[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
 ARE ALL ONLINE TRAVEL SITES GOOD FOR THE CONSUMER: AN EXAMINATION OF 
                   SUPPLIER-OWNED ONLINE TRAVEL SITES
=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE, AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 18, 2002

                               __________

                           Serial No. 107-120

                               __________

      Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house

                               __________








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                    COMMITTEE ON ENERGY AND COMMERCE

               W.J. ``BILLY'' TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida           JOHN D. DINGELL, Michigan
JOE BARTON, Texas                    HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio                RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania     EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California          FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia                 SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         BART GORDON, Tennessee
ED WHITFIELD, Kentucky               PETER DEUTSCH, Florida
GREG GANSKE, Iowa                    BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona             ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING,          GENE GREEN, Texas
Mississippi                          KAREN McCARTHY, Missouri
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
TOM DAVIS, Virginia                  THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee                 BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland     LOIS CAPPS, California
STEVE BUYER, Indiana                 MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California        CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire       JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky

                  David V. Marventano, Staff Director
                   James D. Barnette, General Counsel
      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan                 EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 DIANA DeGETTE, Colorado
  Vice Chairman                      LOIS CAPPS, California
ED WHITFIELD, Kentucky               MICHAEL F. DOYLE, Pennsylvania
BARBARA CUBIN, Wyoming               CHRISTOPHER JOHN, Louisiana
JOHN SHIMKUS, Illinois               JANE HARMAN, California
JOHN B. SHADEGG, Arizona             HENRY A. WAXMAN, California
ED BRYANT, Tennessee                 EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California        BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire       PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania        BOBBY L. RUSH, Illinois
MARY BONO, California                ANNA G. ESHOO, California
GREG WALDEN, Oregon                  JOHN D. DINGELL, Michigan,
LEE TERRY, Nebraska                    (Ex Officio)
ERNIE FLETCHER, Kentucky
W.J. ``BILLY'' TAUZIN, Louisiana
  (Ex Officio)

                                  (ii)














                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Cooper, Mark N., Research Director, Consumer Federal of 
      America....................................................    37
    Gilliland, Sam, President and Chief Executive Officer, 
      Travelocity.com............................................    20
    Ruden, Paul M., Senior Vice President for Legal and Industry 
      Affairs, American Society of Travel Agents.................    42
    Wolff, Bruce, Chairman, TravelWeb, LLC.......................    28
    Zuck, Jonathan, President, Association for Competitive 
      Technology.................................................    33

                                 (iii)








 ARE ALL ONLINE TRAVEL SITES GOOD FOR THE CONSUMER: AN EXAMINATION OF 
                   SUPPLIER-OWNED ONLINE TRAVEL SITES

                              ----------                              


                        THURSDAY, JULY 18, 2002

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                   and Consumer Protection,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:30a.m., in 
room 2123, Rayburn House Office Building, Hon. Cliff Stearns 
(chairman) presiding.
    Members present: Representatives Stearns, Deal, Bryant, 
Bass, Walden, Terry, Towns, DeGette, Markey, Rush, and Eshoo.
    Also present: Representatives Boucher and Grucci.
    Staff present: Ramsen Betfarhad, majority counsel; Mike 
O'Rielly, professional staff; Brendan Williams, legislative 
clerk; Jonathan Cordone, minority counsel; and Bruce Gwinn, 
minority professional staff.
    Mr. Stearns. Good morning. I would like to welcome all of 
you to this hearing of the Subcommittee on Commerce, Trade, and 
Consumer Protection, entitled, ``Are All On-Line Travel Sites 
Good for the Consumer: An Examination of Supplier-Owned On-Line 
Travel Sites.''
    I would like to especially thank our witnesses on behalf of 
the committee for their appearance today and their testimony. 
Notwithstanding the hyper-enthusiasm for all things Internet 
and electronic commerce of the recent past, the fact remains 
that the Internet as an efficient ubiquitous communication tool 
has substantially transformed in fundamental ways commerce as 
we know it today.
    Electronic commerce transversing the communications network 
that is the Internet is real, substantial, and rapidly becoming 
a key component of our economy. The hyperpredictions of not so 
long ago that e-commerce would reach between $3 and $4 trillion 
by the year 2003 may not have come true.
    But by most estimates the value of business-to-business 
commercial transactions that transpire on-line is well over $1 
trillion today. More significantly, the rate of growth of such 
business-to-business transactions is increasing unabated and it 
is far in excess of the growth rate for off-line commerce.
    Business-to-consumer e-commerce may also have not met the 
glorious prediction of abundance who reigned during the .com 
bubble, but the fact, my colleagues, remains that it has grown 
substantially and it continues to grow at rates unmatched by 
off-line commerce.
    One of the more stellar examples of business-to-consumer e-
commerce growth is the on-line travel business. For example, in 
just over 3 years, 15 percent of all airline tickets are now 
being sold on-line, and the growth rate for such transactions 
is still accelerating.
    More significantly, increasingly consumers are seeking and 
receiving more advanced travel services through on-line travel 
sites; such as arranging multi-city, or even country trips, 
involving a myriad of reservations for air travel, car, hotel 
reservations, and tours.
    During the dot.com bubble, it seemed that any and all 
business models were tried as investors in their euphoric 
state, vis-a-vis anything Internet, had the penchant to welcome 
and accept them all.
    However, as the dust settled and we learned that while 
selling books on-line made sense, selling groceries didn't, a 
sort of new business model has gained in appeal among dominant 
suppliers, but only in certain industries.
    That sort of new business model calls for the dominant 
firms within an industry to collectively create an on-line 
distribution network for their goods and services.
    In practice, this business model has manifested itself in a 
number of supplier owned, on-line distribution joint ventures, 
where the participating companies tend to be the top 5 or 6 in 
that industry.
    These supplier-owned on-line distribution joint ventures 
are now present across a number of industries, including air 
travel, lodging, cosmetics, music, and even foreign currency 
exchange.
    Now, there is no question that such supplier-owned on-line 
distribution systems engender economic efficiency and also 
consumer benefits. At the same time there is also no question 
that any time competitors come together in collaborative 
efforts such as these joint ventures that there is a risk.
    There is a risk for collusion activity that may impede 
commerce and harm consumers. This hearing is meant to create an 
educational forum simply to examine both the benefits and 
possible risks that supplier-owned on-line distribution systems 
hold for the American consumer.
    As examining the supplier-owned on-line distribution system 
across a multitude of differing industries within which they 
appear is a tall order at this hearing to accomplish, but we 
are going to try to focus on the online tavel business only.
    This hearing will focus only on on-line joint ventures in 
the air travel and lodging industries. We have before us some 
great expert witnesses on these issues. We had hoped to have 
Orbitz, and at least one of the five major airlines that are 
involved with and own Orbitz, to speak on Orbitz's behalf.
    Unfortunately, it did not work out, and they are unable to 
attend. However, Gary Doernhoefer, Vice President and General 
Counsel of Orbitz, LLC, has provided the subcommittee with 
written testimony on behalf of Orbitz, which I now offer to be 
included as part of the record, and without objection, it is so 
ordered.
    [The prepared statement of Gary Doernhoefer follows:]
 Prepared Statement of Gary R. Doernhoefer, Vice President and General 
                          Counsel, Orbitz LLC
    Online distribution of travel is the Internet's greatest success 
story. Travel is the most successful sector of Internet commerce. The 
Internet has offered services to travelers that a great many of them 
find convenient and informative, and so consumers of travel have given 
the Internet their highest vote of confidence--they choose to use it, 
they like it, and they choose to use it again.
    At the same time, we all have to recognize that leading up to the 
use of the Internet, the automated distribution of travel has long been 
a sector troubled by insufficient competition, and that has resulted, 
among other things, in the costs of selling through many of these 
systems being unreasonably high. Those costs are paid in the first 
instance by the airlines, but are ultimately paid for by consumers as 
part of the cost of air travel.
    The purpose of Orbitz is to bring new competition to automated 
distribution: new price competition, new technology, competition in the 
quality and content of the information provided, and new customer 
service competition. We believe that the results to date speak for 
themselves. We launched just 13 months ago, and since our launch (and 
despite our relatively small size)

 price competition has increased (with several of our larger 
        competitors for the first time engaging in price reductions on 
        the cost of making a booking),
 technology and information quality has increased (with at 
        least one of our larger competitors moving to new search 
        technology), and
 customer service at many websites, both online agencies and 
        individual airline websites, has improved considerably in 
        competitive response to improvements in customer service first 
        launched by Orbitz.
    In short, as a result of new competition from Orbitz, competition 
has increased, and competition is doing what it is supposed to do, 
which is to reduce cost and improve products and services. The consumer 
is better off for Orbitz having entered the market, whether or not that 
consumer actually uses Orbitz.
    Let me review each of these arenas of increased competition:
Price Competition
    Automated distribution came to air travel two decades before the 
Internet did. It came in the form of Computer Reservations Systems 
(CRSs). These were enormous mainframe computer systems with terminals 
placed in travel agencies. Typically a travel agent was placed under 
contract by a CRS, that travel agent used only that one CRS, and there 
were very few CRSs (there are only four in the world today). That meant 
that any airline could only sell through the agents that used a 
particular CRS by agreeing to pay whatever that CRS decided to charge 
for each booking made. As every government agency that looked at the 
issue found,1 that gave the CRSs the power to price their 
services at levels far above what would exist in the case of a 
competitive market.
---------------------------------------------------------------------------
    \1\ The federal agencies that so found were the Civil Aeronautics 
Board, the Department of Justice, the Department of Transportation, and 
the General Accounting Office.
---------------------------------------------------------------------------
    Furthermore, what were excessive prices paid for CRS booking fees 
15 years ago, have continued to climb every year since then, despite 
the fact that computing and telecommunications costs have declined 
dramatically over the years.
    In 1984, federal rules were put in place to try to limit the 
monopoly powers of the CRSs. In some instances, those rules have been 
somewhat successful, as in limiting the display bias of the CRSs. But 
the rules have been completely ineffective with respect to monopoly 
pricing of CRS services, and so those excessive costs have been built 
in to air transportation ever since, and get worse with each passing 
year.
    The coming of the Internet to air travel in the late 1990's brought 
hope that this anti-competitive bottleneck might be opened up, 
restoring competitive market forces. It was impossible to launch a new 
CRS competitor, since they operated under contract to travel agents and 
all the travel agents were locked up in existing contracts. But new 
Internet sites were being launched every day. Users don't have 
contracts with websites--they just use the website if they want to. The 
hope was that the new open competition model of the Internet would 
remedy the long-standing anti-competitive problems of the CRS business.
    However, the biggest of the CRSs, Sabre, moved quickly to establish 
its own dominance of the Internet. It used its unusually large profits 
at Sabre to build the first major online agency, Travelocity. Every 
booking on Travelocity was a booking on Sabre and imposed the same CRS 
booking fee that Sabre charged off the Internet. Other online agencies 
that came along followed the same model--their bookings went through a 
CRS and charged the same CRS booking fee. Thus the Internet became a 
branch office of the CRS oligopoly, rather than a competitive 
alternative to it. And the hope of the Internet acting as a new source 
of badly needed price competition was dashed.
    That is where Orbitz came in. Orbitz was determined that the 
Internet could provide price competition, and Orbitz has done so, 
despite the fact that Orbitz also uses a CRS to make each booking.
    Orbitz offers every airline two options;

 It can pay the standard CRS booking fee, and make available to 
        Orbitz only the fares it makes available to all other websites 
        and CRSs, in which case Orbitz will give it no-bias display of 
        its schedules and services and will book its tickets, or
 It can get a rebate equal to about one-third of its booking 
        fee, in return for an agreement that any fare the airline 
        chooses to sell to the general public through any other outlet, 
        it will also make available to Orbitz. If it accepts this 
        latter proposition, it can put that same fare anywhere else it 
        wants--Orbitz expressly does not limit what that airline may do 
        with that fare anywhere else, because this is an expressly non-
        exclusive arrangement. And the airline also gets non-biased 
        display and booking capability. This lower priced option is has 
        been chosen not only by the 5 airlines who have invested in 
        Orbitz, but by 37 other airlines as well.
    That is the basic offer to encourage price competition: pay us the 
standard amount and give us only the standard fares to sell, or give us 
a few more fares to sell and we will give you a discount on the price 
of having your tickets sold by us. That is exactly what happens in any 
competitive distribution market. We have not previously had price 
competition in air travel distribution, so some of our competitors 
neither recognize it nor welcome it. A few of them would like you to 
help them get government to prohibit price competition in the 
distribution of air travel. But that would not be in the interest of 
competition or of consumers.
    The results speak for themselves. The largest online agencies, 
Travelocity and Expedia, caterwauled for months, alleging that Orbitz 
had exclusive rights to webfares, or that we didn't, but the airlines 
individually refused to make webfares available to them. What was 
really going on was that these largest websites wanted to get the 
webfares without engaging in the price-cutting competition to get them. 
When government did not come to their rescue by requiring the airlines 
to have these websites sell their webfares without regard to what the 
websites charged for the selling of those fares, the websites did what 
any business would do, which is engaged in price competition. They made 
offers to airlines to charge less for selling tickets through their 
website in return for availability of webfares, and the airlines 
individually began accepting those deals. Travelocity and Expedia now 
have webfares and advertise that fact. But they got them by finally 
engaging in normal price competition.
    Let there be no doubt or mistake. Orbitz' competitors are getting 
the websfares now that they have begun to compete for them. Statistics 
that Orbitz uses to track whether it can still substantiate the 
marketing claim of ``the most low fares'' shows the unmistakable trend 
toward common fare offerings by all of the major online travel agents. 
Expedia clearly leads Travelocity in this competitive battle, and their 
recent marketing proudly proclaims their access to webfares. But the 
point is the same. Our competitors allowed us an advantage in having 
better fares for about six months while they complained to Congress and 
the regulators. Then they began to do what they should--compete. The 
fact is that the complaints about Orbitz we have heard for nearly two 
years simply are not being proven by the online travel marketplace. 
Today it is increasingly apparent that the complaints are nothing more 
than the efforts of competitors who dominated a market to hold on to 
the past. Granting them their desires will unquestionably, immediately 
and perhaps irrevocably harm consumers and raise airlines' costs at the 
worst possible time.
    Now the question is being replayed by the CRSs. They are 
caterwauling that Orbitz has exclusive fares, or that we do not but 
airlines are individually refusing to make webfares available to the 
CRSs. What is really going on is that the largest CRSs want to get the 
webfares without engaging in price competition to get them. The 
question again is whether you will call for government to require 
airlines to buy the distribution services of the CRSs without regard to 
what the CRSs charge for that service. If you do, you would be ending 
any hope of price competition in the automated distribution of air 
travel. You would be granting a government-protected monopoly pricing 
power to the CRSs.
    When government requires party A to buy party B's service, without 
regard to the price party B chooses to charge, party B may now price 
with impunity. Why should that excessive cost be built into the price 
of air travel? What public purpose could that possibly serve? Wouldn't 
that, in this case, serve the interests of the largest CRSs at the 
expense of the travelling public?
    A few more points need to be made here.
    First, Orbitz did not invent webfares. They were invented long 
before Orbitz was even conceived. They came about because the CRSs had 
raised their booking fees so high, that the cost of selling tickets 
through a travel agent using a CRS became so high, that airlines could 
no longer afford to sell their lowest fares through that increasingly 
expensive channel. When the airlines developed their own individual 
airline websites, and found that those websites were by far the 
cheapest way to sell a ticket, they began putting their lowest fares 
only on their own website. And those fares became known as webfares. 
What Orbitz has done is take those webfares that were only available on 
the airline's own website, and made them more widely available by 
putting them also on Orbitz. And what the price competition brought by 
Orbitz has done is to also take those webfares and, by pushing 
Travelocity and Expedia to engage in price competition, made those 
webfares even more widely available by putting many of them on 
Travelocity and Expedia. And if competition is allowed to continue to 
work, we expect that the CRSs will sooner or later start to engage in 
price competition as well, and those webfares will show up on the CRSs 
also.
    So webfares are spreading. They are becoming more and more widely 
available. But there is also the benefit of spreading price 
competition. It is a double benefit for consumers.
    Second, not only are airlines and consumers being harmed by 
excessive CRS booking fees, but so are travel agents. The cost of 
selling through a travel agent went up over the past decade not because 
travel agents charged airlines more for their services, but because 
CRSs kept charging airlines more for selling through a travel agent. 
The travel agent was priced out of selling the lowest airline fares, 
not because of any cost imposed by the travel agent, but because of 
costs imposed by the CRSs, decisions over which travel agents had no 
control. To the extent travel agents have been harmed by the inability 
to sell the lowest fares through the CRS that has them under contract, 
that travel agent is the collateral damage of the CRSs having been 
allowed to excessively price their service for so many years. Travel 
agents would benefit from competitive pressure on CRSs to more 
reasonably price their services, because that would make travel agents 
a more price-competitive way to sell airline tickets.
    The high CRS booking fees that have burdened airlines and their 
customers for years have now become a major problem for travel agents 
as well. Agents are being priced out of selling the lowest airline 
fares by costs that are decided by somebody else and are paid by 
somebody else to somebody else.
    Third, Orbitz has in fact not only offered to reduce the costs of 
distribution as described above, but has also offered further cost 
reductions well into the future. Orbitz has agreed to a specified 
schedule of fees that are reduced every year for many years into the 
future. With CRSs the airlines have seen their costs going up every 
year. With Orbitz they see their costs going down every year. In 
addition, Orbitz has offered every airline the option of using new 
technology being developed by Orbitz to remove not only the search from 
the CRS (which Orbitz has already done), but also the booking itself. 
This would eliminate the CRS booking fee, rather than merely reduce it. 
Thus airlines can see substantially greater cost savings in the future.
    And fourth, the importance of the CRS booking fee is easy to 
underestimate, and it is important not to. A typical CRS booking fee 
today is about $4.30 per segment. So for a single connection each way, 
round trip itinerary, the booking fee would be over $17. It doesn't 
sound like much. But that equates to over $2 billion per year for US 
airlines, and ultimately for their customers who pay for that in their 
ticket prices. Distribution costs are the third biggest cost category 
airlines have, after only labor and fuel. And that is in the context of 
a US airline industry that lost $7.7 billion last year, an all-time 
record worst year by far. So far this year airline losses have been 
equally disastrous. There is no question that the airlines have a vital 
interest in seeing price competition come to distribution costs.
    Two numbers are particularly revealing: in the first quarter of 
this year, US airlines had an operating profit margin of negative 14%. 
Sabre, the largest CRS, had an operating profit margin of positive 26%, 
extraordinary for any industry, let alone one that is presumably 
suffering the consequences of post-9/11 downturn in the economy in 
general and travel in particular.
Technology and Information Quality Competition
    The CRS's were built on technology that was cutting edge technology 
in its day. Unfortunately, that day was in the 1960's and 70's. CRSs 
are built on mainframe computing technology, and built around 
programming languages that few even know anymore. One of the 
characteristics of a monopoly is that it stifles innovation. CRSs have 
added features to their old platforms, but at a time when most of the 
world has moved from mainframes to server-based computing, the CRSs are 
the last bastion of the old mainframes.
    Orbitz introduced to travel distribution the use of modern server-
based technology to do searches. No online agency had done that before. 
It brought major new benefits to consumers in the form of improved and 
expanded information, and it substantially lowered the costs of 
building and operating the heart of the system.
    The old mainframes were limited in the size of the search they 
could do in response to a customers request. The Orbitz search is 
unlimited. The websites that used CRS technology for their searches 
typically returned only 9 or 12 options for the consumer to choose 
from. Orbitz returns hundreds of options to choose from, and provides a 
handy matrix by which the consumer can readily organize those options 
by airline, by lowest fare, by elapsed time, and so on. The consumer on 
Orbitz gets more information and gets it in a more readily 
understandable and useable form--and that is good for competition in 
and of itself.
    The positive consumer reaction to the Orbitz offer of more and 
better information produced what it should have produced, which is 
competitive pressure on others to improve their offerings. Expedia, for 
example, after Orbitz launched, took its search function off the old 
CRS mainframe and put it on modern servers. Furthermore, it borrowed 
the matrix idea in a somewhat simpler version. Travelocity has also 
said it intends to move off the mainframes, but has yet to do so.
    This is technological competition doing exactly what it should do--
pushing everybody to get better. Not only are Orbitz customers better 
off because Orbitz entered this market, but so are Expedia's customers.
    However, while the technological innovations of Orbitz now look 
like obvious improvements, at the time they were considered very risky. 
No one had ever attempted to operate a CRS or an online agency using 
anything other than mainframe technology. Some predicted that anything 
other than mainframes would fail. In this environment, the only 
investors willing to take the risk of investing in Orbitz were 
airlines. They had both the knowledge of reservations systems to be 
able to evaluate the technological risk involved, and their vital 
interest as consumers of distribution services in increased 
competition. The combination propelled them to be willing investors 
when no one else was.
    This is exactly the kind of situation the Department of Justice and 
the Federal Trade Commission had in mind when they stated, in their 
guidelines for business ventures that are collaborations of 
competitors, that such collaborations by competitors can be pro-
competitive. In cases where it takes a collaboration of competitors to 
create a new competitor in a field sorely lacking in competition, that 
can be a very positive development both for competition and for 
consumers. That is certainly the case with Orbitz.
    Orbitz, however, has no interest in remaining a company with only 
airline investors. We need to expand our pool of investors, and that 
means going outside the world of airlines to find additional investors. 
We have filed a registration with the SEC for a public offering. It is 
our intent to make that public offering, and bring in public investors 
and all the obligations that entails, as soon as market conditions 
permit.
    One other innovation we have brought to information quality, which 
unfortunately has not been imitated by our competitors, is our no-bias 
displays. The typical practice of the largest online agencies is that 
they sell--or perhaps short-term rent would be more accurate--to 
airlines a commitment ``to swing market share'' to one particular 
airline at the expense of the others. What that means in practice is 
that a large online agency commits to a particular airline that it will 
get more consumers to buy that airline's tickets than would normally be 
the case, in return for extra payment from that airline. Orbitz, by 
contrast, has barred itself by contract from doing that. The Orbitz 
displays are strictly zero-bias. Our strategy is to present to 
consumers the most options, in the clearest format, with no bias among 
any carriers (and we offer the schedules and fares of over 450 
airlines). This is an especially important benefit for small and low-
fare airlines such as National Airlines and Midwest Express; as the DOT 
Inspector General has recognized, ``their fares alone will define where 
they are featured in the Orbitz display.''
    On Orbitz any airline will get exactly the same display advantages 
as any other--no better and no worse. And they don't have to pay extra 
not to be biased against. And any consumer will get thorough and 
unbiased information, without efforts to push them to one airline or 
another. We believe that this approach offers a better deal both to 
airlines and to consumers.
Customer Service Competition
    Our view was that online agency websites before Orbitz offered lots 
of schedules and lots of fares, but not much in the way of service 
after the consumer bought a ticket. We decided that was an area where 
consumers wanted more and we could deliver more. We built a series of 
features we call Customer Care, designed to provide consumers that 
follow-on service that was so lacking. When you book a ticket on 
Orbitz, you have the option of signing up for follow-up information 
about your flights. Orbitz will sent to you electronically continuous 
update information about your flight: a delay, a change of gates, a 
weather problem, congestion on the road to the airport, a delayed 
connecting flight, a local problem with air traffic control delays, 
alternative flights or hubs you might use to solve the problem, and a 
great deal more.
    We find that many of our customers love this service. They tell us 
they often learn of problems from Orbitz before the airline informs 
them of those problems.
    Again, competition did what it was supposed to do. Our competitors 
discovered that our customers loved this service, and they began 
working on up-grading their post-booking service as well. As a result, 
everybody has gotten better. In fact, many of the individual airline 
websites have significantly improved the follow-on service they 
provide. Competition works.
The Subcommittee
    The Subcommittee needs to recognize that Orbitz is an issue not 
because it has reduced competition, but because it has increased it. 
And in particular, it has increased competition in an arena that has 
not been accustomed to price competition in particular in many years. 
The largest CRSs, Sabre in particular, are having a difficult time 
adjusting to the fact that they, like other businesses in America, are 
going to have to operate in a competitive marketplace. This is a new 
development for them, and some of them are not adjusting well.
    Orbitz is not the cause of an anti-competitive situation, it is 
part of the remedy to an anti-competitive situation that has been 
allowed to perpetuate itself far too long. Orbitz is part of the 
process of the competitive marketplace returning to an arena from which 
competitive forces have long been excluded.
    Some in their effort to persuade government to block new 
competition have alleged that Orbitz has such advantages that it will 
sweep all before it and thus ultimately reduce competition. That 
argument is as silly as it is self-serving.
    Most fundamentally, Orbitz has no advantage that others cannot 
duplicate if they choose to.

