kelly. Thank you.
Mr. Davis.
Mr. Davis. Thank you very much, Representative Kelly. I
appreciate the opportunity to be here and to participate. As I
indicated earlier, I am not a member of this subcommittee, but
I wanted to come for two or three reasons.
One, I wanted to be here to welcome Mr. Doernhoefer and
Orbitz. They come from the great City of Chicago, a city that I
represent and love, and continue to hope to see its
development.
I also come because I have some tremendous interest in how
we maintain a market-based economy, and at the same time try
and effectuate as much of what I call fundamental fairness as
we can in the regulation of our business and industries, trying
to use regulatory devices only to the extent necessary, because
obviously the more you regulate the less I think you utilize
and are making use of the concept of market impact.
The questions that I wanted to ask, first to the owners of
agencies, how much of your business is domestic air travel?
Mr. Fenech. Currently, my mix for our agency is
approximately 45 to 50 percent of our ticketing is done for
domestic airline ticketing of our whole profit mix.
Mr. Davis. Anyone else?
Mr. Morse. I would say we are probably closer to 60 percent
domestic.
Ms. Alton. I would say 65 percent domestic.
Mr. Davis. And so anywhere from 45 to 60 percent of your
activity is domestic airline travel. If that then is
significantly reduced because of, one, you are not getting the
commission, do you get a commission on international?
Mr. Fenech. Not by the domestic airlines.
Ms. Siemsen. Not Caribbean.
Mr. Fenech. Not by our United States airlines.
Mr. Davis. So actually you get nothing.
Mr. Fenech. Exactly.
Mr. Davis. And anytime a person accesses ticket through
your business----
Mr. Fenech. We have to charge a fee.
Mr. Davis [continuing]. You have to add an addition cost to
them.
Mr. Fenech. Exactly. That's correct.
Ms. Siemsen. Right.
Mr. Davis. Which of course mitigates against, unless there
is some other reason, they really would not come to you? I am
saying----
Mr. Fenech. Right.
Mr. Davis. From what my daddy taught us, I probably would
not come very often to you.
The other question that I have probably has as much to do
with the digital divide as it does with this particular
industry because I recall just the other day in another
committee asking the question about online job applications and
there being some agencies that the only way you really know if
there is a job vacancy you have got to go online. And it
occurred to me that many of the people who were unemployed----
Ms. Siemsen. And have a computer.
Mr. Davis. In all likelihood might not have a computer, so
they were disadvantaged twice.
Mr. Doernhoefer, all of your activity essentially is
online, right? I mean that is----
Mr. Doernhoefer. We do customer support subsequent to
making a booking via the telephone, but the initial search and
buying the airline ticket, hotel reservation, whatever is all
on line.
Mr. Davis. And the best fares and the best deals and the
best possibilities and all of those one probably would find
those through the search, I would imagine?
Mr. Doernhoefer. That is right. We can only sell what the
airlines give us to sell.
Mr. Davis. Right.
Mr. Doernhoefer. We do not make up the fares ourselves, but
the airlines, because it is less expensive for them to sell
when the customer does it themselves on the Internet, either on
their own--on the individual airline website or on Orbitz
because of our structure and agreements, they put their lowest
fares on those sites because it is the cheapest place for them
to sell them.
Mr. Davis. And so I guess what I am getting around to is
that if the dominant activity is going to be online, then we
still need to find some way for what I would call disadvantaged
consumers. While I represent downtown Chicago and all of the
things that are there, I also represent 68 percent of the
public housing in Chicago, and a lot of what is around it as
well. So I have got an awful lot of consumers who need to find
the best fares, but they are not going to be able to do so
because they do not have computers.
Mr. Doernhoefer. Could I, if I may? I picked up this
brochure which is from ASTA, the travel agents organization,
and it is addressed to consumers. And I find a section very
interesting. It describes a solution to the problem you have
just identified. It says, ``Some personal service agents are
responding to the Internet challenge by becoming skilled
Internet operators. They have added online knowledge to their
prior expertise and have figured out how best to use the
Internet for trips from your home city, which sites have the
best deals, how to play the auction game, and generally how to
take maximum advantage of what the Internet offers.''
