[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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                      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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