 Orbitz got access to webfares, but only because it was willing 
        to engage in reduction of booking costs to get those fares. To 
        the extent others have been willing to do so (particularly 
        Expedia, and to a lesser extent Travelocity) they have gotten 
        webfares as well. CRSs have thus far not been willing to 
        compete on the basis of the booking fees they charge. But it is 
        clear that if they were willing to do so, they could get access 
        to webfares as well. So far they would rather preserve their 
        high booking fees. It is their choice.
 Orbitz has better search technology, performed by modern and 
        far less expensive computers. The Orbitz approach of using the 
        Internet and modern server-based computers is an approach with 
        far lower costs of competitive entry than was the case with CRS 
        technology, in which new entry was fundamentally impossible and 
        never occurred. Orbitz has opened up the possibility of others 
        entering this marketplace by demonstrating that new technology 
        offers significantly lower barriers to entry. Any competitor 
        could make the same upgrade in technology and enjoy not only 
        better performance, but lower operating costs. It is their 
        choice.
 Orbitz pushed the envelope in follow-on service to consumers, 
        but others can do that as well, and some have. It is their 
        choice.
 Orbitz has offered airlines commitments of further cost 
        reductions going into the future, and has offered the option of 
        making most of their bookings without use of the CRS. Any other 
        competitor can offer that as well; they only have to make the 
        technology investment to make those advances possible. It is 
        their choice.
 Orbitz offers consumers a no-bias display, with no pressure or 
        influence on the consumer to buy one airline over another. 
        Orbitz loses a potential revenue source by adopting this 
        approach, but in return it gains some customers who prefer the 
        no-bias approach. Any other competitor can adopt the Orbitz no-
        bias approach as well, if they are willing to give up the extra 
        revenues that come from selling bias. It is their choice.
 Where we are today is that CRSs sell about 70% of all airline 
        tickets by dollar volume. Orbitz sells less than 2%.
 Orbitz launched in June, 2001, and quickly became the third 
        largest online agency, after Travelocity and Expedia. One year 
        later Orbitz's relative position to those two competitors is 
        virtually unchanged. Among the three, Orbitz had slightly less 
        than a third of that market a year ago, and that is what it has 
        today. There is no trend line of Orbitz gobbling up all before 
        it.
    The Internet share of all air travel sold is growing, and is now at 
about 15% by value. But over half of that is individual airline 
websites, and those are growing faster than the online agency segment, 
including Orbitz. Following these numbers through, that means that 
Orbitz has less than 2 percent of the total distribution of airline 
tickets in the U.S. Hardly the dominant position that our critics have 
proclaimed.
    Most basically, if, in some unforeseen and unlikely future, Orbitz 
did start eliminating competition, we have federal agencies with more 
than sufficient powers under the anti-trust laws and aviation statutes 
to step in and stop it. We do not need to stop a new competitor today, 
risking the elimination of clear consumer benefits, because someday, in 
somebody's fevered imagination, Orbitz might become so successful as to 
start eliminating competition itself.
    In short, we do not engage in this country in anti-trust action 
based on future speculation. We act in response to evidence of an 
actual problem, not an imagined problem.
    As the Department of Transportation recently concluded, ``. . . 
government intervention in the marketplace should be designed to 
correct a failure of market forces, not to replace or pre-empt them in 
ways that could potentially stifle competition.''
    Federal and state regulators who are charged with enforcing the 
antitrust laws have reviewed Orbitz extensively, spanning more than two 
years. And despite this extensive review, nothing has come to light 
that has led any regulator to seek changes to the Orbitz business 
model, agreements or structures. In contrast, the most definitive 
conclusions the Department of Transportation has noted in its multiple 
reviews is that Orbitz entry has led to material pro-competitive 
advantages for consumers and the airlines.
    In April, 2000, long before Orbitz launched, Orbitz went to the 
Department of Justice and suggested that they review our agreements, 
business plan, and the like. We provided to Justice all our agreements, 
contracts, and other relevant documents. Justice has reviewed our 
materials and continues to monitor our actual performance. In addition, 
they have sought information from airlines and from our competitors. If 
at any time before our launch or since they had concluded that our 
approach, or any aspect of our arrangements, was anti-competitive, they 
had full powers under the anti-trust laws to move to stop us or to 
force us to modify our approach. They have never done so.
    Similarly, at approximately the same time, we made the same 
materials available to the Department of Transportation and to the 
Inspector General of the DOT. Both have thoroughly reviewed our 
agreements, contracts, business plans, and the like, and have sought 
information from airlines and our competitors. DOT concluded before our 
launch that there was no basis for using their authority to either 
prevent us from launching or to direct us to modify any aspect of our 
approach. They in fact found that on balance we offered both pro-
competitive and pro-consumer effects. Like Justice, they have continued 
to monitor our actual performance. DOT recently issued a report on that 
monitoring and found no basis for changing their original view. It is 
clear that if they had found an anti-competitive problem, they have 
both the legal authority and the will to act to prevent it. But they 
did not.
    Orbitz has been thoroughly scrutinized by both Justice and DOT, and 
continues to be. We have passed every test to date. This Subcommittee, 
if it wishes a careful review of Orbitz, need do nothing. That review 
has been underway for years and continues, despite the fact that it has 
found no anti-competitive problems.
    Those agencies should be allowed to continue and complete their 
work in a thorough and balanced way. No public interest is served by 
one-sided calls for thorough scrutiny of Orbitz, and not of the CRS 
problem.
    Automated distribution of air travel has long-standing problems 
with respect to adequate competition. We need to work toward a 
restoration of competitive market forces in this arena. Reactionary 
calls to artificially preserve an inadequately competitive status quo 
do not serve the public interest and in fact work against both 
competition and the consumer.

    Mr. Stearns. I want to also add that in a Washington Post 
article on June 19, I was quoted as saying that I intended to 
hold this hearing on this subject prior to the August recess.
    I attempted to accommodate some folks on this, and I was 
willing to delay this hearing, but it did not work out. So we 
are proceeding with our witnesses, and I want to thank them, 
and I look forward, of course, to their testimony.
    [The prepared statement of Hon. Cliff Stearns follows:]
  Prepared Statement of Hon. Cliff Stearns, Chairman, Subcommittee on 
                Commerce, Trade, and Consumer Protection
    Good morning. I would like to welcome you all to this oversight 
hearing of the subcommittee on Commerce, Trade and Consumer Protection 
entitled: ``Are all Online Travel Sites Good for the Consumer: An 
Examination of Supplier-Owned Online Travel Sites.'' I would like to 
especially thank our witnesses on behalf of the Committee for their 
appearance and testimony.
    Notwithstanding the hyper-enthusiasm for all things Internet and 
electronic commerce of the recent past, the fact remains that the 
Internet as an efficient, ubiquitous communications tool has 
substantially transformed, in fundamental ways, commerce as we have 
known it. Electronic commerce traversing the communications network 
that is the Internet is real, substantial and rapidly becoming a key 
component of our economy. The hyper-predictions of not so long ago that 
e-commerce will reach $3 to 4 trillion dollars by 2003 may not have 
come true, but by most estimates, the value of business-to-business 
commercial transactions that transpire online is well over $1 trillion 
today. More significantly, the rate of growth of such business-to-
business transactions is increasing unabated and it is far in excess of 
the growth rate for offline commerce.
    Business-to-consumer e-commerce may also have not meet the glorious 
predictions of the pundits who rained during the .com bubble, but the 
fact remains that it has grown substantially and it continues to grow 
at rates unmatched by offline commerce. One of the more stellar 
examples of business-to-consumer e-commerce growth is the online travel 
business. For example, in just over three years, 15% of all airline 
tickets are now being sold online and the growth rate for such 
transactions is still accelerating. More significantly, increasingly 
consumers are seeking and receiving more advanced travel services 
through online travel sites, such as arranging multi-city or even 
country trips involving a myriad of reservations for air travel, car 
and hotel reservations and tours.
    During the .com bubble it seemed that any and all business models 
were tried, as investors, in their euphoric state vis-a-vis ``anything 
Internet'' had the penchant to welcome and accept them all. As the dust 
settled and we learned that while selling books online made sense, 
selling groceries didn't, a ``sort'' of new business model has gained 
in appeal among dominant suppliers in certain industries. That ``sort'' 
of new business model calls for the dominant firms within an industry 
to collectively create an online distribution network for their goods 
and services. In practice this business model has manifested itself in 
a number of supplier-owned online distribution joint-ventures, where 
the participating companies tend to be the top five or six in the 
industry. These supplier-owned online distribution joint-ventures are 
now present across a number industries, including the air travel, 
lodging, cosmetics, music, and foreign currency exchange.
    There is no question that such supplier-owned online distribution 
systems engender economic efficiencies and consumer benefits. At the 
same time, there is also no question that any time competitors come 
together in collaborative efforts, such as these joint-ventures, there 
exits the risk for collusive activity that may impede commerce and harm 
consumers. This hearing is meant to create an educational forum to 
examine both the benefits and possible risks that supplier-owned online 
distribution systems hold for the American consumer. As examining 
supplier-owned online distribution systems across the multitude of 
differing industries within which they appear would have been a tall 
order for one hearing. Therefore, this hearing will focus only on 
online joint-ventures in the air travel and lodging industries.
    We have before us great expert witnesses on the issue. We had hoped 
to have Orbitz and at least one of the five major airlines that own it 
to speak to Orbitz's business model directly. Unfortunately, due 
scheduling conflicts they were unable to attend. However, Mr. Gary 
Doernhoefer, Vice President and General Counsel of Orbitz, L.L.C. has 
provided the subcommittee with written testimony on behalf of Orbitz, 
which I now offer to be included as part of the record.
    I thank the witnesses and look forward to their testimony.

    Mr. Stearns. At this point, the ranking member is on his 
way, and so I will ask the vice chairman of the subcommittee, 
the distinguished member from Georgia, Nathan Deal.
    Mr. Deal. Thank you, Mr. Chairman. There is no admonition 
to trial lawyers that says that if the facts are on your side, 
argue the facts. If the law is on your side, argue the law. If 
neither the facts nor the law are on your side, pound on the 
table.
    I find it highly regrettable that this hearing has been 
intentionally staged to provide a forum for parties who simply 
want to pound on the table, since they have neither the facts 
nor the law on their side.
    It is even more regrettable that the company upon whom much 
of this hearing is focused, Orbitz, was not afforded the same 
respect and common courtesy with regard to notice and 
opportunity to testify as those who will testify against it 
here today.
    It is not only regrettable in my opinion, but inexcusable, 
that those of us on the subcommittee who believe that all 
parties should be treated fairly and equally have likewise been 
regarded as second-class committee members by the staff and by 
some in leadership positions, and who apparently don't want 
anyone to interfere with this public lynching of Orbitz in 
absentia.
    Since the pounding on the table will soon begin, let me 
first set forth some facts. Automated distribution of airline 
travel through large mainframe computers began two decades 
before the Internet.
    These are known as computer reservation systems, CRSs, and 
there are only four of them in the world today. CRSs charge 
airlines booking fees that average over $17 for a single 
connection round-trip.
    These booking fees cost U.S. airlines over $2 billion per 
year. The largest CRS is Sabre, which owns Travelocity, and 
today CRSs sell about 70 percent of all airline tickets, 
whereas Orbitz sells less than 2 percent.
    CRSs were considered so monopolistic that in 1984 Federal 
rules were created to attempt to limit their powers. Even so, 
the booking fees charged by CRSs have continued to rise every 
year over the past 15 years, and since 1999 they have increased 
4 to 7 percent every year, despite the falling costs of the 
information processing and computer systems.
    And 75 percent of Sabre's revenues are from booking fees, 
which have increased an average of 5 percent per year for the 
past 10 years. Thirteen months ago, five major airlines created 
Orbitz in order to provide customers with better service and 
cheaper travel costs.
    Last year U.S. airlines lost $7.7 billion, and are carrying 
debt burdens of $110 billion, and for the first quarter of this 
year have an operating profit margin of negative 14 percent.
    Sabre, the largest CRS, and the parent company of 
Travelocity, had an operating net profit margin of positive 26 
percent. Orbitz has been success by applying advance technology 
and making its products user friendly for those who want to 
book their flights on-line.
    Travelocity, through its old CRS mainframes, are still 
using those old mainframes, but wants Congress to protect it. 
How can this subcommittee, which is charged with consumer 
protection, condemn those who have been innovative, and attempt 
to reward old monopolistic entities who refuse to modernize in 
an effort to try to eliminate their competition through this 
committee means.
    Just as the facts are not on the side of those who 
criticize Orbitz, neither is the law. Before Orbitz was 
launched, it went to the Justice Department and asked them to 
review their business plan and agreements, and DOJ did so, and 
had they thought that Orbitz was anti-competitive, they had the 
power to stop them, but they have not done so.
    The Department of Transportation and the Inspector General 
of the DOT have also monitored Orbitz and have likewise found 
their practices to be not anti-competitive.
    The recently released DOT report to Congress on Orbitz that 
was engineered by some of the witnesses here today don't find 
any violations either, and contain this statement, and I quote:
    ``Government intervention in the market place should be 
designed to correct the failure of market forces, and not to 
replace or preempt them in ways that could potentially stifle 
innovation.'' That is good advice for this subcommittee.
    Those are the facts and the law, and no amount of pounding 
on the table is going to change them. By taking financial risks 
and by employing innovative technology, Orbitz has lowered the 
cost of air travel, has made booking of flights over the 
Internet user friendly, and through the power of competition 
has rattled the cages of some of this monopolistic opponents.
    That is what this subcommittee should encourage and not 
vilify. Thank you, Mr. Chairman.
    Mr. Stearns. I thank my colleague, and I think your robust 
testimony will provide advocacy for anyone who could not make 
it in a very, very confident and able way. The gentleman from 
Nebraska, Mr. Terry.
    Mr. Terry. Thank you, Mr. Chairman. I want to thank you for 
holding this hearing. My friend from Georgia is a trial lawyer, 
and the adage is that if the facts are not on your side, argue 
the law; and if the law is not on your side, settle and get out 
of the case as fast as possible.
    Otherwise, the other part of the adage is attack their 
credibility, and I hope that is not what we are here to do 
today as may be suggested. But I am one of those people who 
signed the letter asking for this hearing, because I am worried 
about what appears to be an attempt for on-line anti-
competitive behavior.
    And I will submit my full statement for the record, only 
highlight the two points that concern me, and why I want to 
have this level of discussion here today. Any time you have an 
entity, when there is vertical integration, and you have the 
five major airlines that own this, the first thought can only 
be that they want to control every facet of booking airlines.
    Fortunately, as Mr. Deal has pointed out in his statement, 
there is so much competition on-line anymore that it may just 
be commercially impossible to dominate at the level that 
probably they intended when they formed this.
    The other issue that I think probably gives you credibility 
where you can argue facts, and can argue law in a case like 
this is the most favored nations clause that is in here that 
gives those people that participate, started up Orbitz, the 
self-serving lowest fares that others can't get.
    So I want to talk about that. Now, fortunately, I think the 
fact that they haven't been able to dominate the market 
probably speaks well for the market. The fact that they intend 
to go out for an IPO certainly lessens my concerns of the 
vertical integration, that it is the five major airlines that 
own this entity of Orbitz.
    Mr. Chairman, I have a more complete statement that I wish 
to enter into the record, but I am anxious to hear from the 
witnesses, and I know that their time is short as well. So I 
yield back.
    [The prepared statement of Hon. Lee Terry follows:]
Prepared Statement of Hon. Lee Terry, a Representative in Congress from 
                         the State of Nebraska
    Thank you, Mr. Chairman, and I thank you for holding this hearing 
on an issue of growing concern, not only in the airline industry, but 
other sectors as well. As I noted in a letter to you May 16th 
requesting this hearing, brick-and-mortar competitors in any industry 
joining forces for an e-commerce venture raises serious concerns. We 
have seen this trend extend past online travel and into the music and 
hospitality industries, and I commend you for holding this hearing to 
ensure members of your subcommittee are well informed on the issues 
surrounding supplier-owned online ventures.
    In April, I joined more than 20 of my colleagues in a letter to 
Deputy Assistant Attorney General Hugh Pate, requesting the Justice 
Department fully investigate the practices of Orbitz, a supplier-owned 
online travel company. My concerns in this regard were twofold. First, 
the owners of Orbitz are the five largest airline companies: United, 
American, Northwest, Delta, and Continental. Moreover, representatives 
of these companies sit on the board of directors of Orbitz. These facts 
raise obvious concerns as to the completeness of information provided 
to consumers about competing airlines when surfing Orbitz.com. Is it 
coincidental these five airlines represent lowest fares on Orbitz 
searches more than 70% of the time, whereas other online travel sites 
return lowest fares for these same five airlines little more than 60% 
of the time? I understand Orbitz soon will be offering an IPO, which 
will diminish some of my concerns of it being owned by the five major 
carriers, but will do nothing to ease my apprehensions it is still 
being operated by the five largest air carriers.
    My second concern is the so-called ``most-favored nation'' clause 
mandated by Orbitz for participating airlines. MFN requires 
participating airlines to produce lowest fares and make them available 
to Orbitz at all times. This clause provides a competitive advantage to 
Orbitz, and consequently its five owners. Worst of all, this clause 
makes consumers dependent on the company, rather than the company 
dependent on consumers, which is the essence of a free market and open 
competition. One question I would like answered at this hearing, Mr. 
Chairman, is why the MFN clause is even necessary? It would seem to me 
that a company engaging in ethical business practices with a solid 
business plan could gain success through innovation and capturing the 
attention of consumers, not artificially manufacturing its own market 
by trapping its competitors. Orbitz's own general counsel, Gary 
Doernhoefer, admitted in a July 12th CNET News interview that Orbitz's 
MFN clause is not necessary for the company to be profitable. Why not, 
then, let the market dictate survivability rather than contractual 
clauses?
    I want to be clear that I wholeheartedly endorse increased 
competition. I also applaud Orbitz, Expedia, Travelocity, and a variety 
of other online ventures for using technology to expand our economy, 
and I'm pleased other sectors are doing the same. However, it is the 
responsibility of this subcommittee in general and a matter of specific 
concern to me that markets expand fairly; that consumer, not corporate, 
behavior drives profitably; and that above all, competition is 
preserved. I look forward to the testimony, and I yield back.