What it points out is nothing prevents a well trained
professional travel agent from using the Internet on behalf of
their customer and finding them that lowest fare.
Mr. Davis. And I know our time is----
Ms. Kelly. In the interest of responding to that, yes, I am
going to extend this period just in case somebody else at this
table would care to respond to Mr. Doernhoefer.
Mr. Thomas. Yes, please.
We have still--even with what Mr. Doernhoefer said, we have
still created a divide in that consumers will have to pay a
premium via a travel agency as compared to what they could get
the same fare directly on Orbitz, and this over time will
inevitably lead to Orbitz gaining a dominant market position
and with the end result being total domination and control of
the North American travel market.
I think that unless steps are taken, this is where it leads
because consumers are looking for the lowest fares, and over
time will gravitate to any solution that provides the lowest
fares on a consistent and regular basis. And as soon as it
becomes widely known that that Orbitz is the site, the location
to buy tickets at a lesser price, over time it will
disadvantage not just the travel agents, the brick and mortar,
but the online travel agencies as well and eventually will
diffuse even the larger online travel agencies that today are
competing vigorously with Orbitz.
Ms. Kelly. Thank you very much, Mr. Thomas.
Anyone else have something they want to add? Ms. Alton.
Ms. Alton. It still would be a Catch-22 because if we were
to book the Orbitz and the person still does not have a credit
card they would not be able to make the purchase.
We also have the CRS contracts that require us to have so
many bookings to be paid for, and then on top of that we all
report to the Airline's Reporting Corporation, where it would
be against our rules if we started using our own credit cards
to pay the general public's traveling fee, which would in turn
be a loss to us.
So to go onto Orbitz and to sell from Orbitz just because
we can find it and using our personal credit cards would still
be a Catch-22, zero commission, and then still would have to
charge the person a fee.
Mr. Fenech. That is correct.
Ms. Kelly. Thank you very much, Ms. Alton.
Mr. Davis. Madam Chairman, if I could just say I thank you
for your indulgence. This has been very enlightening and
beneficial and helpful to me.
I want to thank all of the witnesses for their answers, and
it just helps me to recognize that there are no simple
solutions to very complex problems and complex issues, but I
remain hopeful because I do not want to see any small business
not be able to continue in this country. I mean, I believe that
small businesses are indeed the economic engine that continues
to drive our economy, and I think we need to do everything to
try and preserve and protect them while letting our market
impact work its will to a extent.
So I thank you very much.
Ms. Kelly. Thank you very much, Mr. Davis.
I have some questions of my own, and first, I would like to
ask Mr. Doernhoefer. I do not really understand why the
airlines--why it is appropriate in your view, according to your
testimony, that the airlines should give you a fee and not give
the travel agents a fee. I do not understand that.
You said you get a fee. How much fee do you get?
Mr. Doernhoefer. It will vary as I said over time. We need
to make sure we put this back in perspective. When we sign
these agreements, the fee schedule we were charging was lower
than what everyone else was getting. So let us not lose track
of that.
Ms. Kelly. Could that be because the airlines owned you and
the travel agents already had their contracts with the CRS?
Mr. Doernhoefer. Well, we----
Ms. Kelly. I mean, somebody could have signed on to a five-
year contract with CRS unknowing that Orbitz was going to sign
a lower fee contract with the airlines and undercut their
services, and also unknowing that the airlines were willy-nilly
going to cut all of their fees.
You make a statement that I feel is just really incredibly
presumptive. In the very first part of your introduction you
say that, ``Changes to the industry are bringing about needed
relief to a distribution system that is broken.'' You have not
demonstrated to me in one fact of what you have said so far
that this system was broken, and that it allowed your entry.
So I would like for you answer that question.
Mr. Doernhoefer. Very well.
Ms. Kelly. About why it is fair for them to pay you fees
and it is not for the travel agents to get fees.
Mr. Doernhoefer. Let me first address why it was broken.
Congresswoman, when we arrived on the scene there were
travel agents, there were consumers, and there were CRSs, and
the CRS industry, the four companies that constitute an
oligopoly that were forcing higher costs on both these small
travel agents and the airline industry had a higher profit
margin than either the travel agents on one end or the airline
industry on the other.