    Mr. Stearns. I thank the gentleman, and your complete 
statement will be part of the record, and the distinguished 
ranking member of the committee, Mr. Towns, is recognized.
    Mr. Towns. Thank you very much, Mr. Chairman. Let me begin 
by thanking you for holding this hearing. I strongly believe 
that companies using the Internet to reach more consumers and 
to move their goods and services at inexpensive costs to 
consumers--and I have consistently voted with other members of 
this body to keep the Internet free from sales taxes and other 
regulations would stifle the growth of on-line commerce.
    I think by and large we have accomplished that we set out 
to do, and that is to maintain competition in the on-line 
marketplace. Often times I think there is more competition on-
line than off-line.
    But I most admit to you, Mr. Chairman, that I have concerns 
that certain aspects of these supplier owned business models, 
the new controversy surrounds Orbitz, and which the carriers 
have placed a significant investment.
    And while I have no problem with the airlines seeking to 
make more money, because that would preclude them from having 
to borrow money from the government, I do have some concerns 
regarding the competitive environment, or the perception of 
anti-competitive environment that exists on on-line travel 
sites.
    Earlier this year, I signed on to a letter with my 
colleagues, Mr. Boucher, and Mr. Grucci, which asked the 
Justice Department to continue to monitor Orbitz and other on-
line travel sites which may be using unseemly practices to 
squash competition.
    It is my understanding that the airlines have a compelling 
story to tell, and I wish, I wish, that they were here today to 
discuss their side with us at this hearing. I say again, I 
regret that they are not here. So I will be asking questions of 
those assembled this morning, because it is my priority to 
ensure that the Internet continues to be a competitive 
marketplace, which benefits not only companies, but consumers 
as well.
    Let me add, Mr. Chairman, that I am somewhat confused on 
why Orbitz is not here on their own accord today. I feel that 
as always that in this committee we have tried to put together 
a fair and balanced hearing, and don't understand why we have 
zero representation from Orbitz or the carriers.
    However, I look forward to hearing the testimony before us 
today, Mr. Chairman, and hope to get more information on this 
complicated subject, and I yield back, because this is the most 
bipartisan committee in the U.S. Congress, and I want to let 
you know that is directly affecting upon your leadership. Thank 
you.
    Mr. Stearns. I thank our distinguished colleague. We have 
two members who do not serve on the subcommittee, and both of 
these individuals have approached me, and wish to have an 
opening statement, or to have an opportunity to comment.
    Now, this cannot be done without unanimous consent of this 
committee. So if there is any objection, you can voice it now. 
The gentleman from Georgia.
    Mr. Deal. Mr. Chairman, reserving the right to object, and 
I will not object, certainly Mr. Boucher is an esteemed member 
of the overall committee, and I am well aware of his position, 
having also seen the letter that he and others have circulated 
back in April asking the Justice Department to continue to 
monitor Orbitz.
    And I have no objection to Mr. Grucci also making a 
statement. I would have, of course, much preferred that they 
take the witness table so that they would be subject to being 
asked questions about their positions, which in opening 
statements first of all don't afford us that opportunity for 
that dialog and interchange.
    And of course by the virtue of their positioning in their 
opening statements, they in effect have the last word. But I 
will not object, and I welcome both members to this committee.
    Mr. Stearns. I thank the gentleman, and by unanimous 
consent, both of them will be able to offer their opening 
statement, and at this point we will take Mr. Boucher, who is 
recognized.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. I 
appreciate the opportunity to participate in the hearing today, 
and I want to thank the Chairman for accommodating my presence 
here, as well as the presence of another member who also does 
not serve on the subcommittee.
    I have a very strong interest in the matter that will be 
discussed today, and I want to comment you, mr. Chairman, for 
focusing the attention of the subcommittee on how consumers are 
affected by practices of supplier-owned on-line travel sites.
    There is a growing and in my view disturbing trend of 
companies in a given industry banding together to create a 
website for distributing their products or services, and then 
favoring that website with information or other benefits not 
shared with other websites that compete with the industry owned 
site.
    The denial of this information or other benefit by those 
exclusively in control of it to the web-based competitors of 
the industry-owned website, directly hinders competition in 
electronic commerce, by injuring the businesses of existing on-
line competitors, and by discouraging new entrants into the 
market.
    Consumers are hurt as the number of websites offering 
products or services to them are restricted. Today, we examine 
this practice as it exists in the airline reservations market. 
I would point out to the members that troubling examples of the 
same practice are also found elsewhere.
    In the music industry, the five major record labels have 
created two websites for the delivery of their music 
inventories across the Internet. They have denied to the on-
line competitors of those websites comparable licenses for the 
significant foreclosure of Internet-based competition and music 
delivery.
    And incidentally, I have introduced legislation that is 
designed to address that practice by requiring non-
discriminatory licensing in that instance. Elsewhere, we 
observe the creation of websites jointly owned by other 
suppliers, from a hotel distribution system that is owned by 
five major hotel groups, to Gloss.com, that is owned by three 
leading beauty products manufacturers.
    To MovieLink, that is owned by the six major motion picture 
studios; to FX-All, for currency exchange, and that is owned by 
17 leading international financial institutions. Now, while I 
am not aware of the particular practices of these supplier-
owned ventures, I think that they may deserve this committee's 
inquiry and attention at some future time.
    Their creation clearly marks a trend of suppliers in a 
broad range of industries participating in the creation of 
websites that hold the potential of injuring commerce and 
adversely affecting consumers, and I think they bear watching.
    I am familiar with the practices of the industry that we 
are focusing on this morning. Orbitz, jointly owned by the 
largest air carries, in my view gets an unfair break. The 
carriers give Orbitz their best fairs.
    These lowest fairs are not available to the non-industry 
affiliated websites, Expedia and Travelocity.com. The ability 
of these independent companies to offer vigorous on-line 
competition to Orbitz is injured by this practice.
    Consumers of Internet-based travel sales are hurt as a 
result. Orbitz gets yet another break. Its contract with its 
carrier owners requires that all fares given by any carrier to 
its own website, or to a third-party site, such as Expedia or 
Travelocity, also be given to Orbitz.
    So no carrier can enter into an exclusive promotion with a 
third-party site that would offer exceptional bargains to the 
public. Some of the best opportunities for inexpensive travel 
used to come from these exclusive promotions. Not anymore.
    As my constituents frequently say to me when they are 
outraged about an obvious unfairness, there ought to be a law, 
and in the off-line world, there is a law. The Department of 
Transportation has a rule that airlines owning 5 percent or 
more of a computer reservations system must give other computer 
reservation system the same low fairs they give to the system 
they partially own.
    A rule like that I think is badly needed to address the 
problems in the on-line world, about which we will learn more 
during the course of this morning. Mr. Chairman, I thank you 
for calling the committee's attention to what is an obvious 
problem.
    Consumers, I think, will be benefited by the work that your 
subcommittee is undertaking, and I again thank you for the 
opportunity to take part in the hearing.
    Mr. Stearns. I thank my colleague. You can tell your 
constituents to be careful what he asks for when he said there 
ought to be a law. Mr. Grucci from New York is recognized.
    Mr. Grucci. Thank you, Mr. Chairman. And let me thank you 
and the ranking member, and the esteemed members of this 
committee for giving me the opportunity to be here this 
morning.
    I am not a member of this subcommittee, nor am I a member 
of the Commerce Committee, but I am a member of the Small 
Business Committee where we had a similar hearing that dealt 
with Orbitz, and airlines, and the issue dealt with the 
unilateral decision by the airline industries to stop making 
payments to the travel agents, while continuing to make 
payments to organizations like Orbitz, which is owned by the 
five major airlines.
    This issue first came to my attention when a travel agent 
in my district, a small businessman, came to my office to 
explain the hardships that both on-line and traditional travel 
agencies were facing because of the policies of the major 
airlines.
    He gave me examples of policies ranging from the recent 
elimination of commissions to U.S. travel agencies, to limited 
access to air fares. While many of his concerns were diverse in 
nature, each one of them shared a common theme; the policies 
were anti-competitive, anti-consumer, and anti-small business.
    One need not look beyond the issue of Orbitz to highlight 
the very airline practices my constituents spoke of. Orbitz is 
a company that was started by the five major airlines; Delta, 
United, Northwest, American, and Continental.
    While the purpose for its creation is of some concern, the 
greatest of problems lies within Orbitz's anti-competitive 
practices. Please allow me to review some of these practices 
with you. First, Orbitz receives airfares that are not 
available on any other travel site or through any other travel 
agency.
    Orbitz refutes this claim by standing behind the technology 
they use called ITA. An informal study by the owner of 
OneTravel.com, which I would like to submit for the record, 
Orbitz not only receives better fares than the average travel 
site, but also the very technology it claims to receive these 
fares from.
    For example, a flight from New York to Dallas costs $255 
through ITA, but $249 on Orbitz. Second, Orbitz is clearly 
biased in favor of its own airlines. According to a report 
recently filed with the Department of Transportation, 71.6 
percent of bookings on Orbitz between July 1, 2001 and February 
28, 2002 was for its owner airlines, known as the big five.
    During that same period, 51.3 percent, 61.4 percent, and 
62.7 percent were reported big five bookings on OneTravel, 
Travelocity, and Expedia, respectively. Third, while the owner 
airlines of Orbitz have chosen to eliminate commissions to 
travel agencies in the United States, they continue to pay 
$6.37 to Orbitz for every ticket purchased.
    I may add that the other group of companies that airlines 
have chosen to continue to pay commissions to, are travel 
agencies in foreign countries. In closing, I might add that it 
is greatly troubling that both Orbitz and the airlines are not 
represented here today.
    In a Small Business Committee hearing on this issue on May 
2, the airlines also turned down invitations to testify. Oddly 
enough, before Congress gave airlines $15 billion in financial 
assistance, it was difficult to leave your office without 
seeing airline executives and lobbyists.
    Now when their true practices are being highlighted, as 
travel agencies are forced to go out of business, these 
airlines seem to be hiding. Again, Mr. Chairman, I want to 
thank you for allowing me the opportunity to be here, and I 
would ask that my complete statement be submitted for the 
record, as well as the attachments.
    Mr. Stearns. Without objection, it is so ordered.
    [The prepared statement and attachment of Hon. Felix J. 
Grucci follows:]
 Prepared Statement of Hon. Felix J. Grucci, Jr., a Representative in 
                  Congress from the State of New York
    First, I would like to thank Chairman Stearns for inviting me to 
today's hearing addressing the issue of supplier owned online travel 
sites. I appreciate the committee's generosity in allowing me to be 
here this morning.
    This issue first came to my attention when a travel agent in my 
district--a small businessman--came to my office to explain the 
hardships that both on-line and traditional travel agencies were facing 
because of the policies of the major airlines. He gave me examples of 
policies ranging from the recent elimination of commission to U.S. 
travel agencies to limited access to airfares.
    While many of his concerns were diverse in nature, each one of them 
shared a common theme: the policies were anti-competitive, anti-
consumer and anti-small business. I might also add that his concerns 
were not specific to his company--since I have been involved in this 
issue, hundreds of travel agencies have contacted my office mirroring 
the very concerns expressed to me by my constituent.
    One need not look beyond the issue of Orbitz to highlight the very 
airline practices my constituent spoke of. Orbitz is a company that was 
started by the five major airlines--Delta, United, Northwest, American 
and Continental.
    While many would argue that Orbitz was launched in 2001 in order to 
drive Expedia and Travelocity out of the market, airlines claim that 
Orbitz was created because of the high cost of the travel agency 
industry. Despite the fact that they have eliminated commission to U.S. 
travel agencies, airlines claim that the costs associated with the 
Computer Reservation Systems--or CRSs--used by travel agencies are 
growing too expensive.
    Gary Doernhoefer, the Vice President and General Counsel to Orbitz, 
recently stated in a Small Business Committee hearing that ``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--Computer Reservation Systems or CRSs--deployed 
in a tragically inefficient, unnecessarily costly structure.'' He also 
made reference to CRS costs later in his testimony, stating, ``as these 
costs went up, fares had to go up as well.''
    The great irony of this argument rests in the fact that the 
airlines created, and until recently, owned each of the four computer 
reservation systems. One of the CRSs, Worldspan, is owned by three of 
the owners of Orbitz--Delta, American and Northwest. How can they argue 
that the CRS' are charging too much money, when the airlines are the 
ones responsible for setting rates for the CRS they own?
    While the purpose for its creation is of some concern, the greatest 
of problems lies within Orbitz' anti-competitive practices. Please 
allow me to review some of these practices with you:

 First, Orbitz receives airfares that are not available on any 
        other travel site or through any other travel agency. Orbitz 
        refutes this claim by standing behind the technology they use 
        called ITA. In an informal study by the owner of Onetravel.com, 
        which I would like to submit for the record, Orbitz not only 
        receives better fares than the average travel site, but also 
        the very technology it claims to receive these fares from. For 
        example, a flight from New York to Dallas costs $255 through 
        ITA but $249 on Orbitz.
 Secondly, Orbitz is clearly biased in favor of its owner 
        airlines. According to a report recently filed with the 
        Department of Transportation, 71.6% of bookings on Orbitz 
        between July 1, 2001 and February 28, 2002 was for its owner 
        airlines--known as the big five. During that same period, 
        51.3%, 61.4% and 62.7% were reported big five bookings on 
        Onetravel, Travelocity and Expedia respectively.
 Third, while the owner airlines of Orbitz have chosen to 
        eliminate commission to travel agencies in the United States, 
        they continue to pay $6.37 to Orbitz for every ticket 
        purchased. I may add that the other group of companies that 
        airlines have chosen to continue to pay commission to are 
        travel agencies in foreign countries--at the same time that 
        travel agencies are struggling to survive in the United States 
        because of commission cuts.
    Orbitz has a series of restrictive provisions in its contract with 
an airline that are heavily anti-competitive. Orbitz requires the 
airline to give all fares available through the airline's own website 
to Orbitz. It also requires airlines to give Orbitz any deal that the 
airline reaches with other travel sites. Lastly, it requires the 
airline to provide either marketing support valued at $14 million a 
year or access to exclusive fares.
    Mr. Chairman, I believe Michael Thomas of Onetravel said it best 
when he said, ``It is as if GM, Ford and Chrysler decided to form a 
super-dealership that would compete head-on with independently owned 
car dealers, and would withhold certain automobiles from the 
independents--the cars the public most desired.''
    In closing, I might add that it is greatly troubling that both 
Orbitz and the airlines are not represented here today. In a Small 
Business Committee Hearing on this issue on May 2, the airlines also 
turned down invitations to testify. Oddly enough, before Congress gave 
airlines $15 billion in financial assistance, it was difficult to leave 
your office without seeing airline executives and lobbyists. Now, when 
their true practices are being highlighted--as travel agencies are 
forced to go out of business--these airlines seem to be hiding.
    Again, Mr. Chairman, thank you for allowing me to join you here 
this morning and I look forward to hearing the testimony of the 
witnesses and trying to find a way to eliminate the anti-competitive 
practices of both the airlines and Orbitz that are forcing hard working 
Americans with the travel agency industry--both on-line and off-line--
to look for new jobs.
    Thank you.

    Mr. Stearns. The gentlelady from Colorado.
    Ms. DeGette. Thank you, Mr. Chairman. I just have a couple 
of thoughts that I would like to share, and I don't come into 
this hearing with a preconception about what I think we should 
do about the issue, but let me say last night I decided to see 
what Orbitz did for myself.
    And so I went on to my computer, and I got some prices for 
flights from my hometown of Denver to Washington and back, and 
I went on some of the other travel sites and got comparable 
fares.
    And I did find with some of the fares that Orbitz was 
cheaper, but I also found at the same time that Orbitz did not 
feature flights from Frontier Airlines, which is our big 
competitor in the Denver-Washington market.
    So my question is that while Orbitz may be very helpful for 
consumers right now, and because of its structure may be able 
to really help consumers get low airfares, what happens in the 
long run in markets like my market, which is a hub for United, 
if sites like Orbitz don't feature some of the startup 
competitors.
    What happens to overall airline ticket prices in the long 
run. On the other hand, does the availability of a supplier-
owned distribution system like this turn the concept of anti-
trust on its head, and do we really have anti-trust issues with 
a company like Orbitz, which is an Internet company, and only 
one of many Internet companies.
    So I guess the question we need to ask is whether this 
model is inherently anti-consumer or pro-consumer. Are these 
businesses destined to inhibit competition in the long run, or 
is there some way they could enhance competition in the long 
run.
    I think that from the consumer standpoint that this is 
critically important to answer, because over time given 
Orbitz's successful business model, this is not going to just 
affect the airline industry, but all kinds of different 
industries.
    So I look forward to this hearing, and I thank the chairman 
for having it, and I yield back the balance of my time.
    Mr. Stearns. I thank the gentlelady. The gentleman from New 
Hampshire, Mr. Bass, is recognized.
    Mr. Bass. Thank you, Mr. Chairman, and I appreciate you 
holding the hearing, and as a former member of the Aviation 
Subcommittee and a licensed pilot myself, and I have been an 
instrumented pilot now for 32 years, I would like to be back 
thinking about aviation issues just for a couple of hours.
    We are all aware of the boom and bust cycle of most e-
commerce enterprises over the past few years, but from the 
beginning travel planning was among the very limited number of 
industry sectors that could be profitable on-line. It could be 
because it makes sense.
    And for better or for worse, instead of calling a travel 
agent for airline or hotel directly on the phone, you can now 
do it yourself, and we all do that, sometimes directly with 
airlines, and sometimes with intermediaries.
    It has obvious consumer appeal, and you can check prices, 
and it has really made the business of understanding airline 
travel a lot easier. But more broadly, I think today's hearing 
will be an opportunity to consider the consumer benefits of 
moving outside proprietary networks into a more open 
architecture.
    So this is like Orbitz and TravelWeb represent a shift in 
the technology S-curve, but interestingly enough, they are also 
joint ventures of the old economy firms, airlines, and hotels.
    Nevertheless, there is a certain need for oversight to 
ensure that the issues of competitiveness and market power are 
not abused. As such, I welcome the FTC's disclosure 
requirements for websites that receive compensation from 
supplies, and although none of us spilt many tears for buggy 
whip manufacturers when the automobile arrived, small travel 
agents across the Nation are facing a change in industry model, 
and their significant power in small business America.
    Nevertheless, I believe it is clear that the market 
consumers have not yet spoken on which model they prefer. The 
bottom line is that I appreciate this hearing, and I am 
wondering where the beef is.
    And we will hopefully get both sides of the issue here, and 
let's stick up for the consumer, because I think it is a great 
opportunity for consumers to get good deals for travel, while 
at the same time maintaining a good strong economy hopefully in 
the air. Thanks a lot, Mr. Chairman.
    Mr. Stearns. And I thank the gentleman.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee 
                         on Energy and Commerce
    Thank you, Mr. Chairman for calling this hearing. As a former 
Subcommittee chair, I spent a great deal of time examining e-commerce 
issues, particularly those impacting consumers and the long-term 
development of e-commerce. Additionally, it is refreshing to examine a 
segment of the economy that is growing and flourishing. Much of the 
Committee's time and energy recently has been spent examining failing 
industries or collapsing companies. While that is an important 
function, it is sad to have to focus on such events. And so, I think 
this is an important and beneficial hearing and look forward to the 
testimony of the witnesses.
    The online travel industry has grown by leaps and bounds in a short 
amount of time. As one of the largest e-commerce success stories, it 
highlights the great possibilities of the Internet and e-commerce. 
Consumers have certainly found cause to take advantage of the myriad of 
web sites offered to improve their travel experiences. The Internet 
practically has turned each and every consumer into his or her own 
travel agent, with travel sites offering various business models to 
meet consumer demand and interest. From the bidding mechanisms of 
Priceline.com, to web auctions, to the new independent sites like 
Expedia and Travelocity, and to the supplier-owned site of Orbitz, we 
are seeing some refreshing developments. These results are being 
duplicated throughout the entire travel industry, including the lodging 
industry. This innovation isn't stopping with how the travel services 
are offered but extends to what is being offered as well. Online travel 
companies are developing some of the most creative consumer attentive 
services imaginable all with the goal of obtaining consumer loyalty and 
consumer attention.
    However, this portrait is not completely rosy. As consumers 
continue to use the Internet for travel purposes and transparency 
continues to improve, some business approaches will fail. Furthermore, 
some traditional services, such as the old role of the travel agent, 
may no be longer necessary. It used to be that when a person wanted to 
travel to a distant city they called their local travel agent and 
booked the best plan for their needs. Such a function may be no longer 
applicable, forcing the travel agent of yesterday to adapt to a new 
role. I believe this is exactly what travel agents are preparing to do.
    Technology advances eliminate old-style jobs all the time. We no 
longer have Blacksmiths and candle makers to name a few. This is the 
traditional debate captured in the children's tale of Paul Bunyan. We 
probably ought not try to protect jobs supplanted by new technologies 
or failed business models. However, there may be legitimate concern if 
such technology advances are coupled with creative relationships that 
could mask old-time trickery, funny business, or collusion.
    Supplier-owned distribution systems in the online world within 
various industries have generated some heated debate in both the 
academic and practical worlds. As a group such sites, which go beyond 
just the travel industry, raise some interesting questions. I will 
admit that it is quite unusual to see the biggest industry players 
within an industry--longtime fierce competitors in the off-line world--
come together in one happy family to jointly sell services or products 
online.
    Orbitz and Travelweb hold out the many potentially positive 
benefits for their owners such as lowing the operating costs, creating 
a new avenue for unloading excess supply of travel services or 
products, creating new relationships with end-consumers, and promoting 
efficiency. There is legitimate concern when the controllers of supply 
also get a major role in distribution. A remaining question is whether 
the creation of these sites by the suppliers was done or is operating 
with malicious intent to block new entrants from getting their foot in 
the door. This remains the crux of this debate for which I will reserve 
judgment. I will say that I would be concerned if Orbitz and Travelweb 
are contemplating becoming the new OPEC of the online travel industry.

    Mr. Stearns. Now I welcome our panel. Mr. Sam Gilliland, 
President and Chief Executive Officer of Travelocity.com; Mr. 
Bruce Wolff, Chairman, of Travelweb, LLC; Jonathan Zuck, 
President, Association for Competitive Technologies; Dr. Mark 
N. Cooper, Research Director, Consumer Federal of America; and 
Mr. Paul M. Ruden, Senior Vice President for Legal and Industry 
Affairs, the American Society of Travel Agents.
    I welcome all of you, and we will start with you, Mr. 
Gilliland, for your opening statement.

  STATEMENTS OF SAM GILLILAND, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, TRAVELOCITY.COM; BRUCE WOLFF, CHAIRMAN, TRAVELWEB, 
  LLC; JONATHAN ZUCK, PRESIDENT, ASSOCIATION FOR COMPETITIVE 
TECHNOLOGY; MARK N. COOPER, RESEARCH DIRECTOR, CONSUMER FEDERAL 
OF AMERICA; AND PAUL M. RUDEN, SENIOR VICE PRESIDENT FOR LEGAL 
    AND INDUSTRY AFFAIRS, AMERICAN SOCIETY OF TRAVEL AGENTS

    Mr. Gilliland. Chairman Stearns and Congressman Towns, I am 
Sam Gilliland, President and CEO of Travelocity.com, the 
Nation's most popular on-line travel site.
    I want to thank you for the opportunity to testify. This 
hearing is an excellent opportunity for you to begin examining, 
and I hope reversing, a dangerous e-commerce trend across a 
growing number of industries.
    Travelocity, along with many others, has been an 
outstanding critic of Orbitz, a joint venture owned by five of 
the Nation's largest airlines, which together account for 80 
percent of the Nation's airlift.
    It is very troubling from both an anti-trust and e-commerce 
perspective when the overwhelming majority of suppliers in an 
industry band together to coordinate distribution strategies.
    Still, Travelocity has never argued that Orbitz should be 
restricted from entering the on-line travel market. There is 
certainly room for other competitors. We have instead focused 
on certain anti-competitive features of the Orbitz contract, 
the so-called most favored nations and exclusivity provisions.
    These clauses, which provide Orbitz's long term contractual 
access to the full array of major airlines' fares and inventory 
threaten all independent travel retailers and consumers that we 
serve.
    We believe that Orbitz should be required to compete on the 
merits of its technology, its customer service, and marketing 
ability, and not on contractual guarantees that deter airlines 
from offering their lowest fares to more consumers.
    As Orbitz grows larger, consumers are being denied a choice 
in travel agents. They are required to pay increasing service 
fees on Orbitz that major independent on-line sites do not 
currently charge, and are losing the benefits of airline 
competition that the independent websites have fostered.
    The on-line travel market is the fastest growing e-commerce 
category. With the rise of the Internet, independent travel 
agents are increasingly using this distribution channel to 
benefit consumers. I believe the role played by such 
independent agents is critical in maintaining and enhancing 
effective competition.
    The travel sector of e-commerce has tremendous upside 
potential. The product that we sell is a virtual one, ideally 
suited to the Internet. Travelocity can help people dream about 
travel, and give them reliable tools to book their trips.
    Even the paper ticket, the last physical product in travel 
distribution, has largely given way to the increasingly popular 
e-ticket. At Travelocity, we don't need to maintain warehouses 
or take return shipments.
    However, independent travel agents can have the latest 
technology tools, but it makes little difference without the 
full array of fares and inventory to sell. The Orbitz strategy 
is about choking off the flow of critical content to 
independent travel distributors, a strategy that has a long 
checkered history in travel distribution, and one that led to 
the imposition of rules of fair play in the mid-1980's.
    These so-called CRS rules, which have now been updated by 
the DOT for 10 years, do not apply to Internet sales, a 
loophole that Orbitz exploits every single day. And yet the 
very same conduct that the CRS rules restrain, where airline 
owners use their control to harm airline competition and 
consumers, is the exact conduct that Orbitz is engaging in 
today.
    We believe that the rules should be updated to create 
regulatory parity. Orbitz and Orbitz alone has received wave 
after wave of web fares from its airline owners, often for 
discounts across their entire network of flights.
    Our research shows that web fares account for a whopping 60 
percent of Orbitz's total airfare sales, and those fares were 
generally denied to other travel retailers, to the detriment of 
consumers.
    The data also shows that Orbitz is hardly a friendly site 
for most low fare and smaller airlines, which consistently sell 
a lower percentage of tickets in Orbitz than in the independent 
sites, a growing threat to their ability to compete.
    On June 27, the DOT issued a report to Congress that raised 
the concerns about Orbitz, but was essentially inconclusive 
about what should be done, deferring instead to DOJ, which 
continues to pursue its own longstanding investigation.
    Of course, consumers in competition are suffering while the 
agencies delay action. They fail to tackle these problems and 
it may be necessary for Congress to act. Now, the remedy is 
simple.
    DOT and DOJ should remove the contract provisions that give 
Orbitz an unfair advantage and force Orbitz to compete on its 
own merits. Mr. Chairman, the rise of the Internet has 
initiated a true revolution in the travel industry. It holds 
the promise of greater efficiency and enhanced competition at 
all levels.
    And as a policy matter and as a legal matter, we do not 
believe that suppliers should be able to engage in collective 
action to withhold information from independent distributors. 
This is an obstacle to consumer choice that this committee 
should strive to remove.
    Thank you again for the opportunity to testify, and I look 
forward to your questions.
    [The prepared statement of Sam Gilliland follows:]
  Prepared Statement of Sam Gilliland, President and Chief Executive 
                        Officer, Travelocity.com
                              introduction
    Chairman Stearns, Ranking Member Towns, I am Sam Gilliland, 
President and CEO of Travelocity.com, the nation's most popular online 
travel site. I want to thank you for the opportunity to testify today. 
This Subcommittee has shown great leadership on many critical 
electronic commerce and consumer protection issues, ranging from 
privacy to cyber-crime to restraints on digital trade. We at 
Travelocity share your commitment to facilitating public policy that 
will create an online environment that is good for business and good 
for consumer welfare. The focus of this hearing on the consumer 
implications of online, supplier-owned travel agency joint ventures is 
an excellent opportunity for you to begin examining, and I hope 
reversing, a dangerous e-commerce trend across a growing number of 
industries.
    Travelocity (along with other independent travel retailers, 
business travelers, consumer groups, several small and low cost 
airlines, a large and growing number of Members of Congress, and other 
government officials) has been an outspoken critic of Orbitz, the joint 
venture owned by five of the nations' largest airlines. Travelocity has 
never argued that Orbitz should be restricted from entering the market; 
to the contrary, there is room for more competition in online travel. 
Our concern has instead been focused on certain features of the Orbitz 
contract which we believe unnecessarily restrict the ability of 
airlines to provide consumers better access to the lowest fares in the 
marketplace. These features are the so-called ``most favored nations'' 
(MFN) provisions and exclusivity incentives. These clauses, which 
provide to Orbitz long-term contractual access to a full array of the 
major airlines' fares and inventory, threaten all independent travel 
retailers and the consumers we serve.
    We hope that this hearing will help catalyze the continuing efforts 
of Congress, the Department of Justice, the Department of 
Transportation, and other government officials to find a workable 
solution to the Orbitz problem. We have called on them to remove these 
anticompetitive clauses and require Orbitz to do what all other travel 
retailers do everyday--compete on the merits of their technology, 
customer service and marketing ability--and not on contractual 
guarantees that insulate Orbitz from true competition and serve as a 
deterrent to airlines from offering their lowest fares to a greater 
number of consumers. We have also called on the DOT to update and 
modernize the CRS rules to address the Orbitz issues--for the sole 
reason that the rules were last revised 10 years ago and therefore do 
not apply to airline-owned online travel retailers, but only to 
traditional computer reservation systems marketed to travel agents.
    Mr. Chairman, this hearing before this subcommittee is critical, 
because it is consumers and their welfare that this debate is all 
about. We believe that much is at stake for consumers now, and much 
more profound harm is in store for them if Orbitz' plan is executed 
without restraint. Consumers are increasingly being denied a choice in 
travel agents, both online and offline, as they are being forced to go 
to Orbitz, through the operation of Orbitz' MFN and exclusivity 
provisions, for full access to the major carriers' lowest fares. 
Consumers are required to pay an across the board service fee on Orbitz 
that the major independent online sites do not currently charge, and 
this fee will almost certainly rise as Orbitz accounts for an ever 
larger share of airline ticket sales. Orbitz and the Orbitz MFN are 
actually catalysts for transferring the costs of distribution directly 
to consumers--although it is highly unlikely that consumers will see 
equivalent reductions in airfares as Orbitz' service fees will 
undoubtedly increase. With the ascendancy of Orbitz, consumers are 
losing the benefits of airline competition that the independent travel 
web sites have until now fostered both by forcing the major carriers to 
compete with each other and by giving new entrant and low cost 
carriers--the major force for keeping airfares low--a better 
opportunity to compete with the majors. Left unchecked, the operation 
of the anti-competitive provisions of the Orbitz agreement will 
inevitably lead to less consumer choice, less airline competition and 
higher consumer prices for air travel.
    The online travel market in which Travelocity.com participates is 
growing at a rapid pace and, according to the research firm 
PhoCusWright, ``is the fastest growing e-commerce category.'' With the 
rise of the Internet, independent travel retailers--both brick-and-
mortar and online--are increasingly using this distribution channel to 
expand the richness and reach of their product and service offerings to 
the ultimate benefit of consumers, who benefit from the more robust 
airline competition the independents foster.
    A key component to the continued growth and consumer gains in the 
Internet travel market is fair access to information from travel 
suppliers and, in particular, access to travel suppliers' lowest fares 
and corresponding inventory. It is of no benefit to companies that 
distribute airline tickets if they develop the best low fare search 
technologies but are denied access to the full range of airfare 
inventory. At Travelocity, while we are focused on providing the best 
technology and customer service, we are also focused on giving our 
customers--both business and leisure--the most comprehensive access to 
the lowest fares and rates available. After all, that is what consumers 
demand and rightly so.
    You will hear from Orbitz that it offers the carriers lower 
distribution costs in exchange for the guaranteed contractual access to 
their inventory that Orbitz alone enjoys. This is simply not true. 
Independent retailers, like Travelocity, have repeatedly offered to 
meet or beat Orbitz's economics, and yet have been denied equal access 
to the low fare inventory Orbitz receives. On July 11, American Express 
stated that for the last six months or so it had offered to pay a 
portion or all of the airlines' distribution costs relating to certain 
fares and inventory only provided to Orbitz, but thus far no airlines 
have accepted American Express' proposal.
    We strongly believe that the denial of fair and open access to 
travel information to independent travel agents raises substantial 
public policy questions that Congress, the Department of 
Transportation, the Department of Justice and other government 
officials must address.
       travelocity.com and the online travel distribution channel
    Travelocity.com is an Internet commerce pioneer. Since our initial 
launch in March 1996, our customer base has grown to more than 34 
million members. We have built this successful business and a solid 
brand by constantly innovating and creating new products that take 
advantage of Internet technologies to bring benefits to consumers and 
travel suppliers alike. We believe we are changing the way consumers 
can shop for and buy travel. Some of our web site's innovations and 
features include: (i) Alternate Airports--which provides alternative 
city fare information (often bypassing hub airports) in response to a 
given fare request; (ii) ``Dream Maps''--which offers leisure travelers 
on a limited budget the ability to view ``theme'' vacations (i.e., 
beach, ski or national park packages) that compare and select among the 
best fares for multiple destinations, and (iii) Best Fare Finder--a 
revolutionary product that shows consumers calendar-based fare 
offerings, so that they know precisely when advertised low fares are 
really offered.
    While travel suppliers are understandably focused on maximizing the 
amount of revenue they receive with each sale of inventory, at 
Travelocity.com we are focused not only on giving travel suppliers an 
excellent, low-cost selling channel but perhaps more importantly, on 
providing consumers with what they want, which, more often than not, is 
the lowest available fare. We have invested heavily to improve the 
speed and functionality of our site. As noted by one airline industry 
analyst, ``the philosophy [of independent travel web sites] is to push 
the price lower--a complete reversal of the aims of an airline's own 
yield management team.'' 1
---------------------------------------------------------------------------
    \1\ Reuters Finance (Feb. 23, 2000) at .
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    Travelocity.com creates a global storefront for consumers to see, 
experience, research and buy their travel in one place. As such, 
Travelocity is the ``front-end'' or user interface through which 
consumers access a vast virtual warehouse of travel information, such 
as supplier inventory, prices and schedules.
    Just like any other travel agency in the world, Travelocity 
contracts with one of four computer reservation systems (CRS) for 
access to this supplier information. Travelocity's agreement for these 
``back engine'' services is with Sabre, the CRS owned by Sabre Holdings 
Corporation, Travelocity's parent. CRSs are closely regulated by DOT 
(and also by DOT's counterparts in Canada and the European Union). One 
of the bedrock principles of these rules is the requirement that the 
airlines that own CRS's participate in the other CRS's to the same 
extent they participate in the systems they own, so long as the other 
CRS's offer the airlines commercially reasonable terms. These are rules 
of fair play designed to protect competition and consumers and they 
have stood the test of time.
    Currently, the CRS rules in the United States, unlike the rules in 
Canada and the European Union, do not apply to the distribution of 
airline information directly to consumers via the Internet. The CRS 
rules were last amended in any significant way in 1992 (before the 
Internet became a major channel for e-commerce) and were scheduled to 
sunset in December 1997. It was over five years ago that DOT first 
solicited comments on how the rules should be updated to reflect the 
multitude of changes in the travel distribution landscape that had 
already occurred since the regulations were revised in 1992.
    Ten years ago, all CRSs were owned and controlled by large 
airlines. Today, two of the four traditional CRSs, including Sabre, are 
free of all airline ownership. This structural change has effected 
substantial modifications in the fundamental incentives and business 
goals of those independent CRS enterprises. Further, in 1992, the 
Internet was in its embryonic stage as a tool for the distribution of 
airline products, with only a handful of airline sales made online. At 
present, roughly 15% of all airline tickets are sold through the 
Internet and the percentage is growing rapidly. If these rules are to 
remain in effect, these rules need to be modernized.
    I understand that a draft of the rules has been completed and is 
under review at the Office of Management and Budget. The revised rules 
must sufficiently and appropriately address the most critical issues 
facing travel distributors today, including the ability of travel 
distributors to obtain access to the lowest fares of travel suppliers 
that own competing travel agent sites, as exemplified by the airline-
owned site Orbitz (we are not seeking to have these rules apply to data 
that the carriers put only on their proprietary single carrier web 
sites). In revising these rules, DOT must strive for fairness. It makes 
no sense to have rules insuring fair competition and consumer 
protection for the offline environment that are not applicable to the 
online environment. For example, core antitrust principles are not 
solely applicable in the offline environment, but govern all commerce. 
Either the rules should apply to both, or not at all. Further, even 
after five years of delay, it makes no sense for DOT to attempt to 
regulate until it receives critical inputs from the Commission Congress 
chartered two years ago and DOT just recently formed to study the 
plight of travel agents, and until the Inspector General completes the 
separate study on Orbitz Congress required as part of last year's 
Appropriations bill. These exercises are directly relevant to how the 
rules should be modernized, as the DOT itself has acknowledged. In 
short, DOT should not put the regulatory cart before the horse.
            how orbitz operates--though mfn and exclusivity
    Evidence of how Orbitz operates in the online travel channel may be 
found in its ``Airline Charter Associate Agreement.'' Based on the most 
favored nations language in this agreement, airline participants may 
not undercut the prices they post on Orbitz, either by putting lower 
prices on their own web sites or by running promotions (even one day 
sales) with online competitors of Orbitz. The MFN specifically requires 
that any published fare posted on the airline's own web site or on any 
third party site be given immediately to Orbitz. Under the agreement, 
``published fares'' are broadly defined and include the overwhelming 
majority of fares in a given airline's inventory.
    In addition, the owners agreed among themselves to impose annual 
in-kind promotional support obligations on carriers, with one of the 
ways carriers could meet this obligation being to offer their lowest 
fares exclusively through Orbitz. It works this way: Each participating 
carrier is obligated to provide Orbitz with substantial ``In-Kind 
Promotions,'' which can run into the millions of dollars. Among other 
things, these obligations can be satisfied by offering ``exclusive 
promotions or fares available only on'' Orbitz or the participating 
airline's own Internet travel site. Orbitz can withhold certain rebates 
if the carrier and Orbitz fail to develop a mutually acceptable 
promotional plan and/or if the carrier fails to adhere to the terms of 
that plan.2 Moreover, Orbitz' requirement that all 
participants immediately provide to Orbitz all promotions and fares 
that are offered using alternative distribution methods will undercut 
any incentive by Orbitz to innovate by developing and packaging special 
promotions from suppliers.
---------------------------------------------------------------------------
    \2\ The non-equity owning carriers can also apparently satisfy 
these requirements by providing Orbitz with ``passenger database 
information'' and ``competitive purchaser names'' (e.g., e-mail 
addresses of passengers who booked travel through another online 
agency).
---------------------------------------------------------------------------
    These very unusual contract provisions were the subject of much 
controversy in 2000 and early 2001 as the Department of Transportation 
and Department of Justice considered what safeguards might be required 
up front, before Orbitz' launch. DOT (and DOJ) nonetheless allowed 
Orbitz to launch without any limitations on its ability to enforce the 
MFN clauses and exclusivity incentives. An analysis of that DOT 
decision, and an examination of the events of the months since Orbitz 
began operation, leads only to the conclusion that if there were ever a 
basis for permitting Orbitz to enforce either of these provisions, it 
evaporated long ago.
    In and of themselves, the terms of the Orbitz agreement with its 
participating carriers have impaired the ability of consumers to have 
broader access to lower airline fares. This harm to the competitive 
airline process has materialized with even more severe, long-term harm 
inevitable. In its April 13, 2001 letter to Orbitz, DOT acknowledged 
that ``critics argue that the MFN clause undermines the ability of 
individual airlines to make clandestine deals with other Internet 
travel sites--deals that they rightly contend have a pro-competitive 
effect on pricing . . . Thus, there is some potential impact on the 
market dynamic.'' 3
---------------------------------------------------------------------------
    \3\ DOT Letter at 4.
---------------------------------------------------------------------------
    While ``under the radar'' sales by airlines on independent travel 
agents have slowed, the volume of immediately detectable web fares 
offered on Orbitz has exploded. Orbitz's strict most favored nations 
requirement, which it strongly polices, ensures that price discounts 
are immediately detectable by all carriers at the same time every 
working day. To the detriment of consumers, this environment acts to 
discourage discounting, because there is no way for carriers to create 
even a temporary advantage over competitors.
    In its June 27, 2002 Report to Congress, DOT recited the concerns 
of those smaller low-fare carriers opposed to Orbitz because, among 
other things, ``they do not want to lose their ability to selectively 
engage in deals with other online agencies and distribution channels 
without the obligation to also give these deals to Orbitz.'' Even more 
telling, one such carrier stated the in-kind advertising commitment was 
``designed to burden small low-fare carriers with higher distribution 
costs.'' 4
---------------------------------------------------------------------------
    \4\ DOT Report at 13.
---------------------------------------------------------------------------
                       exclusivity and web fares
    In the April 13, 2001 letter, DOT expressed its rationale for 
allowing Orbitz to launch with contractual incentives to provide 
content to Orbitz exclusively. The Department expressed strong 
misgivings, saying:
        We have serious concerns about incentives toward exclusivity, 
        however limited. While we are prepared to reserve judgment 
        until we see how this provision operates in the marketplace, we 
        will monitor these developments closely. Allowing a new entrant 
        with no sales or market share to offer financial incentives to 
        get exclusive access to a very limited portion of supplier 
        inventory may be a legitimate means of overcoming entry 
        barriers. (emphasis added)
    As predicted by many of its critics, in the months following its 
launch the owners of Orbitz made available to Orbitz--and Orbitz 
alone--wave after wave of web fares, often for discounts across all or 
much of their entire network of flights 5. The 
representations made by Orbitz to induce DOT to allow it to commence 
operations unfettered by standard rules of fair play--namely, that web 
fares would represent only ``1/10th of one percent'' of the fares 
offered 6--have proven to be completely false. To the 
contrary, our research indicates that web fares account for at least 
60% of Orbitz' total airfare sales, and those fares were generally 
unavailable for negotiation (as American Express and others can attest) 
and therefore denied to other travel retailers to the ultimate 
detriment of consumers.
---------------------------------------------------------------------------
    \5\ Of course, Travelocity welcomes low fares and the more the 
better. However, because the largest carriers in the U.S. have withheld 
comparable low fares from any of the tens of thousands of offline and 
online travel agencies that compete with the agency they jointly own--
Orbitz--they have distorted competition in the field of airline ticket 
distribution and have also injured those millions of consumers and 
businesses who, for all sorts of valid reasons, choose to deal with 
travel agencies that are independent of the big carriers.
    \6\ See DOT Letter at 7.
---------------------------------------------------------------------------
    Importantly, these Orbitz web fares are not simply last-minute 
weekend travel fares on flights that have an unusually high number of 
empty seats; they are instead wide swaths of the airlines' fares on 
flights and available for more advanced booking. On February 26, 2002, 
Karl Peterson, CEO of Hotwire, a travel web site owned by four of the 
five Orbitz owners succinctly described the transformation of the uses 
of web fares by large airlines, noting:
        ``[N]o longer are web fares surgical. They are closer to a 
        published fare sale than they've ever been . . .''
    Because of this guaranteed access to low web fares on the Big 
Five--and not because of any technological innovation or high level of 
customer service--Orbitz has become one of the top three online sellers 
of airline tickets.7
---------------------------------------------------------------------------
    \7\ Orbitz claims that it does not have ``exclusive'' fares because 
most of these fares are also available on the individual carriers' web 
sites. While Orbitz engages in such semantic games, this form of self-
dealing is hardly the type of robust competition a free and fair 
marketplace would demand.
---------------------------------------------------------------------------
    In recent months, some of the Orbitz carriers have started to 
provide limited access to some web fares to some independent retailers. 
This has not, however, solved the problems raised by the Orbitz MFN or 
leveled the playing field. For example, Orbitz has now confirmed 
publicly that it has 10 year contracts with its owners that, among 
other things, guarantee Orbitz access to all these web fares.
    A key premise of the DOT's decision allowing Orbitz to proceed was 
that a ``very limited portion of supplier inventory'' would be made 
available to Orbitz on an exclusive basis. In other forums, Orbitz 
executives had asserted that these special web fares to which it alone 
would have access would not account for any significant portion of the 
lowest fares it offered. In a May 22, 2001 speech to the Aero Club, 
Jeff Katz said:
        ``We estimate that about 99% of the time that Orbitz produces a 
        lower fare, it will be [sic]not be because we had access to a 
        fare others did not, but because we found a fare that everybody 
        had access to, but not everybody could find. Or not everyone 
        chose to display.''
    As any observer of Orbitz will know, this statement has not proven 
to be accurate. Instead, in the 13 months since Orbitz commenced 
operation it has offered numerous ``web only'' discounts that the five 
Orbitz owners made available on Orbitz, but denied to all of Orbitz's 
independent competitors, online and offline.
       smaller carriers have consistently poorer sales in orbitz
    There is more data that should concern consumers, evidence that has 
ominous overtones for the future of airline competition and e-commerce. 
A number of concerned parties predicted in 2000 and early 2001 that 
Orbitz would be designed and operated in ways that would neutralize the 
ability of the small, discount carriers to achieve a premium share of 
ticket sales in the independent web sites. For example, Orbitz's 
refusal to allow airline advertising in the airline displays was seen 
by many as an attempt to deprive smaller airlines of a very useful, 
point-of-sale technique that touted their bargain fares. Through banner 
ads promoting their fare specials, smaller carriers had been able in 
the independent sites to overcome their lack of name recognition and to 
attract needed incremental business.
    In short, the data show that the small discount carriers do attract 
a substantially higher share of sales in the independent sites and that 
in Orbitz the major airlines have succeeded in nullifying that 
phenomenon.
    As forecasted by many, the hard sales data for the months since 
Orbitz's launch show that smaller and low fare carriers do much more 
poorly in Orbitz than in the two largest independent web sites. These 
low-fare carriers achieve a percentage of total bookings that is 15% to 
more than 200% larger in the independent sites than in Orbitz.
    Simply put, the data concerning how smaller airlines do in Orbitz 
are a bad omen of what the future holds for them and consumers. 
Moreover, they are a stark reminder of what the world was like for 
smaller carriers in traditional CRSs before the Civil Aeronautics Board 
adopted rules in 1984 to governing the operation of airline-controlled 
CRSs.
    In response to this uneven competitive playing field, many travel 
retailers have responded by shifting their focus away from the sale of 
scheduled air, where they have long been positive forces for airline 
competition, to the sale of other products, such as hotels, package 
vacations and cruises. Lowestfares.com recently announced that it was 
discontinuing selling airline tickets entirely. In contrast, Orbitz's 
recently filed S-1 reveals that almost 90% of its 2001 revenues came 
from the sale of air transportation. As Orbitz becomes a larger seller 
of air transportation, this is not likely to be helpful for small and 
low-fare carriers (such as JetBlue and Southwest, neither of which 
participate in Orbitz), nor for the consumers who look to them to serve 
as a competitive spur for lower fares. As independents shift their 
focus away from the sale of scheduled air service, consumers lose 
choice as well as the competitive pressure that comes from agents who 
have historically provided them with tools to help them find the best 
deals. Orbitz, as an airline joint venture, has little incentive to 
provide or improve upon these tools particularly as competition from 
independent, non-airline owned sites diminishes.
                 should orbitz be permitted to operate?
    Travelocity has never asked that Orbitz be blocked from operating. 
Instead, we have expressed concern over the consumer harm and 
competitive implications of DOT not taking action while Orbitz 
implements a business plan predicated on exclusive access to the lowest 
fares of the five largest carriers in the U.S. Orbitz did not have to 
compete or negotiate for that access, but was simply given (and 
guaranteed) that access--which is not indicative of a competitive 
marketplace. We have urged the government to address this risk head-on, 
certainly allowing Orbitz to exist and engage in competition with the 
rest of us, but to be mindful of the ``rules of the road'' in any 
competitive marketplace and to consider the lessons learned from prior 
airline owned distribution ventures. This simply means removing the 
anticompetitive contract clauses and modernizing the CRS rules. These 
are surgical actions that can be taken and in no way constitute 
``regulating the Internet'' as Orbitz has asserted.
                          what should be done?
    We believe DOT or DOJ should act now to ban the use by Orbitz of 
the two contract provisions that require carriers to collectively 
provide ``most-favored nations'' treatment to Orbitz with respect to 
fares and inventory. The agencies should also void the provisions of 
the Orbitz Agreement that collectively give carriers financial 
incentives to confer fares and other content on Orbitz on an exclusive 
basis. DOT's June 27, 2002 Report to Congress raised concerns about 
Orbitz, but failed to reach conclusions on what should be done, 
deferring instead to DOJ, which continues to have open a long-standing 
investigation, which has no timetable for conclusion. If the agencies 
fail to tackle these problems, it may be necessary for Congress to step 
in and come up with a solution.
    Unfortunately, DOT has not addressed the ``sea changes'' in the 
industry that have occurred over the past ten years. The limited scope 
of the U.S. CRS rules, which apply only to computer reservations 
systems to the extent these systems are used by travel agents, may have 
made sense in 1992. However, at a time when tickets sold online 
directly to consumers are approaching 15% of all sales, it is 
nonsensical to say that stringent rules banning the withholding by 
airline owners of key flight data are essential elements of public 
policy in the case of the four traditional CRSs (two of which are no 
longer airline owned), but that a ticket distribution system like 
Orbitz that is backed by the combined strength of the five biggest 
airlines, gets a free pass. This is bad public policy.
    In fashioning the appropriate response to the competitive harm of 
Orbitz, DOT should be mindful of the policy underpinnings of the rules. 
In 1984, the CAB found that regulation of airline owned or marketed 
CRSs was necessary because, it concluded, airlines that owned the 
electronic distribution outlets for airline tickets had both the means 
and the incentive to use that control to advance their fortunes as 
airlines. DOT found a documented halo effect in terms of sale of 
tickets sold through the systems that favored major carriers that owned 
distribution outlets at the expense of smaller carriers.
    In 1992, DOT affirmed that view and also found that airlines had an 
inherent incentive and power to favor the distribution outlets they 
owned over all others. No good reason exists today to believe that 
these fundamental dynamics in the airline industry have changed. In the 
face of those facts, it is difficult to see how rules designed to 
prevent abuses by even a single carrier owning a traditional CRSs 
offered to travel agencies are not applicable to this scenario where 
the five largest air suppliers form a joint venture to operate a 
distribution web site targeted at consumers.
    DOT should promptly take the steps needed to apply with respect to 
Orbitz the same regulatory safeguards that it found long ago were 
necessary to protect competition in the case of traditional airline-
owned CRSs.
                               conclusion
    Based on its MFN and exclusivity provisions that lead to exclusive 
access to web fares on the nation's five largest airlines--fares that 
predominate its listings despite its earlier representations to the 
contrary to DOT--Orbitz has gone from nowhere to become the one of the 
largest Internet travel agencies, and has achieved this position 
without having to compete for this favored access to fares and 
inventory. This is perhaps the most troubling aspect and key issue in 
supplier owned joint ventures--the danger of distorting competition and 
creating an uneven playing field which ultimately harms consumers and 
competition.
    Action is needed now to prevent Orbitz from continuing to benefit 
from its supplier-owned structure and favored access to inventory--
which it did not obtain through competition--and protect the 
competitive dynamic and promise of Internet distribution to bring lower 
prices and more innovative technology and tools into the reach of more 
consumers. If the MFN provisions were ever justifiable in April 2001 
because Orbitz had ``few sales and no market share'' and if the 
exclusivity incentives might have been defended as a legitimate means 
to ``overcome entry barriers,'' those reasons for DOT or DOJ to stay 
its hand have disappeared completely.
    The rise of Internet commerce has initiated a true revolution in 
the travel distribution industry, and holds the promise of greater 
efficiency and enhanced competition at all levels. As a policy matter, 
and as a legal matter, we do not believe suppliers should be able to 
engage in collective action to withhold information from independent 
distributors. This is an obstacle to e-commerce that this committee 
should strive to remove.
    In this country, laws and rules exist that prevent such boycotts 
from occurring--and it's time to enforce them now. Consumer choice, 
robust airline competition, and access to low fares are at stake here; 
broader issues of e-commerce and consumer harm hang in the balance as 
the Orbitz model is replicated by other suppliers in other industries.
    Thank you for the opportunity to testify and I look forward to 
answering your questions.