The middleman was taking out the profit and punishing both
ends of the spectrum.
Ms. Kelly. Excuse me, sir, but the middleman was owned by
the airlines also as I understand it.
Mr. Doernhoefer. It was not, and that is not true anymore.
Ms. Kelly. Oh, Sabre was not?
Mr. Doernhoefer. It is not owned by the--it is a completely
independent, publicly traded corporation today.
Ms. Kelly. Currently.
Mr. Doernhoefer. It was not----
Ms. Kelly. But when it came into existence----
Mr. Doernhoefer. It has no control by the airlines. I am
sorry. It is publicly traded. It was spun off by American
Airlines several years ago. It has a 50 percent----
Ms. Kelly. You still have not answered my basic question.
Why is it appropriate for you to get fees and they do not?
Mr. Doernhoefer. Okay. Now let's go to the--and you are
right, I have not addressed that, but I wanted to first talk
about what was broken in the industry.
The second thing that was broken and is still to some
extent is that these people at this table provide a service to
the consumer. The customer comes in the door, and says I need
your help to find my vacation plans, find the cheapest fare,
whatever. The right way to go about that, and frankly, it is
something that Orbitz believes in as well, is that we serve the
customer. And if we do a good job, and find them a cheaper
fare, then they should pay us for that professional service,
and we charge a customer a fee just like the people at this
table do.
Now that----
Ms. Kelly. You tell me how you are finding a cheaper fare
when they are giving you the cheaper fares?
Mr. Doernhoefer. We are finding----
Ms. Kelly. What effort are you putting into this when they
are giving it to you? I am only looking at what your testimony
is.
Mr. Doernhoefer. We find a cheaper fare because we went out
and find the ITA software, which we have talked about, which
was not fully utilized in any website. We spent tens of
millions of dollars to develop a website that was easier to
use, that did not rely on the CRS, which was the old mainframe
technology and was slower, less efficient and more expensive.
We spent tens of millions of dollars to develop an entirely
brand new system with the best software we could find. No one
else did that.
Ms. Kelly. Who paid for it?
Mr. Doernhoefer. The airlines, the owner, the owner
investors of the----
Ms. Kelly. The airlines.
Mr. Doernhoefer. The five airlines; not all airlines, but
five airlines.
Ms. Kelly. So what they were trying to do is develop, if I
understand you correctly, they were trying to develop a system
that would make it cheaper for them to do business; is that
correct?
Mr. Doernhoefer. That is absolutely correct. They were
trying to figure out----
Ms. Kelly. Well, they are in business. They are entitled to
do that.
Mr. Doernhoefer. They were trying to streamline their
distribution channel by cutting out the high cost GDS.
Now to your question about us receiving still a fee, I
mean, frankly, this move to zero commissions is fairly new. We
are under pressure from our owners and others in terms of the
contract that we have signed with them. However, it is the case
that small agencies are not getting paid anymore by the airline
industry. Large agencies, as the testimony, came in are still
being paid commissions.
We are a large agency. We sell over 20,000 airline tickets
a day, and we spend tens of millions of dollars in marketing to
the entire country, making sure our website is available, and
we actually just can move more business on behalf of the
airline industry than, unfortunately, the smallest of the
travel agents cannot.
We are still being paid a fee. We are being paid, in our
estimate, less fee than other comparably sized travel agencies
because we are----
Ms. Kelly. Can you name--I am sorry to interrupt you, but I
only have a certain amount of time also.
Mr. Doernhoefer. Sure.
Ms. Kelly. Can you name at least two or three other large
agencies that are getting fees?
Mr. Doernhoefer. Oh, sure. I mean, absolutely. Things like
American Express, Carlson/WagonLit, the big major agencies, and
my competitors, Travelocity and Expedia are still being paid
fees. They will be paid fees to actually reward their shifting
of market share from one airline to another. They will engage
in contracts where they will be rewarded for performance in
moving market share.
We cannot and will not do that. We are an unbiased, neutral
site, but we are being paid a small fee that will decline every
year for the next ten years by contract until it is essentially
zero, and that was the scheme by which the airlines were trying
to put downward pressure on all of their distribution costs.