    Mr. Stearns. Mr. Wolff, we welcome you.

                    STATEMENT OF BRUCE WOLFF

    Mr. Wolff. Chairman Stearns, thank you, too, for the 
opportunity to testify before this committee. First, in the 
interest of brevity, I have submitted a complete summary of 
this complex issue, and an attachment which I would like to 
include for the record.
    Mr. Stearns. By unanimous consent, it is so ordered.
    Mr. Wolff. My name is Bruce Wolff, and I am Chairman of the 
Board of Pegasus LLC, and I am also senior vice president of 
Marriott Intentional, and a member of the board of directors of 
Pegasus Solutions, two of the founding members of TravelWeb.
    Today I am testifying on behalf of the Chairman of 
Travelweb. There is no doubt that TravelWeb sites can provide 
enormous benefit for American consumers. However, these 
websites should be viewed as one option among many for 
consumers.
    Some consumers will find them absolutely right for their 
needs, and others will not. The increased use of travel 
websites and general customer satisfaction are evidence of the 
benefits that websites provide to some of America's busy and 
discerning customers.
    In a few minutes, I would like to address the specific 
concerns that might be raised about the fact that TravelWeb is 
owned by hotel companies. For a moment, let me just say that 
owners of TravelWeb go toe-to-toe in the market every day 
trying to out-market each other and outsell each other.
    We compete on price, location, frequent stay programs, 
travel agent incentive programs, and many other facets. 
TravelWeb will not change that powerful dynamic. However, 
TravelWeb allows us to achieve some economies of scale and some 
operational efficiencies for consumers without undermining in 
any way vigorous competition among the owners of TravelWeb, 
which drive down prices.
    For that reason, we feel confident that TravelWeb is good 
for consumers. The initial owners of TravelWeb include five 
hotel chains; Hilton Hotels, Hyatt Corporation, Marriott 
International, Six Continents, Starwood Hotels and Resorts, and 
Pegasus Solutions, the leading technology provider to the hotel 
industry.
    In the aggregate, these chains control only a small portion 
of hotel properties that carry their brand name. They are 
affiliated with many more properties that are independently 
owned, and although the hotel exchange and Pegasus are owners, 
TravelWeb is an entirely separate company, with its own board 
of directors and employees.
    TravelWeb will specialize in on-line distribution of 
discount hotel rooms; that is, hotel rooms that are sold 
through what the industry calls their Merchant model. These 
rooms tend to be sold at prices below regular rates, primarily 
because of excess capacity.
    We also operate TravelWeb sites to consumers called 
TravelWeb.com, which is accessible to the public. We view that 
as an important part of our business, but our primary effort is 
offering discounted rooms to TravelWeb site companies.
    Let me now turn to some of the potential concerns about 
supplier-owned travel websites. I cannot address these concerns 
for other websites, but I can discuss them specifically for 
TravelWeb. First is privacy.
    As with any website, concerns about privacy are legitimate 
and important. Travelweb is strongly committed to protecting 
private personal data collected in the process of a 
transaction, which may include customer's name, address, credit 
card information, and other important information.
    TravelWeb is fully committed to adhering to all applicable 
Federal and State laws protecting privacy, and we are very 
sensitive to international laws on privacy. Now I would like to 
turn to the competition issue. One question is whether 
competition or whether competitors who own TravelWeb could 
collude to raise prices.
    As I will discuss, this market makes it almost impossible 
to collude, and TravelWeb is carefully structured to prevent 
even the unlikely possibility of collusion. First, it is 
important to realize that only about 4 percent of hotel rooms 
are sold on-line.
    In distributing rooms on-line, we compete with every other 
way of distributing hotel rooms. People can call directly, and 
they can call their travel agent, and various other ways.
    Although we don't have hard numbers, we believe about 5 
percent of rooms sold on-line are sold through the merchant 
model. Companies that sell through this channel are also in 
competition with rooms sold through other traditional channels.
    On-line sales of rooms through the merchant model represent 
less than 1 percent of the rooms sold. TravelWeb's share of 
this market is tiny. We currently hope to grow it over time, 
but TravelWeb is really a latecomer to the market that is 
dominated by other large companies.
    Even if two were to achieve a 10 percent market share that 
would mean that we would have less than one-tenth of 1 percent 
of approximately the $108 billion annual hotel market, hardly a 
prescription for market domination.
    In addition, it is also important to focus on the structure 
of the hotel industry. Individual hotel properties are 
overwhelmingly independently owned. The combination or the 
combined share of all hotel rooms in the U.S. which carry the 
brand names of our owners is 29 percent.
    However, about 80 percent of those properties that carry a 
national brand name are owned by franchisees, and therefore, 
they make their own business and pricing decisions.
    I see that my time is up, and allow me to summarize by 
saying that we are an industry of very fierce competition. We 
are highly fragmented and unconcentrated. We are a non-
homogeneous product. We entered into this venture to add choice 
to the consumers for on-line distribution of discount rooms.
    We are very careful in structuring the organization so that 
care would be taken that even the appearance of collusion would 
be carefully monitored. I look forward to answering questions 
from all of you.
    [The prepared statement of Bruce Wolff follows:]
Prepared Statement of Bruce Wolff, Chairman of the Board, TravelWeb LLC
    Mr. Chairman and members of the Subcommittee, thank you for holding 
this hearing and for giving me the opportunity to testify on supplier-
owned travel websites. My name is Bruce Wolff, and I am Chairman of the 
Board of TravelWeb LLC (``TravelWeb''), a joint venture of six 
companies in the hotel industry, which distributes hotel room 
reservations online. I am also Senior Vice President of Marriott 
International and a Director of Pegasus Solutions, which are both 
founding members of TravelWeb. Today, I am testifying in my capacity as 
Chairman of TravelWeb.
    There is no doubt that travel websites can provide enormous 
benefits for American consumers. However, these websites should be 
viewed as one option among many for consumers. Some consumers will find 
them absolutely right for their needs; others will not. But the fact 
that they have this choice is certainly a benefit. Travel websites 
offer incredible convenience by allowing consumers to obtain a wealth 
of travel-related information in minutes. They can see photos, learn 
about the nearby attractions, and compare prices from the comfort of 
their homes in minutes, often saving hours of effort. In addition, by 
achieving efficiencies in distribution, websites reduce costs and allow 
consumers to benefit from some of the most competitive rates available. 
The increasing use of travel websites and general customer satisfaction 
are evidence of the benefits that websites provide to some of America's 
busy, and discerning, consumers.
    New, efficient methods of doing business sometimes mean that 
companies using traditional methods lose customers. That is a painful 
process, but it is the hallmark of a free enterprise system. The issue 
is not the effect of travel websites on other businesses that compete 
in distributing hotel rooms, however. It is the effect on consumers. 
Thus, it is perfectly appropriate for this Subcommittee to examine 
whether supplier ownership of TravelWebsites is good for consumers. In 
a few minutes, I want to address the specific concerns that might be 
raised by the fact that TravelWeb is owned by hotel companies. For the 
moment, let me just say that the owners of TravelWeb go toe to toe in 
the market every day, trying to outmarket and outsell each other. We 
compete on price, location, service, frequent stay programs, travel 
agent programs and many other factors. TravelWeb will not change that 
powerful dynamic. However, TravelWeb allows us to achieve some 
operational efficiencies for consumers, without undermining in any way 
the vigorous competition among the owners, which helps to drive down 
prices. For that reason, we feel very confident that TravelWeb is good 
for consumers.
                               travelweb
    TravelWeb is an independent company created in February 2002 to 
provide online marketing of hotel rooms and is only now ramping up 
operations. The initial owners of TravelWeb include five hotel chains--
Hilton Hotels, Hyatt Corporation, Marriott International, Six 
Continents Hotels, and Starwood Hotels and Resorts--and Pegasus 
Solutions, a leading technology provider to the hotel industry. In the 
aggregate these chains own only a small portion of the hotel properties 
that carry their brand name, and they are affiliated with many more 
properties that are independently owned. Pegasus provides central 
reservation system and other services to many hotels in the U.S., and 
its Utell subsidiary provides marketing and reservation services to a 
network of hotel properties. I should note that, although these hotel 
chains and Pegasus are owners, TravelWeb is an entirely separate 
company, with its own board of directors and employees. While the board 
members set general policy, the management of TravelWeb makes 
independent business decisions focused on achieving success for 
TravelWeb. Under the agreement governing TravelWeb, the hotel company 
owners of TravelWeb, including myself, do not have access to certain 
information and cannot participate in certain decisions.
    Hotel properties other than those of the founding members are 
invited to participate in TravelWeb by supplying room inventory for 
distribution. Many properties of other chains already participate in 
TravelWeb, and we expect increased participation by additional chains 
and independent properties as we become more established. In the long 
run, our customers will primarily be other travel website companies, 
not consumers themselves. We will specialize in the online distribution 
of discounted hotel rooms, that is hotel rooms that are sold through 
what the industry calls the ``merchant channel.'' These are rooms that 
tend to be sold at prices below regular rates primarily because of 
excess capacity in the market.
    TravelWeb will compensate participating hotels for inventory in an 
amount that is based on market conditions and negotiations between 
TravelWeb and the hotel property. TravelWeb in turn will add a markup 
to that base rate when it makes inventory available to other travel 
websites. The room will be offered to consumers at a rate determined by 
TravelWeb, and the travel website who ``sells'' the room will receive a 
commission.
    We also operate a travel website for consumers called 
TravelWeb.com, which is accessible to the public. That site has been in 
operation for some time and provides another choice for consumers 
alongside many other travel websites. Through that website, TravelWeb 
operates as a retailer and deals directly with consumers. We view that 
as an important part of our business, but our primary effort is 
offering discounted rooms through other travel website companies.
                           potential concerns
    Let me turn now to some of the potential concerns about supplier 
owned travel websites. I cannot address these concerns for all 
websites, but I can discuss them in connection with TravelWeb.
1. Consumer Privacy Protection
    As with any website, consumers are legitimately concerned about 
privacy. TravelWeb is strongly committed to protecting the private 
personal data collected in processing a transaction, which may include 
a consumer's name, address, credit card information, and other 
important information. TravelWeb acts as both a ``wholesaler,'' by 
selling through other travel websites and as a ``retailer.'' Whenever 
TravelWeb is furnished personal information by consumers, it transmits 
only the information necessary to complete a transaction. In addition, 
TravelWeb may use other information voluntarily submitted by the 
consumer in order to evaluate his or her travel preferences and to make 
better recommendations. TravelWeb may also aggregate certain 
information, e.g., zip code data, for its own market research or for 
advertisers. Other than these uses, TravelWeb does not sell, lease, or 
share personal financial information with other parties and is fully 
committed to adhering to all applicable federal and state laws 
protecting the privacy of consumers. We are also sensitive to 
international privacy laws requirements.
2. Competition Issues
    Now I want to turn to competition issues. Let me say at the outset 
that TravelWeb provided background material to both the Department of 
Justice and the Federal Trade Commission prior to our formation in 
February. We have offered to meet with and brief appropriate officials 
in both agencies regarding our structure and operations. We have not 
been contacted by either agency but we stand ready to cooperate with 
them.
                        possibility of collusion
    One question is whether the competitors who own TravelWeb could 
collude to raise prices. As I will discuss, the market makes it almost 
impossible to collude, and TravelWeb is carefully structured to prevent 
even that unlikely possibility.
    First, it is important to realize that only about 4% of hotel rooms 
are sold online. In distributing rooms online, we compete with all 
other ways of distributing hotel rooms--directly from the hotel, 
through 800 numbers, through travel agents, and so on. Although we 
don't have hard numbers, we believe about 5% of rooms sold online are 
sold through the merchant channel. Companies that sell through this 
channel are also in competition with rooms sold through traditional 
channels. Online sales of rooms through the merchant channel represent 
less than 1% of all rooms sold.
    TravelWeb's share of online merchant channel sales is tiny. We 
certainly hope it grows over time, but TravelWeb is really a ``late-
comer'' to a market segment that is dominated by other, large 
companies. A recent industry analysis stated: ``The hotel industry is 
too complex and unwieldy for [TravelWeb] to wrestle away the top spot'' 
from our competitors.1 But, even if we were to achieve 10% 
of this category, that would mean that we will sell less than .1% of 
the approximately $108 billion in annual hotel bookings in the U.S.--
hardly a prescription for market domination.
---------------------------------------------------------------------------
    \1\ Henry Harteveldt, New Portal Leader Won't Dislodge Current 
Leaders, Forrester Consumer Technographics North America Brief, Feb. 
20, 2002.
---------------------------------------------------------------------------
    In addition, it is also important to focus on the structure of the 
hotel industry. Individual hotel properties are overwhelmingly 
independently-owned. The combined share of all hotel rooms in the U.S. 
which carry the brand names of one of our owners is 29%. However, about 
80% of the properties that carry a national brand name are owned by 
franchisees that make their own, independent business decisions and 
establishes its own prices. Neither TravelWeb nor our individual owners 
compel these properties to participate in TravelWeb or to comply with 
any centralized price-setting system. In other words, the hotel 
industry is highly fragmented, with literally thousands of independent 
actors. Even at the local level, there are usually hundreds of 
independent hotel properties in any large metropolitan area and dozens 
in small areas. Finally, hotel rooms are not homogeneous. Hotel rooms 
vary greatly in size, quality, amenities, and location. Consumers shop 
around for the combination of room rate, location, and amenities they 
want.
    The combination of the highly unconcentrated industry structure, 
the large number of independent actors, and the lack of homogeneity 
make collusion extremely unlikely. In order to guard against even a 
remote possibility of collusion, TravelWeb was advised by antitrust 
counsel throughout the formation process and continues to be advised on 
an ongoing basis. TravelWeb has adopted a number of restrictions on our 
own operations to ensure its continuing compliance with the antitrust 
laws. The management of TravelWeb does not share pricing information 
with any participating hotel or chain, including the owner chains. For 
example, even though I am Chairman of the Board, TravelWeb does not 
provide me with the base rates charged to TravelWeb by any individual 
property. We do not discuss rooms rates or any other sensitive 
competitive terms offered by individual properties at any of our 
meetings or in any documents. In short, TravelWeb believes that 
collusion in this industry is exceedingly unlikely, and we have taken 
steps to ensure that it is impossible within the TravelWeb structure.
                              exclusivity
    Questions have been raised about the possibility that TravelWeb 
could have exclusive access to discounts offered by participating 
properties. That is not the case. Each participating property is free 
to offer discounted rooms through other websites or through any other 
channels. In fact, it is typically the case that the same room is made 
available simultaneously through multiple websites and is removed from 
the inventory only after it is sold. No independent property of a 
participating chain is required to participate with TravelWeb, and 
participating properties are not required to offer any particular 
portion of their inventory--either rooms offered at regular rates or 
``discount'' rooms--through TravelWeb.
                    ``most favored nations'' clause
    Another question concerns TravelWeb's ``most favored nations'' 
(MFN) clause. We have included a narrow MFN in our contracts with 
participating properties. Our MFN provides that, if hotel properties 
offer inventory to be sold through TravelWeb, they agree that they will 
make available to TravelWeb the lowest price that they make available 
to any other independent travel website for comparable inventory. 
However, hotel properties are free to offer even lower rates directly, 
through travel agents, through their own websites, or through any 
another outlet. There are no incentives to properties to induce them to 
offer discounted rooms only through TravelWeb or necessarily to offer 
their lowest rates through TravelWeb. Thus, the MFN gives us some 
assurance that we are competitive with other independent travel 
websites, but it does not mean that we have any ``corner'' on the 
lowest rates offered by hotel properties.
                               conclusion
    TravelWeb is a new entrant in a market with vigorous competition. 
The hotel industry is composed of thousands of participants that 
compete every day for consumers. TravelWeb is a very small participant 
in that large market. We believe that the merchant channel is a 
valuable part of this market because it adds yet another way that rooms 
are sold. Frankly, we felt that the merchant segment of the market was 
not as competitive as it could be, and that is the reason we, that is, 
the hotel companies that own TravelWeb, decided to enter. We don't have 
all the answers, and no doubt we will learn better how to serve 
consumers over time. However, we are confident that TravelWeb will be a 
valuable addition to the market, one which promotes competition, rather 
than limits it. Thank you again for the opportunity to testify and I 
would be pleased to answer any questions.

    Mr. Stearns. I thank the gentleman, and Mr. Zuck, we 
welcome you and your opening statement.

                   STATEMENT OF JONATHAN ZUCK

    Mr. Zuck. Thank you. One sure sign that consumers are 
seeing increased benefits is the presence of entrenched vendors 
on Capital Hill claiming that consumers need to be protected.
    Mr. Chairman, and members of the subcommittee, it is a 
pleasure to be here again to help tell the electronic commerce 
story on behalf of the more than 3,000 members of ACT, 
including many who do business online, and most of whom are 
small businesses.
    Thank you for holding these proceedings, and I am 
optimistic that the clear light of realism resulting from your 
efforts and scrutiny today will reveal the Whitford campaign 
for what it is, hypocritical, entrenched marketing incumbents 
looking for protection from real competition.
    Improvements in technology and specifically the Internet, 
have proven a tremendous boon to consumers who are beginning to 
enjoy greater convenience, better selection of goods and 
services, and lower prices.
    At the same time, these increased efficiencies represent a 
serious threat to a large segment of our economy, middle 
management. It is estimated that the cost to consumers of 
entrenched middle management is something close to $15 billion 
annually.
    The situation as far as lobbying at the Federal and State 
level, and business practices designed to stifle competition 
has become so severe that the FTC has recently announced a 
workshop to look into this problem.
    We see inefficient middlemen attempting to stifle 
innovation and consumer choice on the net from multiple 
sectors, including cars, auctions, contact lenses, real estate, 
and of course air travel.
    Something that is really important is let's agree at the 
outset that if consumer choice brought about the end of third-
party travel distribution that it wouldn't be the end of the 
world. There is only a market for distributors as long as there 
is value added to the suppliers and consumers.
    This is not a guaranteed marketplace. Nothing could be 
worse for consumers or small businesses than a fourth 
distribution channel. That said, it is far more likely that 
multiple channels of distribution will remain for a long time 
to come.
    Power fliers will buy directly off of airline sites based 
on hub and route knowledge. Knowledgeable fliers might use 
Orbitz, Expedia, or Travelocity, and still others will continue 
to value the hand-holding that a travel agency is able to 
provide.
    In fact, the recent Forrester report found that the 
majority of travel booked through brick and mortar agencies is 
premium travel. Remember again that those bookings currently 
make up 70 percent of the market; whereas, Orbitz, by way of 
example, has 2 percent.
    Value added travel agencies will be the No. 1 beneficiaries 
of the elimination of valueless simple resellers and pressure 
on CRS rates. The Department of Transportation has found that 
there is no evidence that consumers can be herded into a single 
channel. The switching costs are simply far too low.
    Throughout the economy distribution channels have created a 
secondary market with its own pitfalls, latencies, and costs to 
both suppliers and consumers. The evolution of the Internet has 
provided an alternative to these inefficiencies and an 
opportunity for suppliers to cut costs and to pass at least 
some of these savings on to their customers.
    The obvious at first blush is to sell direct and the second 
is to combine suppliers and reintermediate in a more efficient 
manner. This is pro-competitive activity for which specific 
guidelines exist from the Department of Justice, and it has 
nothing to do with price competition between suppliers.
    Ironically, the No. 1 recommendation of consumer groups 
during the fiasco brought about by the likes of Sabre before 
was that an industry-wide CRS system be created, and perhaps 
one like Orbitz, which serves over 40 airlines, is part of the 
answer.
    Third-party distribution generally does not promote 
surprise competition between suppliers, but instead simply 
increases costs to consumers. That's fine if there is 
additional value being provided, and silly if there isn't.
    The experiments with supplier initiated re-intermediation 
on the web today are good for e-commerce and good for 
consumers, and they will succeed or fail on their own merits.
    Orbitz, like so many e-commerce sites before it, has 
delivered to the consumer better information, better services 
and lower prices, while at the same time saving the suppliers 
money, which in-turn benefits consumers.
    They went to the Department of Justice and the Department 
of Transportation before even starting to get a review of their 
business plan. They have been under constant scrutiny by both 
agencies for the past 2 years, and in both chambers of the 
Congress, and at no time has there been any hint of a problem 
with their business model.
    To the contrary, the Department of Transportation has 
concluded that they have helped competition in the travel 
booking market by following the DOJ guidelines. So-called web 
fares are now more widely available and more competition exists 
in the distribution channel.
    The notion that the deals that exist are in fact 
exclusivity deals is a ridiculous one as we see advertising 
from many sites now saying that they have web fares. I hope the 
question gets asked what kind of deals are being cut to get 
them.
    The notion that there has been any additional exclusive 
deals, or fare bias, is ridiculous. Those were already in place 
with folks like Travelocity, who were paid off to bias their 
listing.
    Instead, there has been marketing increases and 
transparency with the Orbitz entry. The presence of Orbitz in 
the marketplace has been a boon to consumers, period. As a 
local theater owner, I am compelled to use a movie metaphor.
    In the movie, Minority Report, we see the pitfalls 
associated with preemptive enforcement, such as might be 
suggested by some of the folks here at this table today, and it 
is very important that we don't engage in this kind of psychic 
behavior, but instead allow the market to work itself out.
    So while I may seem to be providing the minority report 
here at this table, I, for sure, represent the majority view. 
Thank you, Mr. Chairman, and I look forward to questions.
    [The prepared statement of Jonathan Zuck follows:]
    Prepared Statement of Jonathan Zuck, President, Association for 
                         Competitive Technology
    The issue before this committee today transcends the air travel 
industry. The current situation in this industry is part of the natural 
struggle between entrenched business models and the ongoing drive 
toward greater efficiencies and consumer benefits through innovation in 
the marketplace and on the Internet. The Association for Competitive 
Technology (ACT) has always supported the creation of innovative e-
commerce technologies and business models such as the one developed by 
its member company Orbitz. In the online travel space, Orbitz has 
created a new, lower-cost technology platform that provides consumers 
with easy access to a broader selection of low fares in a guaranteed 
unbiased display. The fastest growing IT organization in Washington, 
ACT represents over 3,000 technology companies and professionals. The 
bulk of our membership is comprised of small and mid-size companies and 
their executives
    Following a worldwide trend, Orbitz represents a move away from 
inefficient proprietary networks toward more open and cost effective, 
open, Internet-based networks. Orbitz uses superior server-based 
technology to provide consumers with more information about all 
available fares. Their technology is better than first generation 
search engines, thus it can search billions of flight-options to find 
more choices. Moreover, the server technology can handle the huge 
volume needed to search billions of airline routings at a much lower 
cost, allowing Orbitz to charge the airlines less to distribute their 
tickets.
    Since the launch of Orbitz, consumers have been given a much larger 
set of choices when searching for fares. In addition, there has been 
significant distribution cost savings for airlines and other travel 
suppliers at a most critical time for them. Orbitz is providing the 
first real downward pressure on one element of distribution costs in 
particular; booking fees charged by the dominant Computer Reservation 
Systems (CRS), which average nearly $14.00 per ticket. These CRS's have 
thus far refused to invest in Internet-based technologies that could 
help bring these costs down.
                       beyond the investigations
    It is time to move past the seemingly interminable investigative 
process. By way of background, Orbitz has been scrutinized by more 
government agencies and congressional committees than any other online 
venture. Not one of these reviews has asked for any change in the 
Orbitz business model. Moreover, each review has noted the pro-
competitive impact that Orbitz brings to travel consumers. The 
Department of Transportation report released last month found Orbitz 
implementation has been consistent with plans and that current evidence 
shows that no Orbitz charter associate airline has provided exclusive 
fares to Orbitz. The Department of Justice review has been ``open'' for 
more than two years. We are confident if there were any problems with 
Orbitz structure or joint ownership, the DOJ would have acted. Despite 
the results of the investigations, the chorus of Orbitz detractors 
continues the ``Most Favored Nation (MFN) Indignation'' refrain. Simply 
put, the MFN is a necessary part of the Orbitz business model that 
benefits consumers. James DeLong, senior fellow with the Competitive 
Enterprise Institute's Project on Technology and Innovation, noted in a 
paper prepared for the CATO Institute, that:
        ``if good information [regarding airfares] is to exist, each 
        participant must bind itself to provide Orbitz with its lowest 
        fare. That is why the Orbitz charter contains, and must 
        contain, a [MFN] clause whereby each participant makes 
        available to Orbitz all fares that are made to the general 
        public.'' 1
---------------------------------------------------------------------------
    \1\ James V. DeLong,, ``Online Travel Services: The Antitrust 
Assault on Orbitz--and on Consumers, CATO Policy Analysis, June 6, 2002 
at p.10. The full paper is attached to this testimony as Appendix A.
---------------------------------------------------------------------------
    Despite this logic and without regard to the fact that Orbitz 
charter is consistent with the DOJ collaboration 
guidelines,2 some of Orbitz's protectionist competitors 
continue to insist that the DOT and DOJ pursue investigations without 
demonstrating in any way that competition would be hindered or that 
consumers would not benefit. Indeed, these same competitors continue to 
complain about their lack of access to special deals and fares while 
making public announcements about airline fare deals they havle 
negotiated, including deals for web-only fares, and specially 
negotiated fares that give those two sites exclusive fares that Orbitz 
does not have.
---------------------------------------------------------------------------
    \2\ Department of Justice, ``Antitrust Guidelines for 
Collaborations Among Competitors.'' April, 2000.
---------------------------------------------------------------------------
            state of competition in the online travel space
    Despite the wild claims that Orbitz means the end of all other 
online travel services, the industry is healthy and competition alive 
and well. The travel market is $140 billion annually. Online travel 
bookings are on the rise. Online bookings comprise 13% of total 
bookings. Forrester Research estimates that online travel spending will 
grow to $60 billion in 2006. Currently, there are over 25 independent 
online travel sites vying for consumer dollars and eyeballs.
    It is difficult to overestimate the challenges facing the travel 
market. Forrester estimates that 60% of consumers have no loyalty to 
any one travel site and often choose among several. Clearly it's a case 
of ``what have you done for me lately?'' This fact means that the 
online travel space can, and does, support multiple competitors with 
varying business models and value propositions. Indeed, Neilsen/Net 
Ratings noted that the consumer's ability to easily comparison shop for 
fares means that there can be several tiers of contenders.
    Turning to the stories of these ``contenders,'' you can see the 
promise of the online travel market for producing consumer value. 
SideStep.com, a Santa Clara, California company has produced a web 
application that is devoid of graphics and rich content. The premise is 
that SideStep.com can deliver a consumer a list of fares faster than 
Orbitz or the individual airline web site. Consumers with dial-up 
Internet access would be particularly well served by this approach. 
SideStep.com was launched in 2000 and produced a profit in April of 
2002. Following the natural evolution of e-commerce, Qixo, a San 
Francisco company, has developed an application that searches across 
numerous sites including online travel, carrier and specialty sites. 
This application takes advantage of the fact that the carriers time to 
send the data to sites like Orbitz from their servers. This data can be 
mined before it can be posted to Orbitz. The goal is to find the 
cheapest fare no matter where it may be hiding. Finally, AgentWare, 
based in Atlanta, provides travel agents with all fares from online and 
offline sties. AgentWare is a $40 per month alternative to Sabre. At a 
recent meeting of the National Commission to Ensure Consumer 
Information and Choice in the Airline Industry in San Francisco, 
Commissioner Patrick Murphy stated that government intervention, in the 
face of technological innovation, is ``very challenging indeed.'' 
Without question, this level of innovation and competition has produced 
manifold benefits for consumers.
            the consumer's endgame: efficient intermediation
    The Orbitz machinations are part of a larger issue. This is what is 
to become of intermediaries or ``middlemen'' who provide little or no 
added value. The Progressive Policy Institute (PPI) has studied this 
issue and published the seminal paper in this field.'' 3 In 
the paper, PPI estimates that American consumers pay a minimum of $15 
billion more annually for goods and services as a result of such e-
commerce protectionism by middlemen. The CRS's and many of the ``brick 
and mortar'' travel agents fall squarely into this category. Rather 
than adapting to a changing marketplace, they have mounted a campaign 
to stifle the growth of online travel services.
---------------------------------------------------------------------------
    \3\ Robert D. Atkinson, ``Revenge of the Disintermediated: How the 
Middleman is Fighting E-Commerce and Hurting Consumers.,'' Progressive 
Policy Institute Policy Paper, January 2001. This paper is attached to 
this testimony as Appendix B.
---------------------------------------------------------------------------
    Without a doubt, traditional travel agents have provided consumers 
value by serving as a buffer between them and the airlines. However, as 
more and more consumers book their travel through online travel sites 
and directly through the carriers' sites, travel agents fear the 
elimination of their business model. For online buyers, it's not just 
about saving a few dollars per ticket. It's more about the control, 
information, and convenience consumers get by online searches for 
schedules, routes, and fares, then buying an e-ticket--in the middle of 
the night, when all the travel agents are asleep.
    Technology has repeatedly enabled new information distribution that 
takes market power away from existing middlemen. (e.g., real estate, 
books, stock brokers, and car dealers).
    ``Survival of the fittest'' favors those travel agents who find 
ways to charge consumers for the value they provide in counseling 
consumers and booking their travel. And many travel agents are learning 
how to survive--even thrive. In 2001, travel agents accounted for $63 
billion in sales an increase of 40%. These travel agents account for 
nearly 70% of all airfares, as compared to 2% for Orbitz. This does not 
take into account the fact that traditional travel agents still process 
90% of cruises and 95% of tours. The American Society of Travel Agents 
has acknowledged that while consolidation has taken place, the total 
amount of business remains constant. Arguments of mass unemployment are 
specious indeed.
    More important than the absence of erosion, travel agents who do 
embrace technological change can still add value to a consumers travel 
experience. For example, in areas underserved by the Internet, these 
agents could offer to search fares, research and build customized 
vacation packages, add some mark-up and hire a delivery person to bring 
a person their e-ticket print out (while including brochures on 
activities to do while on the trip). The possibilities are endless.
    Traditional travel agents make baseless claims that the online 
distribution models are ``anti-consumer'' because they take away 
``truly independent choice.'' This completely misses the point. The 
fact of the matter is that airlines pay between $22 and $32 per ticket 
in distribution fees to travel agents. In 2001, this totaled $380 
million. This cost is passed through to consumers. Online distribution 
models can cut this cost to $6-$8 per ticket. A simple equation 
follows: A cheaper distribution model equals a cheaper ticket. The 
disruption of costly and inefficient distribution channels is part of 
the ``creative destruction'' process of technology-driven innovation 
and must be acknowledged. It is now being applied to the travel space. 
Traditional travel agents who do not incorporate Internet distribution 
models risk being held hostage by the CRS. The CRS distribution model 
supported biased display and kept information away consumer. In fact, a 
Consumer Federation of America paper from 1999 complained that: 
``Traffic is diverted to the dominant incumbents through a number of 
marketing mechanisms that extends market power over travelers: . . . 
deals with travel agents to divert traffic, . . . and manipulation of 
computerized reservation systems.'' 4 This era is over. It 
is irrefutable that consumers enjoy the control, information and 
convenience achieved through booking online. Travel agents should shed 
the CRS shackle or they will sit idly by while consumers move further 
and further toward the near perfect choice model provided by the 
Internet.
---------------------------------------------------------------------------
    \4\ Freeing Public Policy from the Deregulation Debate: The Airline 
Industry Comes of Age (and should be held accountable for its 
anticompetitive behavior), at p.7. Http://www.consumerfed.org/
abaair1.pdf.
---------------------------------------------------------------------------
                               conclusion
    ACT vigorously supports any competitor that invests in information 
technology to serve consumers better, faster, and cheaper. ACT is just 
as vigorous in opposing the use of government regulation to prohibit 
competition on the merits of investment and innovation. As you 
contemplate the issue of Internet-based distribution, I urge you to 
focus on promoting robust competition and meeting the needs of 
consumers, not the protection of business models that are threatened by 
new technology and changing consumer preferences.

    Mr. Stearns. I thank the gentleman.
    Dr. Cooper, welcome.