Keep in mind that distribution costs ultimately go into the
cost of the ticket. It has to go somewhere. And as you lower
those costs, you give room for the airline industry to lower
fares.
Ms. Kelly. Why do you need if you are so successful and you
are getting all this input from the airlines, why do you need
this most-favored nations clause?
Mr. Doernhoefer. When we went into business, Congresswoman,
we said we need to serve the suppliers and the consumer. Every
bit of consumer testing we did said the consumer is tired of
having to go to 20 different websites to be sure they have the
right fare.
So we said how do we encourage the airline industry as a
whole to make sure we get to sell everything they are selling,
and the answer was to lower their costs. It is not exclusive.
Travelocity and Expedia or any agency that can move as many
tickets as we can is welcome to match our costs and get exactly
the same deal from the airline industry, and indeed they are.
It is simply a statement that is not true to say that webfares
are not available on Expedia and Travelocity today.
Mr. Thomas. It is certainly not available on OneTravel and
OneTravel is a cheaper cost channel than Orbitz is today. That
is clearly established.
My concern is that Orbitz is misrepresenting the way the
compensation structure is, and even though OneTravel works with
a CRS the cost per ticket today is half of what Orbitz charges
as charter members, and that is not including the fee that they
charge on top of the money that they get from the airlines, and
it does not include the fact that they get a subsidy from the
airlines that allow them to have a cheaper fare even after they
have put on the fee.
Furthermore, Mr. Doernhoefer said earlier, mentioned
something about National Airlines, and including a record into
the testimony. I would like to--my concern is really multi-
fold. Aside from making sure that we have a competitive and
vigorous environment for OneTravel and other players in the
travel industry to thrive, I am concerned about the long-term
impact for consumers, and I am also concerned about the long-
term impact for low-cost carriers. I believe that Orbitz is a
vehicle for the major airlines to wrestle control of the market
in order for them to be able to manipulate the market in the
future and disadvantage the low-cost carriers.
I would like to enter into the record a letter from
Vanguard Airline that says that during the period that they
were a charter associate of Orbitz, that Orbitz displayed
inaccurate fare information about Vanguard flights, and blamed
such inaccuracies on fabricated deficiencies in Vanguard's
system. And that moreover, Orbitz strong-armed a most-favored
nation clause and in-kind promotion exclusivity in a manner
that we believe is not justified by our contractual agreement.
The whole letter will be in the record.
Ms. Kelly. With unanimous consent, of course.
Mr. Thomas. Thank you.
Ms. Kelly. Mr. Fenech, would you like to respond to this
dialogue we have been having?
Mr. Fenech. Yes, ma'am. I just want to go over a part of
one thing here. Orbitz, as you may correct me if I am wrong
here, but has a great connection with a company called
WorldSpan; am I right?
Mr. Doernhoefer. Yes, that is true.
Mr. Fenech. Okay. WorldSpan is the automation system that I
subscribe to. WorldSpan has not given me any of the technology,
the benefits of the technology that they have given to Orbitz.
Okay, yet I am paying to be on WorldSpan. Moreover, WorldSpan
is jointly owned by Northwest, Delta, and TWA, who then was
bought out by American.
So, ma'am, how do they say that the CRSs are not owned by
airlines when WorldSpan is clearly in fact owned by airlines?
Ms. Kelly. Thank you for explaining that.
Ms. Siemsen.
Ms. Siemsen. Thank you.
When I opened up my agency 24 years ago, we did things the
old way. We called each airline, tried to get the best fare,
handwrote the ticket, and gave it to the consumer. The airline
at that time was Eastern Airlines, and they came to me and
said, we have a new system that we have developed for the
smaller agencies because my American sales rep tell me I did
not qualify for Sabre's requirements. So my Eastern sales rep
came to me and said, I have this computer system that will
bring you up to date, give you technology, have all the access
to all the affairs, yada-yada-yada, let us go online.
Okay, so we go online with this computer system. Now, the
airlines at that time, Eastern Airlines did own System One.
They set the CRS fees. They are the one that set my fees. They
are the ones that set my ARC requirements. My whole life is
tied into what the airlines require me to do.
I do not understand how they can sit here and claim that
the airlines have nothing to do with this computer system. They
set the fees to begin with on the CRS.