                   STATEMENT OF MARK N. COOPER

    Mr. Cooper. Thank you, Mr. Chairman. In my testimony, I 
describe two clear examples of what we consider to be 
restraints on trade in cyberspace. One deals with the sale of 
cheap seats on airlines, and the other with expensive products, 
new automobiles.
    Now, I choose these two examples from the ends of the 
spectrum of what can be sold in cyberspace to underscore an 
important point, and one that is the theme of this hearing. 
Anti-competitive practices from the old economy can rob 
consumers of the benefits of the Internet, just as surely as 
closed platforms and incompatible operating systems, and 
balkanized applications that we so frequently hear about.
    We believe that Orbitz reduces the supply of cheap seats to 
independent merchants, a good word. It imposes and facilitates 
uniformity and diminishes the tendency to undercut price 
leadership, which is so clear in this oligopolistic industry.
    There is a reason for that the cyber auction has become 
sort of the essential symbol of the Internet. The essence of 
the pro-competitive, consumer friendly, Internet is the ability 
to conduct many to many transactions. Many people interacting 
with many suppliers increases efficiency, and drives prices 
down.
    When the five largest suppliers jointly commit to 
guaranteeing the lowest price on their website and nowhere 
else, they interdict that many-to-many characteristic. They 
drive the Internet back toward the few-to-many, which is the 
old economy model.
    Two years ago, at an FTC roundtable, we identified a series 
of characteristics that we said should sound the alarm about 
potential anti-competitive effects. Orbitz trips every one of 
those wires. It has a large market share, 80 percent of the 
main suppliers; direct ownership, restriction on supply; 
coercive participation rules, and clear information exchange 
that creates uniformity.
    These are characteristics that frustrate the Internet's 
ability, and I might briefly mention the other industry to Mr. 
Boucher, who said that there ought to be a law. As we pointed 
out in our testimony, it is illegal to sell cars directly to 
the public in virtually every State in this country, including 
Virginia.
    It is illegal to sell comparison shopping even in some 
States, but that is considered a dealer function. It is illegal 
for auto manufacturers to use website hits to direct customers 
to their best dealers.
    So unfortunately we have laws. We have State laws that are 
frustrating the benefits that the consumer could get from the 
Internet. The Internet is a revolutionary means of 
communications in commerce that can direct dramatically and 
directly enhance consumer soverignity and empower citizens, but 
only if public policy keeps it open.
    A decade-and-a-half of our experience in the Internet and 
hi-tech software industries leads us to believe that the 
consumer and the economy are best served by open standards and 
unfettered commerce.
    These afford consumers maximum choice and citizens maximum 
voice. They stimulate audacious competition, and encourage use 
and expression, and promote unfettered innovation.
    The Internet is a disruptive technology and entrenched 
interests will seek to preserve their market niches and market 
power, no matter how high the cost to consumers. The most 
important antitrust case of the Internet century has its 
origins in the observation of a CEO that the Internet 
threatened to commoditize his product, the PC operating system.
    Commoditization is the consumer's best friend, and 
empowerment with information and the ability to execute 
transactions directly turns products into commodities. 
Producers will resist by fair means or foul. I applaud you for 
holding these hearings that highlight this important aspect of 
the Internet that is so frequently overlooked here in 
Washington. Thank you.
    [The prepared statement of Mark N. Cooper follows:]
Prepared Statement of Mark Cooper on Behalf of The Consumer Federation 
                               Of America
    Mr. Chairman and Members of the Committee, ny name is Dr. Mark 
Cooper. I am Director of Research of the Consumer Federation of 
America. The Consumer Federation of America (CFA) is the nation's 
largest consumer advocacy group, composed of two hundred and eighty 
state and local affiliates representing consumer, senior, citizen, low-
income, labor, farm, public power and cooperative organizations, with 
more than fifty million individual members. CFA is online at www.
consumerfed.org.
    I appreciate the opportunity to appear before you today to share 
our thoughts on the potential anticompetitive effects of joint ventures 
and other producer restraints on trade on the Internet. The Consumer 
Federation of America, founded over 30 years ago, was one of the first 
consumer groups to become involved in public policy affecting high-
tech, consumer-oriented industries.
    The Internet is a revolutionary means of communications and 
commerce that can dramatically enhance consumer sovereignty and empower 
citizens, but only if public policy keeps it open. A decade and a-half 
of experience in Internet and software industry policy reaffirms our 
belief that consumers and the economy are best served by open standards 
and networks. These afford the consumer maximum choice and the citizen 
maximum voice, stimulate audacious competition, encourage use and 
expression, and promote unfettered innovation by both consumers and 
producers.
           a technical and consumer policy map of cyberspace
    I believe that the Internet can best be understood by seeing it as 
a communications platform consisting of four layers--the physical 
layer, the logic layer, the applications layer and the content layer. 
It is a platform because the layers are strong complements; they need 
to be tightly integrated and coordinated. In each layer there are 
``digital economy'' issues that stem from its unique characteristics.
    We hear a great deal about the physical layer, which is the medium 
over which Internet messages are transmitted. In this layer the primary 
concern is with owners of facilities--like cable operators and 
telephone companies--who refuse to allow service to have 
nondiscriminatory access to their telecommunications networks.
    We hear a great deal about the logic layer, which is where code and 
protocols allow communications equipment, computers and display devices 
to interconnect and interoperate. In this layer the concern is with 
dominant software firms--like Microsoft--who can undermine the 
compatibility of competing code and lock out competition.
    We hear a lot about the applications layer, where programs execute 
a sequence of steps to solve a problem or perform a task for the user. 
Here the concern is with applications--like instant messaging or 
identity verification--that refuse to interoperate, undermining 
universal availability and creating walls in cyberspace.
    The issue before the Committee today deals with the content layer--
the specific products or services delivered through the platform--but 
it is not the usual content debate we hear about. We frequently hear 
about this layer as a debate over digital content--digital rights 
management demands by content owners, on one side, who treat all 
consumers as thieves and want to hardwire antitheft devices into the 
fabric of cyberspace, and consumers on the other side, who demand fair 
use rights to enjoy the content they purchase when, where and how they 
desire.
    The issue the Committee raises today is different.
             old economy problems migrating into cyberspace
    This hearing highlights a very familiar old economy problem with 
very real implications for the new economy of the Internet. Traditional 
commercial restraints on trade can rob consumers of the benefits of the 
Internet, just as surely as do closed proprietary networks, 
incompatible operating systems, or balkanized applications. Classic 
restraints on trade, unilateral or collusive, can limit the 
availability of products, restrain price competition, or negate the 
beneficial effects of the Internet in enhancing consumer search.
    The ability to gather and process information that is greatly 
facilitated by the Internet is a two edged sword. It can strengthen the 
ability of producers to control and manipulate the markets, just as 
easily as it can enhance the ability of consumers to shop and open 
distribution channels that increase competition.
    This hearing makes it clear that we must be vigilant to prevent 
plain old dirty business practices from migrating into cyberspace, if 
we are to preserve the procompetitive, consumer-friendly promise of the 
Internet. To demonstrate how important this view of the content layer 
is, I will make the point with reference to two very different 
examples. The first involves highly perishable, low costs services--
cheap seats on airplanes. The second involves very durable, expensive 
products--new automobiles.
                              cheap seats
    A couple of years ago, the airlines showed a willingness to make 
low value, high margin seats available to online discounters. These are 
low value seats in the sense that they involve unsold seats close to 
the time of departure. They are like overripe fruit on the grocery 
shelf that cannot be sold at full price. Since the incremental cost of 
that unsold seat is virtually zero, any incremental revenue is pure 
profit.
    Acting independently, the airlines cannot resist making them 
available at a low, ``name your own price'' level. The information 
exchange about these tickets in a cyber auction increases the 
likelihood of their being sold and allows supply to meet demand in a 
more efficient manner. Only the Internet (or an equally ubiquitous. 
accessible information environment) could bring this immense real time 
market into existence on a massive scale for consumers to directly 
choose what to buy in the way of discount tickets.
    The side effects were not to the liking of the airlines 
collectively, however. As long as William Shatner was able to make 
people think they could name their own price, he was creating price 
resistance on the demand-side. As long as these tickets pop up in the 
chaos of this new cyberspace type of auction, he creates uncertainty on 
the supply-side. It is more difficult for airlines to know how many 
seats are being offered at what prices with this sort of arrangement. 
It is easy to make secret deals with the discounters to fill your 
planes at the expense of rivals. In an oligopolistic industry that has 
developed the most precise mechanisms of price discrimination in memory 
and an intricate systems of fortress hubs to exercise market power over 
increasingly captive traffic, this web-based discounting sound 
suspiciously like competition.
    The response by the industry as a whole is to try to control this 
unruly behavior. By organizing their own online broker over which they 
have greater control, they may still sell many of the seats, but 
eliminate the price disciplining effect of unaffiliated discounters. At 
a minimum, they could reduce the supply of discount seats the 
discounter can offer. Diminishing their ability to make the ``name your 
own price'' promise, or even the lowest price available claim, will 
eventually degrade their ability to discipline price.
    Depending on how they organize the site, the airlines can guarantee 
a reduction in supply of discounted seats by requiring members to make 
seats available. Airlines may have better information about the 
availability and price of seats when they control their own site.
    They may also have rules--formal, or more likely informal--about 
making seats available on multiple sites.
    I use the ``name your own price'' model as an example, because it 
exploits the information environment most intensively and has the 
cheapest seats. Orbitz may not be directly targeted at it, but it is 
certainly targeted at the next tier of cheap seats that are offered by 
Travelocity, Expedia and travel agents and it certainly has an effect 
on all discounters.
    Obviously, we are skeptical of the proconsumer intent and impact of 
this sort of coordinated industry activity, especially when an 
independent undertaking came first. In more general terms, these types 
of producer joint ventures raise the fundamental problems of horizontal 
concentration and vertical integration disguised as consumer friendly 
e-commerce applications.

 Every time firms that are supposed to compete in the 
        marketplaces have a meeting in cyberspace or physical space, it 
        enhances the chances of collusion.
 Every time firms exchange information about input prices or 
        the price and quality mix of their product line, they can 
        increase the likelihood of anticompetitive parallelism.
 Every time they create ventures that diminish the availability 
        of inputs, they may raise barriers to entry for potential 
        competitors and raise the costs of the actual rivals.
 Every time they create ventures that coordinate their sales to 
        the public, they reduce the likelihood that independent action 
        will lower prices.
    In other words, the efficiency that these ventures promise by 
lowering input costs is only in the public interest if it does not have 
any of these anticompetitive side effects. Of course, the industry 
insists this is not the purpose, nor would it engage in such activity, 
but it is the job of the antitrust and consumer protection agencies to 
prevent the anticompetitive outcomes. The problem could be massive in 
cyberspace and the ability of enforcement authorities to detect and 
prevent it is limited. As the chances of being caught are diminished, 
the likelihood of the violation increases.
    One possibility is to have a huge increase in the funding for the 
regulatory agencies charged with policing this type of potentially 
anticompetitive activity. There is little chance that will happen. In 
the alternative, we need clear measures to prevent anticompetitive 
arrangements before they are executed. An ounce of prevention is worth 
a pound of cure. The antitrust authorities are familiar with such 
mechanisms. A rule of reason should apply with heightened scrutiny and 
consent decrees that ban specific practices.
    Market Share thresholds: Arrangements that account for a 
significant share of the suppliers in a market should be subject to 
specific investigation.
    Ownership Matters: Profit sharing between firms should be 
discouraged, since this diminishes the incentive to compete. Firms 
should not generally appear on both sides of a transaction, since this 
aids in the manipulation of the availability of a product or its price.
    Restriction of supply: Restriction of supply either by requiring 
certain quantities to be offered or preventing participants from 
selling outside of the arrangement at attractive prices may restrict 
supply to the market and have the effect of undermining rivals or 
reducing competition for consumers. Such arrangements should not be 
allowed.
    Participation Rules: If the ventures that invite the public to 
participate as buyers or sellers, then rules about who can make product 
available to or purchase product from the venture should not be unduly 
discriminatory or exclusionary.
    Information exchange: Joint venture participants should not gain 
access to information on competitors' costs (of inputs) or quantities 
and prices of output sold through the venture. This requires anonymous 
transactions executed by a site administrator.
    Oversight of informal behavior and compliance with conditions: 
Joint venture operations provide significant opportunity for exchange 
of competitively sensitive information in informal ways. These joint 
ventures should be required to have an Ombudsman to be present at all 
official functions and to monitor operations. A finding by the 
Ombudsman that anticompetitive activity has occurred should become a 
rebuttable presumption of a violation of the antitrust law.
                           expensive products
    At the start of what has been called the ``Internet Century,'' 
there can be no better symbol of the transformation of the economy than 
a battle over automobile sales on the Internet. The automobile is not 
only the quintessential symbol of the industrial economy of the 
twentieth century; it is also the second largest expense on a consumer 
durable that most households make. Moreover, the distribution network 
that typifies the industry has important and unique elements that make 
it a potentially intense battleground when the new economy meets the 
old. The automobile is an expensive, long-lived commodity that requires 
post-purchase maintenance. Historically, this created a unique 
relationship between the dealer and the consumer. The dealerships have 
traditionally involved substantial investment. Automobile dealers are 
the quintessential old economy middlemen.
    Some believed that these unique characteristics would prevent or 
slow Internet-based transactions from penetrating the distribution 
chain. The automobile was believed to be a type of commodity that is 
not well suited to Internet sales. Cars were not considered a good 
candidate because consumers needed to ``kick the tires'' before buying 
a car.
    In fact it was not consumers who resisted the Internet when it 
comes to new auto sales. Consumers are perfectly willing to turn to the 
Internet for information about autos and tell the salesman exactly what 
they want based on online research. They would probably buy direct over 
the Internet, without going to a show room in many cases, if they 
could. Unfortunately, they have not been able to test this distribution 
chain because state laws protecting dealers will not let them. Direct 
sales over the Internet are illegal in virtually all states.
    The cost of distribution of new automobiles approaches $100 billion 
per year. The distribution chain is ripe with inefficiencies and local 
monopolies that are perpetuated by state laws. Instead of the build-to-
inventory system of the 20th century, which causes new cars to sit on 
lots for two or three months, a 21st century build-to-order system 
could get exactly the car the consumer wants into his or her driveway 
in two or three weeks. The savings for consumers and the economy would 
be immense. But this would dramatically reduce the role of the dealers 
as middlemen. The acres and acres of inventory by which they defined 
their very being would be irrelevant and uneconomic.
    As the capability to deliver information expands and access to 
multimedia, interactive information applications improves, an 
environment in which producers and consumers can interact directly for 
automobiles could be created, just as it was for the ``name your own 
price tickets.'' These changes would result in more effective shopping 
by consumers, better targeting of marketing efforts, personalized 
design of products, and reduced inventory/holding times for the 
delivery of goods.

 Higher and higher quality visual and video images that can be 
        tailored and modified during the transaction, promise a quantum 
        leap in the quality of marketing and consumer information 
        gathering.
 Increasing integration of production with consumer preferences 
        identified through on-line transactions can both dramatically 
        reduce marketing and inventory costs and increase customer 
        satisfaction.
 Personalized selling and flexible production can combine with 
        interactive scheduling to reduce the amount of time that goods 
        must be held in storage or spend in transit, sharply reducing 
        delivered costs on big ticket items like automobiles.
    To achieve these potential gains, however, major institutional 
changes must come about. Not only is it illegal to sell a car on the 
Internet, it is even illegal for manufacturers to distribute the hits 
on their home pages to the best dealers in the consumers' area. In some 
states it is illegal to sell comparison-shopping information to the 
public. These anticompetitive barriers to use of the Internet may be 
costing consumers $20 to $40 billion in the cost of new autos. 
Moreover, once the sale of autos is pulled out of the showroom and put 
into the competitive context of the Internet, financing, warranty work, 
and after market services would become much more competitive, 
potentially saving consumers tens of billions of dollars more.
    Congress was quick to prevent the states from taxing the Internet, 
but much more harm is being done to consumers by these anticompetitive 
statutes that prevent them from utilizing the Internet for full effect. 
Congress needs to require states to allow the direct sale of cars over 
the Internet.
                               conclusion
    These two examples from the opposite ends of the spectrum of 
consumer goods and services that could be sold over the Internet remind 
us how vigilant we must be if we are to ensure that the Internet 
continues to operate in a procompetitive, consumer-friendly fashion. 
The Internet is a disruptive technology and entrenched interests will 
seek to preserve their market niches and market power, no matter how 
high a cost that imposes on the public. I applaud you for holding these 
hearings that highlight this important but overlooked aspect of public 
policy for the Internet.

    Mr. Stearns. I thank the gentleman.
    Mr. Ruden.