Mr. Fenech. They paid themselves.
Ms. Siemsen. Right.
Ms. Kelly. Mr. Doernhoefer, do you want to comment on that?
Mr. Doernhoefer. I do. There is a horrible, ugly history to
the CRS industry when it was owned by the airlines. One CRS is
still owned by the domestic airlines, and that is WorldSpan.
The dominant agency, Sabre, has 50 percent market share and is
completely independent. The other two, one is owned now by
Cendant Corporation, which has hotels and rent-a-cars and so
forth, and the fourth is owned by foreign airlines.
Now, those are the four choices that all of the people at
this table have today to place a booking. There is essentially
no other way to do it.
Congresswoman, if this committee and the people at this
table would work together to eliminate the regulations which
exist today to allow the airline industry and Orbitz to offer a
cheaper booking channel directly to the travel agents, they
would get access to the webfares and airlines could save money
by avoiding the CRS fee.
We could implement that by the end of this year if there
were no regulatory obstacles, but the fact is there are and we
cannot--and the airlines that own us support the concept. We
could do that but for the existing CRS regulations that prevent
Orbitz from offering a desktop version directly to the travel
agency community.
Ms. Kelly. I am interested, Mr. Doernhoefer, that your
response was concerning whether or not the airlines could save
money. We bailed out the airlines. I voted for a $15 million or
billion dollar package to make sure--I cannot even remember how
much it was, they kept coming back more and more and more--for
a package to help keep the airline industry from going
completely into some kind of real economic tailspin after 9-11.
Your concern right now in front of this committee this
morning after having heard all of this with the travel agents,
you are still concerned about saving the airlines money. We do
want to keep the airlines in business, no question about it,
but if we do not help them--Mr. Morse, I would like to ask you
and the rest of the people at this table, are you not going to
be edged out by the kinds of arrangements that we see here with
Orbitz and that Mr. Doernhoefer has talked about.
Mr. Morse. Well, the level playing field means we should
have access to all fares. It is very plain and simple. Mr.
Doernhoefer is saying, well, that eliminates the need for
Orbitz. I do not agree. We have a free market economy, but we
also have an entrepreneurial spirit going bad. We have gotten
into the oligopoly and monopoly access. We need access to all
the fares. We also need, for example, from the CRS contract
folks, any notification well in advance of any termination
contract.
Right now, Congresswoman Kelly, if I walk home today and
find out that Delta Airlines has shut off my system because of
maybe a debit memo that is in conflict for some period of time,
I have no access. I have no control. I am all of a sudden shut
down, and my Delta customer walks in the door, I cannot serve
him, and that is an arbitrary thing on the part of the airlines
right now.
Much of what I am saying is in the heart of H.R. 1734, the
Consumer Bill of Rights, and that is what I would like to see,
but level playing field in airfares is more important than
anything.
May I add just a couple of little comments?
My contract for the CRSs right now stated in the year 2000.
It is a five-year contract. With the zero commissions and with
everything else going on right now, I have got three years of
fines facing me for short falls on a contract I cannot get out
of for three years.
Second of all, to pick up on Mr. Davis's point, yes, I can
do the online ticketing through Orbitz or anybody else. I still
have to charge that fee, absolutely. He is saying, well, you
should be charging the fee. The customer is going to pay. I am
sorry. The customer is going to pay the fee.
Thank you.
Ms. Kelly. Thank you very much, Mr. Morse.
The Chairman of the committee has come back so we have
changed chairs. Back to you, Mr. Pence.
Chairman Pence. Thank you. Thanks for filling in and
indulging me as I participated in the floor debate, and
especially thank you for your veteran handling of the hearing,
I can tell on my return.
Before I recognize Mr. Grucci, we are obviously at a
disadvantage because while I think we invited to the hearing
several airline companies to come and talk with us, we did not
get a favorable response. Neither do I think there is any
representative for any of the airlines that have been mentioned
today or that might be involved with as owners in Orbitz.com.
And if anyone in the room is associated with any of the
airlines, you can wave your hand in the air, and I would be
happy to correct the record. It is frustrating to the Chair
that we do not have that representation here because I think,
as the gentlelady from New York just shared, a great deal of
the angst that I think is felt in the industry, and, frankly,
is profoundly felt on Capitol Hill as I think this strong
turnout shows at this subcommittee hearing, strong bipartisan
diverse turnout shows is that following, and the number
specifically being 15 billion, 5 billion in direct payments and
10 billion in loan guarantees, the memory of the Chair is very
much that that airline package was sold as a way of stabilizing
the travel industry in America, staving off the kinds of losses
that would result in the collapse of airlines which would have
affects on everyone from vendors at airports to people in the
travel industry.
I guess my question, and this may not be a fair question,
but given your background at American Airlines, Mr.
Doernhoefer, is there--among your clients and owners, is there
any sense that you bring to this hearing about a, and maybe I
picked this up a little bit in your comment a few moments ago,
but a desire in the wake of that $15 billion action last fall
by Congress, is there a desire in the industry with which you
are associated, a desire to address this issue and to stave off
what we appear to see, an implosion among agents for the
airlines?
And if you do not feel competent to answer that question,
then I understand that, but I would be grateful if you did.
Mr. Doernhoefer. Mr. Chairman, I appreciate it, and I
really cannot speak on behalf of the airlines other than just a
very high level general sense, and that is that the airline
industry today is still hemorrhaging losses at an alarming
rate.
My colleagues at American Airlines tell me they are still
today losing $4 million a day in their operations at a time
when they are being asked to incur additional costs to increase
security. So without knowing, you know, the details of their
current thinking, I think you have an industry that is still
very much in lifeboat mentality, and probably not looking
outwardly nearly as much as we might like, but looking inwardly
for their own survival.
Chairman Pence. And certainly the Chair would recognize
that focus that has to be the focus of every business. So your
judgment outside looking in, but with your background in the
industry, would be that there was not the expectation that the
$15 billion bailout was about stabilizing the industry, it was
about stabilizing the airlines specifically?
Mr. Doernhoefer. I guess I cannot quite adopt that view. I
mean, I think--I do not know what the expectation was or how
far they thought that money would go----
Chairman Pence. Right.
Mr. Doernhoefer.--To actually reach some stable point, but
I can tell you that the industry is questioning every aspect of
its current operations, trying to figure out how to fix the
predicament they find themselves in today. But I would suspect
that most of that is they are looking at their own operations
for how to cut costs, and how to operate efficiently and
safely, and consistent with the new security regulations, and
actually stem the losses.
Chairman Pence. Mr. Fenech, one question, and then I am
going to yield back to--at this point I think I am going to
recognize the ranking members after this question, then Mr.
Grucci had a question or two.
You made a comment that was news to me, that the airlines
have not been alone in eliminating your commissions, that the
rental car companies and others have. My question is has this
trend essentially paralleled the reduction of commission in the
airline industry?
Mr. Fenech. Well, sir----
Chairman Pence. And how widespread is it among--excuse me
for interrupting you, but I have a legal background and I
understand agency relationships. And the first question in an
agency relationship is who are you representing. And it strikes
me as peculiar that so many of the companies that you have been
representing when I walk through your door no longer pay you
anything.
Mr. Fenech. It is peculiar to us too, sir.
Chairman Pence. I do not understand.
Mr. Fenech. It is astounding to us, sir.
Chairman Pence. Well, how widespread is that apart from the
airline industry?
Mr. Fenech. Well, right now the rental companies have did
this on a corporate level, so if they have a negotiated
corporate rate, they have determined that those are not
commissionable to travel agents, okay. It is endemic though.
This is what is going to be the trend.
As the airlines do this, the rest of the industry looks at
that and says, okay, let us see what the reaction is going to
be. What are these travel agents going to do? Are they going to
go on strike against the airlines? Are they going to stop
selling their services?
We cannot do that. We have no antitrust immunity to draw
any sort of a strike or even a negotiation against the
practices that we have been forced to accept.
Our own agency agreements were never negotiated. They said
if you want to sell airline tickets, you must have a bond, you
must secure our documents, you must be open for business in a
storefront location a certain member of hours per week. They
investigate. They sent a representative in to look at our
office, make sure we were there. No negotiation. They cut our
commission. No negotiation.
Our own agreement that we have signed says that the
airlines will determine compensation.
Chairman Pence. So it is happened in part of the related
industry, and you believe it will become much more acute if
this----
Mr. Fenech. I am very afraid because there are major cruise
lines right now which are also merging and being absorbed by
each other to the point where that is also becoming
questionable to our future in the commissions.
Chairman Pence. Let me yield to Mr. Brady, the gentleman
from Pennsylvania, for any further questions.
Mr. Brady. Thank you, Mr. Chairman. Just an observation and
statement, but also to answer you.
I have a union background. Be a little careful how you
speak. I am liable to help you get organized, and that might be
a bad thing. [Laughter.]
Mr. Fenech. I would welcome it.
Mr. Brady. If you want to talk to me about it, I have to
have my union hat and say we could always talk.
Mr. Fenech. We will do lunch.
Mr. Brady. Okay. [Laughter.]
Mr. Brady. I guess, Mr. Doernhoefer, I am not trying to
single you out or try to look at you in any kind of way, shape
or form. You are in business. You need to be in business, and
you should be in business to make money, but the only thing
that troubles me is that we talk about something that is
broken. And I am wondering whether or not if this thing gets
fixed, do 25 years of service in this table go out of business.
So maybe we need to look at it a little bit more and try to
come up with some type of--whatever we can come up with and try
to have you stay in business competitively, but also have them
25 years, we like to say mom and pop, and in your case mom and
son. We like to keep them in business too because there is a
personal touch other than pushing on a computer when you deal
with a travel agency.
And I found out a lot of times that when there is a mix-up,
no fault of anybody, but just there is a mix-up, that you
cannot sit there and holler at that computer as much as you can
maybe holler--not so much holler, but talk to one of them and
have somebody tell you just what is going on.
So you know, I just think that I might appreciate you
having the sharing to bring this to light, and I would like to
be a part of anything to try to make some type of solution
come, and maybe we should do lunch. [Laughter.]
Chairman Pence. Thank you, Mr. Brady, and the gentleman
from New York had a few more questions before we conclude here.
Mr. Grucci. Mr. Doernhoefer, I said earlier I do not have a
quarrel with Orbitz. I think I have changed my position on
that. [Laughter.]
Mr. Grucci. I think after listening to your testimony and
listening to some of the things that were said I do have a
quarrel. I have a quarrel when five of the major airlines owns
an organization that markets tickets and they pay themselves a
fee. And one could argue that the reimbursement to the airlines
or the return on investment is the fact that they are getting
the market share of the traveling public, putting other online
competitors at a disadvantage because the tickets are being
offered to their own organization far cheaper than others.
And then hearing you indicate that we could fix that
problem by moving some kind of legislation that would allow the
travel agents to become agents for Orbitz and sell Orbitz's low
fares. I never heard anything about commissions being paid, but
I would suspect that there would be some kind of reimbursement.
So the question that I would have is if it could happen
through legislation, why cannot it happen without the
legislation? Why does government need to jump into this thing
to make it happen? Why cannot the industry fix its own problem
before government has to?
And I do not need you to answer those questions because you
cannot speak for the airlines, and I would not expect you to,
and I would not ask you to be put in that position. I would
once again point out that the airlines are not here to answer
those questions, and as a result of that, you know, this
hearing today is still left with a lot of unanswered questions.
But one question in my mind has been answered. The next
time I see an airline industry representatives walk through my
front door I will be a little less willing to help them and a
lot more reluctant to believe what they are telling me to be
true to be true.
What I would like to ask and, Celeste, you have spoke
eloquently about your operation, how long you have been in
business. What is going to happen to you and your business in
the next year?
Ms. Siemsen. It depends if I can get out of my CRS
contract. That is going to be a big part of it since I still
have a $350 a month fee that I do not have anything to offset
it right now.
I do, I am part of a franchise, so hopefully, and we are
more leisure than we are corporate, which is good for me. But
if the airlines go to the next step and eliminate the
commission based on how I do my packages to the Caribbean.
Right now we book through a tour operator. So right now their
commissions have not been hit, but yet they still have
contracts with the airlines through the rest of this year. So
we have no idea whether or not those contracts are going to be
honored for the tour operators, and that only helps me in my
businesses as far as packages are concerned.
If we do not get any help, we do not get any relief, I
would say I will probably be able to hold on through the rest
of this year. I do not know what next year will bring
considering the climate out there.
Mr. Grucci. One last question, Mr. Doernhoefer, and this
you can answer, I would suspect. It has been reported that
between 70 to 75 percent of the sales of Orbitz is done to the
five major airlines that are board members and have funded the
foundation in the beginning and the genesis of Orbitz. Is that
true?
Mr. Doernhoefer. Our sales, Congressman, almost exactly
mirror industry market share. So yes, because the five biggest
airlines sell about 80 percent actually of all domestic airline
tickets period, their sales on Orbitz reflects almost exactly
their market share statistics, and that is because we cannot
bias. We cannot move share one way or another, so our internal
share looks just like industry share.
Mr. Grucci. Mr. Thomas, is 80 percent----
Mr. Thomas. That is----
Mr. Grucci. Let me ask the question first.
Mr. Thomas. I am sorry.
Is 80 percent or 70 to 75 percent of your business done
with those five major airlines?
Mr. Thomas. No, it is about 50 percent; it is actually 51
percent.
But I would like to have Mr. Doernhoefer elaborate. Given
that they went to--Orbitz went to utilize the ITA technology in
order to provide unbiased fair displays, it really does not
explain why Orbitz meaningfully changed the display on its own
site from the original design that ITA has. And I believe that
that change in design is largely in order to effectively bias
in favor of the major carriers that have a greater route
structure.
Mr. Grucci. Thank you. I have no further questions, Mr.
Chairman.
Chairman Pence. Thank you, Mr. Grucci. And again, the Chair
would like to say for the record that Mr. Grucci played a
pivotal role in assembling this hearing, and I and other
members of the Small Business Committee look forward to working
with our colleague as we collate and digest what we have
learned in this hearing today. But I think it is safe to say
that without Felix Grucci's leadership this hearing would not
have occurred.
That said, allow me to thank all of the panelists and also
Congressman Foley who joined us earlier.
As I said earlier, I have a small business background
having hung the fluorescent lights and put a fax machine in the
basement of my house, and greatly appreciate the challenges
that all of you face in the small business environment.
And I also have a great love for communication and the
information age, and admire both of the men who are here and
who are part of that information revolution. These are
difficult issues. This is obviously a time of transition in the
industry.
It is my hope that all of the participants of the panel
will recognize that, and I say this on behalf of the ranking
member, the gentleman from Pennsylvania, the distinguished
panel of minority members who joined the committee today, the
distinguished panel of members of the majority who joined the
panel today, I hope that all of you who are feeling beset by
these changes in the industry will have seen evidence today
that this Congress on both sides of the aisle is aware,
interested, as of today better informed, and poised for action.
And though the man in the cross-hairs today who did an able
and capable job of speaking on his behalf and on behalf of
Orbitz.Com is not a representative of the airline industry. I
know that your tie is to your clients, and your former
employees are deep, and I am confident that, and trust that in
some informal way you will help, in addition to the media
gather here today, you will help carry back the concerns
expressed by many members of Congress to those major airline
industries.
I think Felix Grucci's comments are fairly echoed by all of
us who heard the airline bailout bill sold here on Capitol Hill
not as a way of helping airlines specifically, but about
stabilizing the travel industry in America which obviously the
jurisdiction of this subcommittee and of the Small Business
Committee generally is about looking after and tending to the
interest of small business Americans, and it is our hope that
that messages makes its way back to the airline industry, that
there is concern on Capitol Hill and that this hearing does not
represent the end of that concern. It really represents the
beginning of that concern, and asking some questions that will
hopefully ultimately result in--whether it is future
legislation, whether it is deregulation, but that it will
result in the kinds of changes that will allow all the ships to
rise in this industry, and ultimately for the consumer to have
the best service, which we know happens in that corner travel
agency where they can walk in and get the right answers, and a
word of encouragement in combination with the very best prices,
and that is the ambition of this committee.
With that the Subcommittee on Regulatory Reform and
Oversight of the Committee on Small Business stands adjourned.
Thank you.
[Whereupon, at 12:26 p.m., the subcommittee was adjourned.]
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