                   STATEMENT OF PAUL M. RUDEN

    Mr. Ruden. Thank you, Mr. Chairman. The short answer to the 
question posed in the title of this hearing is no. E-commerce 
in fact in travel is in grave danger of being dominated by the 
joint market power of the largest airlines.
    Perhaps uniquely the Internet has penetrated and influences 
the travel market place more than any other line of commerce. 
The potentials of this technology has been actively exploited 
by several non-airline entities, the most prominent of which 
are Travelocity and Expedia, but there are many others.
    These firms are examples of the much maligned middleman, a 
firm that operates between the producer and the end-consumer, 
living off the value delivered to both the ultimate seller and 
the ultimate user of the product or service.
    Many smaller firms have also entered the Internet space, 
using it to transmit information and to communicate with 
consumers. The variety of approaches by retailers to the use of 
the Internet is imposing. The latest buzz word is convergence, 
signifying the merging of Internet and traditional business 
methods by parties at all points along the spectrum between 
what were once seen as pure Internet firms, and pure brick and 
mortar business models.
    We refer to the middleman as much maligned because it is an 
article of faith among Internet proponents that the technology 
as Dr. Cooper said is disruptive, a disruptive force that 
eliminates what are described as wasteful middlemen by enabling 
more efficient transactions directly between producers and 
consumers.
    The premise is that e-commerce meets all relevant consumer 
needs for access to information, and enables consumers to make 
decisions and act on them without assistance from anyone.
    While there is no doubt that technology works fine for many 
consumers, the inference that it can meet all needs simply is 
not supported by the available facts. The truth is that for 
most consumers most of the time direct contact with a human 
being, with knowledge and expertise in travel, remains 
essential.
    The consumer either lacks the credit or the information, or 
the wherewithal, or the comfort, to do his business on the 
Internet. You have heard about Orbitz, and I am not going to go 
on at great length about Orbitz.
    They claim to have the greatest array of low fares 
available anywhere. They can make that claim because of 
preferential arrangements with the five largest airlines in the 
world, and 38 other airlines that give them preferential access 
to fares that other competitors on-line and off-line do not 
receive.
    When Orbitz testified before a Congressional committee not 
long ago, they described themselves as just another startup 
travel agency. That, of course, was just testimonial snake oil. 
In reality, Orbitz was given a promotion budget unmatched in 
the history of retailing.
    The Orbitz campaign reinforced in the minds of many 
consumers the concept that the Internet always delivers lower 
prices. Yet, virtually everyone who has tested Orbitz's actual 
performance in a systematic way, including Consumer Report's 
travel letter, has found that a substantial part of the time 
the on-line agencies produce better prices.
    And the so-called traditional agents are still out there, 
showing consumers how to get better value for their money 
through alternate routings and other tactics known only to the 
professionals, and overlooked entirely by consumers working on 
their own.
    Information and knowledge are very different concepts, and 
the information delivery potential of the Internet, while 
great, cannot replace the knowledge and experience of humans 
acquainted with the tricks and traps oft his complicated 
network.
    The airlines would have the consumer believe that the on-
line marketplace, through that marketplace, they mean to give 
consumers the lowest possible prices for air travel. Can that 
be so? Are the airlines, which constantly remind us of their 
slim to none profit margins over the years, and their 
staggering current losses, really in the business of selling 
their service for the lowest possible price. We think not.
    The goal and the strategy of the airlines on the Internet 
is to dominate that space to such an extent that the flow of 
information will essentially be in their control, rather than 
under the control of the independent firms, and in that way 
their yield management systems will cease to run interference 
from neutral third-party retailers, whose first priority must 
always be to serve their customers.
    Then the price discounts that Orbitz touts today will be 
entirely in the airlines' control, and largely non-existent. 
Orbitz's offer to be the next computer reservation system for 
travel agents, jointly owned and jointly managed by airlines, 
but uncontrolled by government regulation, is like a dinner 
invitation from Don Corleone, an offer everyone should refuse.
    The small travel agencies of this country, on whose 
services the airlines relied for decades, and upon whom the 
majority of air travelers still depend, are being crushed by 
the market power of the airlines. Orbitz is the fighting ship 
that they are using to lead that charge.
    The Federal Government, Mr. Chairman, bears a large part of 
the responsibility for the problem the agency industry now 
faces. Travel agents are still largely locked into long term 
contracts with severe penalties for failing to achieve book air 
segment thresholds.
    Their ability to efficiently adapt to Internet technology 
is impaired by those contracts, and those contracts are 
permitted by the CRS regulations last adopted in 1992, and 
scheduled for review 5 years thereafter.
    For 5 more years, the Department of Transportation has 
failed to address those regulations, leaving agents trapped 
between the CRS vendors and the airlines, the CRS's former and 
present owners, and the owners of Orbitz.
    In addition to the elimination of commissions, the launch 
of Orbitz, the withholding of Internet fares from CRS displays, 
there is now even talk of the shifting of segment booking fees 
to travel agents, as well as credit card merchant fees.
    The Internet could have and perhaps still can be a vibrant 
place in which all manner of travel commerce is conducted by 
firms large and small, as opposed to the path which the 
airlines have set out.
    But that result will not emerge by itself. The government 
is going to have to take some swift and strong action to stop 
the trend toward airline domination of this space. So the 
question then of whether airline ownership of all on-line 
travel sites is in the interest of consumers, ASTA says no, not 
when the airlines are permitted to collectively own and control 
sites, such as Orbitz.
    And do not be mislead by the effort Orbitz has put forth to 
have a public offering. If you read the public offering 
statement, it makes absolutely clear that the five airline 
owners intend to indefinitely maintain complete, 100 percent 
control of the management of Orbitz.
    We have no objection, no objection, to individual airlines 
operating independently of each other, and doing on their own 
websites what their marketing philosophies and attitudes 
warrant.
    Traditional travel agents and the new on-line agents, and 
all of the hybrids in between will find their way with 
consumers, in a marketplace where each firm is making 
independent decisions about how and where to sell its services.
    Orbitz is the antithesis of independent decisionmaking, and 
consumers, like travel agents, can expect no good to come of 
it. Thank you very much.
    [The prepared statement of Paul M. Ruden follows:]
Prepared Statement of Paul M. Ruden, Senior Vice President for Legal & 
       Industry Affairs, American Society of Travel Agents, Inc.
    The American Society of Travel Agents (``ASTA'') offers this 
testimony on the Subcommittee's deliberations on the question whether 
all supplier-owned online travel sites are good for the 
consumer.1
---------------------------------------------------------------------------
    \1\ The presenter, Paul M. Ruden, is a Commissioner on the National 
Commission to Ensure Consumer Information and Choice in the Airline 
Industry, created by HR 1000 in the 106th Congress. This testimony is 
presented in his capacity as a representative of the American Society 
of Travel Agents and not in his capacity as Commissioner. This 
testimony does not reflect any position of the Commission which is 
still holding public hearings and will file its report in November, 
2002.
---------------------------------------------------------------------------
    The short answer is ``no.'' ASTA believes that e-commerce in travel 
is in grave danger of being dominated by the joint market power of the 
largest airlines, with the result that the short term ``deals'' and so-
called unbiased information that are now promised to consumers will be 
replaced with higher prices and restricted or distorted information 
that will make it more difficult for consumers to make optimum 
purchases of travel either online and offline.
    Perhaps uniquely, the Internet has penetrated and influences the 
travel marketplace more than any other line of commerce. By expanding 
drastically and at low unit cost the ``reach'' of any information 
provider or seller, the Internet creates the potential for significant 
market expansion by many players of all sizes and configurations. By 
enabling consumers to cheaply and relatively quickly find and compare 
information, the Internet potentially increases the competitiveness of 
the marketplace along with possible stimulation of demand.
    The potential of this technology has been actively exploited by 
several non-airline entities, the most prominent of which are 
Travelocity and Expedia. These firms are examples of the much maligned 
``middleman,'' a firm that operates between the producer and the end-
consumer, living off the value delivered to both the ultimate seller 
and the ultimate user of the product or service.
    Many firms that did not have the investment capital available to 
the major name players have also entered the Internet space, using it 
to transmit information and to communicate with consumers. Typically 
these firms do not provide transaction capability on their Internet 
sites, but use them as advertisement, information and communication 
tools.
    The variety of approaches by retailers to the use of Internet 
technology is imposing and defies most attempts to categorize. The 
latest buzz word is ``convergence,'' signifying the merging of Internet 
and traditional business methods by parties at points all along the 
spectrum between what were once seen as ``pure Internet'' firms and 
``pure brick-and-mortar'' business models.
    We refer to the middleman as ``much maligned'' because it is an 
article of faith among Internet proponents that the technology is a 
``disruptive'' and ``disintermediating'' force that eliminates 
``wasteful'' middlemen by enabling more efficient communication and 
business transactions directly between producers and consumers. The 
premise of this view is that e-commerce meets all relevant consumer 
needs for access to information and enables consumers to make 
decisions, and act on them, without assistance from anyone.
    There can be no argument for that some consumers, some of the time, 
this is true. There is no denying the rapid growth of travel purchasing 
on the Internet. ASTA believes that virtually all of the growth in air 
travel sales by travel agencies nationwide is accounted for by sales on 
the Internet. Air travel sales by travel agencies, collectively 
considered, have been essentially flat for several years and no change 
in that pattern can be foreseen. To that extent, consumers are speaking 
with their hands, choosing the Internet to buy a substantial amount of 
air travel through direct access to the producer or through an online 
travel agency.2 Recent reports indicate that airline 
websites are now growing even more rapidly than the online agencies.
---------------------------------------------------------------------------
    \2\ A major qualification to that point is that travel agents have 
for some time been buying air travel on the Internet for their clients. 
We are aware of no reliable way to measure the extent to which Internet 
sales growth is a product of that shift of booking from traditional 
computer reservations systems by travel agents.
---------------------------------------------------------------------------
    The problem is that the foregoing facts lead many observers to 
conclude that the Internet is the complete answer to virtually all 
travel consumers' needs for convenient, low cost, trustworthy access to 
the national air transportation system. While there is no doubt that 
the technology works fine for many consumers, the inference that it can 
meet all needs simply is not supported by the available facts.
    The truth is that for most consumers, most of the time, direct 
contact with a human being with knowledge and expertise in travel 
remains essential. Many air travel transactions are simply too complex 
for a consumer to successfully negotiate them over the Internet. Some 
transactions that seem simple on their face have complex aspects in the 
fare conditions and in the existence of alternative purchasing choices 
that will not be known to the average buyer. Many consumers of air 
travel do not have practical access to the Internet, do not have credit 
cards that are essential to buying online, or simply lack the 
wherewithal or comfort level necessary to buy online successfully. 
These people either need or strongly desire to continue using 
traditional travel retailers for the purchase of air tickets and 
ancillary travel services.
    Normally, one might say this is a fine and proper division of 
supply and demand. The Internet, one might say, has simply added a new 
alternative for consumers and now each consumer can decide for himself 
which channel he wants to use.
    But that is not what is happening. In ASTA's view the e-commerce 
marketplace for travel services is being distorted and misused by 
airlines who seek collectively to dominate the Internet space, and 
indeed all distribution channels, while throwing roadblocks in the way 
of competitors, actual and potential, who would challenge their 
hegemony.3 The airlines have seen the power of retailers on 
the Internet, in contravention of the conventional wisdom, and now seek 
to lock them out of that competitive space with collective action that 
can only harm consumers in the long run.
---------------------------------------------------------------------------
    \3\ ASTA has detailed its views on this process in numerous fora, 
including testimony before the National Commission to Ensure Consumer 
Information and Choice in the Airline Industry. With the Subcommittee's 
approval, we will submit a copy of that document for the record in 
these hearings
---------------------------------------------------------------------------
    We speak, of course, of Orbitz, the joint airline-owned website, 
owned by five of the largest airlines in the world. Orbitz claims to 
display the largest array of the lowest fares available anywhere, a 
claim they make because of preferential arrangements with the five 
owners and thirty-eight other airlines that give Orbitz access to low 
Internet fares that are denied to other retailers through the computer 
reservation systems on which they are dependent for access to fare and 
schedule information. That dependency was fostered, indeed virtually 
insisted upon by the very airlines that now own and control Orbitz.
    When Orbitz first testified before a Congressional committee not 
too long ago, its president described it as Ajust another travel 
agency.'' But of course that humility was just testimonial snake oil.
    In reality Orbitz was given a promotion budget probably unmatched 
in the history of travel retailing. It managed to lose $153 million in 
its first year and a half of operations but rose in less time than that 
to a very close third in business volume behind the two larger and 
theretofore better known online agencies.
    The Orbitz campaign reinforced in the minds of many consumers the 
concept that the Internet always delivers lower prices. It also 
reinforced the idea that buying air travel is as simple as inputting a 
few simple pieces of information and getting a result that is always 
right, always the best price. Yet virtually everyone who has tested 
Orbitz' actual performance in a systematic way, including Consumer 
Reports Travel Letter, has found that a substantial part of the time, 
the online agencies produce better prices. In reality, no one firm has 
a monopoly, yet, on the distribution of low priced air travel. Indeed 
some firms, among them Southwest Airlines, have refused to allow Orbitz 
to publish or use their schedules. The Department of Transportation, 
while giving Orbitz pretty much everything it wants in every other way, 
has admonished Orbitz that it cannot claim to have all the lowest 
fares.
    And of course the so-called traditional travel agents are still out 
there, albeit in reduced numbers, showing consumers how to get better 
value for their money through alternative routings and other tactics 
known largely to the professionals and often overlooked by the consumer 
working on his own. Traditional travel agents often produce the lowest 
price for a consumer by applying knowledge of travel opportunities that 
consumers often never consider. Information and knowledge are two very 
different concepts and the information delivery potential of the 
Internet, while very great indeed, cannot replace the knowledge and 
experience of humans well acquainted with the rules, tricks and traps 
of our very complicated air travel network.
    The airlines would have the consumer believe that through the 
online marketplace they mean to give consumers the lowest possible 
prices for air travel. Can this be so? Are the airlines, which 
constantly remind this august body of their slim-to-none profit margins 
over the years and their staggering current losses, really in the 
business of selling their service for the lowest possible price? We 
think not.
    The goal of the airlines' strategy on the Internet is to dominate 
that space to such an extent that the flow of information will 
essentially be in their control rather than the control of independent 
firms. In this way their yield management systems will cease to run 
into interference from neutral third party retailers whose absolutely 
mandatory first priority must be to serve their customers. Then the 
price discounts that Orbitz touts will be entirely in the airlines' 
control and largely non-existent.
    Orbitz will tell you, of course, that it is actually the friend of 
travel agents and consumers. It will say that travel agents are free to 
book on Orbitz today and to charge a fee to their client for the 
service of finding them what Orbitz says is the lowest possible fare. 
And that statement would be true in one limited sense but false in most 
ways that matter. It is certainly the case that a travel agent can book 
on Orbitz, masquerading as his client. But the complete reality is that 
the agent then gives up management of the transaction thereafter, which 
is often one of the main reasons the client used the agent in the first 
place. To create a manageable record in his own back-office accounting 
system, all the data has to be reentered. Moreover, almost all travel 
agents have in their computer reservations systems contracts a clause 
specifying a minimum monthly air segment count that must be booked. 
Failure to achieve that booking level results in a financial penalty. 
Bookings on Orbitz do not count toward CRS segment count thresholds.
    Orbitz goes one better, however. It has now announced that it 
intends to become a CRS in its own right, offering its services to 
travel agencies in a more robust, but unspecified, manner, provided, of 
course, that it is freed of the DOT regulations that apply to the four 
existing CRS's. Thus, Orbitz, owned by five airlines, all former owners 
of CRS's and three of whom own another CRS now (Worldspan), portends a 
return to the times prior to 1984 when there were no CRS regulations. 
In that environment the airlines biased the CRS displays to benefit the 
owners and their co-host partners and otherwise distorted air 
transportation competition so badly that the Civil Aeronautics Board, 
in the final throes of deregulation, was forced to enact regulations.
    It is, we respectfully suggest, simply not plausible to believe 
that the joint operation of websites by the airlines are going to 
produce consumer benefits for the long run. The Orbitz offer to be the 
next CRS, jointly owned and managed by airlines but uncontrolled by 
government regulation, is, like a dinner invitation from Don Corleone, 
an offer everyone should decline.
    The small travel agencies of this country, on whose services the 
airlines relied for decades, and upon whom the majority of air 
travelers still depend, are being crushed by the market power of the 
big airlines. In the space of seven years those airlines have 
eliminated travel agent base commissions and are clearly committed to 
diverting as many of the agency customer base as possible to their 
websites. Orbitz is the fighting ship they are using to lead the 
charge. Keep in mind that, among its other blessings, Orbitz is favored 
by the 43 participating airlines with guaranteed compensation that 
insulated Orbitz from the final rounds of airline commission cuts faced 
by Orbitz' competitors.
    The federal government bears a large part of the responsibility for 
the problem that the travel agency industry now faces. Travel agents 
are largely still locked into long term contracts, with severe 
penalties for failing to achieve booked air segment thresholds. Their 
ability to efficiently adapt to Internet technology is impaired by 
those contracts that are permitted by the CRS regulations last adopted 
in 1992 and scheduled for review five years thereafter. For five more 
years the Department of Transportation has failed to address those 
regulations, leaving the agents trapped between the CRS vendors and the 
airlines (the CRS's former and/or present owners and the owners of 
Orbitz). In addition to the elimination of commissions, the launch of 
Orbitz, and the withholding of Internet fares from CRS displays agents 
need to conduct their businesses, there is now talk of the CRS's 
shifting segment booking fees to travel agents, as well as credit card 
merchant fees.
    The Internet could have, and still could be, a vibrant place in 
which all manner of travel commerce is conducted by firms large and 
small, as opposed to the path on which the airlines have set out, 
which, if not halted, will leave the Internet, and all other retail air 
travel distribution, dominated by a handful of powerful producers. But 
that result will not emerge by itself. The government is going to have 
to take some swift and strong action to stop the trend toward airline 
domination of this space.
    To the question, then, of whether all airline ownership of online 
travel sites is in the interest of consumers, ASTA says ``no, not when 
the airlines are permitted to collectively own and control such sites 
as Orbitz.'' We have no objection to airlines' operating their own 
sites as extensions of whatever marketing policies they individually 
develop. Traditional and online agencies will find their way with 
consumers in a marketplace in which each firm, including each airline 
firm, is making independent decisions about how and where to sell its 
services. Orbitz is the antithesis of independent decision making and 
consumers, like travel agents, can expect no good to come of it.
    There is another issue before the Subcommittee: the question is 
essentially whether the joint hotel website, now called Travelweb, is 
materially different than Orbitz in terms of issues raised for e-
commerce. As it functions today, travelweb.com appears to operate quite 
differently from Orbitz. We have very little hard information about the 
internal arrangements, but viewing the website, there is little 
similarity. The only function that seems to work simply gives the 
inquirer a list of hotel chains to whose individual websites the 
inquirer must go, one at a time, to seek rates and dates. The ``Click-
It'' function that claims to offer comparative prices for weekend stays 
does not seem to do anything. Hotels.com is a principal competitor of 
travelweb.com. We were unable to understand the manner in which this 
site displays properties and rates.
    But in neither case are we aware that there is a ``most favored 
nation'' clause that entitles the websites to all the rates that the 
hotels publish elsewhere. If such arrangements exist, we are entirely 
opposed to them. We are also concerned about any situation in which 
large competitors engage in cooperative marketing that includes price 
setting. While the neutral operation of a ``posting board'' for hotel 
rates from different properties is unobjectionable in general, it would 
be far better for e-commerce, indeed for all commerce, and consumers if 
the opportunities for abuse in these sites were eliminated by having 
them operated by independent third parties.
    ASTA appreciates the opportunity to have presented its views, and 
remains at the Subcommittee's disposal to assist in any way it can.

    Mr. Stearns. I thank the gentleman. I will start the 
questioning to the panel, and let me just say as an overview 
that as Mr. Boucher, from Virginia, mentioned that this is a 
broad understanding of what happens, and the implications for 
the consumers, and that our role in this Commerce, Trade, and 
Consumer Protection Subcommittee is to determine what nuances, 
what problems, would exist if five airlines, for example--you 
have United, American, Delta, Continental, and Northwestern--
who own an online site such as Orbitz.
    But then you have TravelWeb, which is Marriott, Hilton, 
Hyatt, Sheraton, and Holiday Inn. Now, they might have some 
holding company names, but those are the major chains. And when 
these five large companies get together and have a website, do 
they provide efficiency that benefits the consumer, or do they 
thwart competition, and that is what we are looking at in terms 
of this hearing, and trying to see whether this model is also 
applicable to other industries.
    But I would like to start with Mr. Gilliland. The 
Department of Transportation reported last month that they did 
an investigation, and they found no Orbitz charter airline has 
provided exclusive fares to Orbitz. Please comment.
    In other words, that report would collaborate what Orbitz 
is saying, which is that basically they are competitive, and 
they are providing a good service, and they are not doing 
anything wrong. So the Department of Transportation said that, 
and so the question would be to you to say why is the 
Department of Transportation wrong.
    Mr. Gilliland. Well, I think it comes back to the basic 
question of what we have been talking about here, which is this 
Orbitz MFN, or most favored nations, clause. And I might just 
describe that here briefly.
    There are two important components of that MFN. First, the 
third-party MFN, where every fare given to a third-party site, 
like Travelocity, by an airline must also be given to Orbitz.
    And then the airline website component of that MFN, where 
ever fare on the airlines' website must be given to Orbitz. 
Now, you must ask, okay, so what is the implication of that. 
Well, it is a serious deterrent to airlines offering price 
discounts to independent distributors like Travelocity.
    And so prior to Orbitz's launch, airlines could and did 
post exclusive fares on their own websites and occasionally 
gave those same web fares----
    Mr. Stearns. But, Mr. Gilliland, would not the Department 
of Transportation in their study take that into account and 
actually look at that? I mean, they understand the clause just 
as well as you do, and not as well as I do, but it would seem 
that they looked at it and found that there wasn't a problem.
    Mr. Gilliland. I would suggest that they give it further 
and deeper examination.
    Mr. Stearns. Okay. Mr. Wolff, you stated that this most 
favored nations clause, ``ensures that we are competitive with 
other independent travel websites.'' How is this intended to 
keep you competitive with others--you might explain that--with 
other independent travel sites.
    And do other independent websites have such agreements with 
the member companies of TravelWeb? For example, as I understand 
it, Hilton has their own site, and Marriott has their own site.
    And you have these other hotel companies having their own 
sites. So I could go to those websites, and for example, 
Marriott, and get a fare, or I could go to TravelWeb. So you 
might provide how that----
    Mr. Wolff. Okay. This is complex and I will try to be very 
careful in the answer. First of all----
    Mr. Stearns. Make it simple.
    Mr. Wolff. We all compete very fierciously, and we all have 
our own independent websites where we try to attract----
    Mr. Stearns. The obvious question for the consumers is that 
if Marriott has their own site, why do you have to have a site 
like TravelWeb, and it is just those five?
    Mr. Wolff. And on behalf of Marriott, we would like the 
consumer to go to Marriott.Com.
    Mr. Stearns. Okay.
    Mr. Wolff. However, what we have noticed is that there are 
consumers who would like to go to sites with multiple brands on 
it. That's why Travelocity, and that's why there are several 
sites--HRN, Hotels.com, et cetera.
    So we are creating a site with various hotels on it, 
TravelWeb. Now, is it a site that will have a lot of hotels? I 
was very interested in Gentlewoman DeGette's concern about 
competitors.
    Mr. Stearns. Frontier Airlines.
    Mr. Wolff. Frontier Airlines, and having run a sales 
marketing customer service for a small startup airline 
competing through the CRS's and everything, I am very sensitive 
to that issue.
    TravelWeb's position is that we are inviting all hotel 
companies to participate, and while we are founded by the 
TravelWeb members that you have mentioned, we are going to 
other hotel chains and independents, and encouraging them to 
participate in our website also, which will just be one 
additional manner in which a customer can get a fare.
    They can go to Marriott.com, and if they feel more 
comfortable going to a site with multiple brands, they can go 
to this site, and they can go to Travelocity, Hotels.com, a 
variety of sites.
    Mr. Stearns. Thank you. My time has expired. The ranking 
member, Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman. Let me begin 
with you, Mr. Ruden. In the early 1980's, the Department of 
Transportation wrote CRS rules, forcing the carriers to produce 
the same low fares to travel agents that gave to customers who 
called the airlines directly.
    I have heard that applying these rules to the on-line world 
is technically not feasible as a business model. Is this true, 
and should the rules be rewritten to apply to the on-line 
world, as well as the off-line world?
    Mr. Ruden. Well, Congressman, I don't think that the CRS 
regulations had anything to do with which prices airlines 
charge. The CRS regulations were a response to practices that 
the airlines jointly owned computer systems, an analogy 
somewhat to the current situation of an on-line market place 
where they jointly own Orbitz.
    Their jointly owned information distribution systems, which 
were placed in the hands of travel agents, had displays which 
were designed through bias and programming tricks to favor the 
owners of those systems and other companies which entered into 
partnerships with them.
    And the judgment of the government, which was in the throws 
of deregulation, of finishing the process of deregulation, and 
shifting the residual authority of CAB to DOT, and putting the 
CAB completely out of business at that moment in history, the 
problem was judged so severe for airline competition that the 
government was compelled to regulate those practices to 
eliminate the propensity of these airlines working together to 
bias the displays in favor of themselves and against their 
competition.
    And that is the fundamental principle to which those rules 
were directed, a lesson we are suggesting that we should keep 
in mind now that Orbitz has acknowledged publicly and in its 
filing with the Securities Exchange Commission, that it wants 
to be ultimately the fifth CRS, but without being subjected to 
those same regulations.
    There is nothing in the regulations that I am aware of that 
would inherently prevent their application to airline jointly 
owned on-line operations.
    Mr. Towns. Thank you very much. I guess a question to Mr. 
Zuck and Mr. Gilliland, this morning I decided to do a little 
on-line homework, and went to Orbitz and looked up what a 
flight would be from National Airport to LaGuardia, because I 
go home a couple of times a week, and sometimes three times.
    And I then went to Travelocity, and typed in the same 
details. Do you have any guesses to what I found? And being you 
can't guess, let me tell you. I found a flight on either U.S. 
Airways or Delta Shuttle, on Orbitz where it was $290. The same 
flight on Travelocity was $412.50. Could I get a response, Mr. 
Zuck, and Mr. Gilliland?
    Mr. Zuck. Sure, I will take first shot at that. I mean, 
obviously, speaking on behalf of the airlines is way above my 
pay grade, but it is amazing that some of the things that 
people are allowed to get away with saying up here.
    For example, one of the things that is going unsaid is that 
the airlines are in fact customers, too, to the CRS system that 
sell their tickets. They are in fact paying those----
    Mr. Stearns. Mr. Zuck, do you have your microphone on?
    Mr. Zuck. No. Now it is. Okay. Thanks. The airlines in fact 
pay companies like Travelocity's owner, Sabre, in order to sell 
tickets, and those rates, as Congressman Deal mentioned, have 
gone up, and up, and up. In fact, airlines are losing business, 
and losing money, and the CRS is making money, which might be 
some indication of why the CRSs have time to be here today.
    I don't know if that is an answer to that question which 
has been raised, but the bottom line is this. Orbitz put 
something in their contracts that said we are willing to 
discount the money you spend on us to book this travel in 
return for giving us these cheaper fares that obviously you 
make less money on.
    The ones that were previously offered on their on-line 
sites are ones that they have a lower profit margin on, and 
therefore don't want to spend the exorbitant booking fees that 
are being paid to CRS systems. These nonexclusive parts of the 
so-call MFN agreement is just an inventory availability 
agreement that is the result of discounts that Orbitz offers to 
suppliers on those booking fees.
    So they make it cheaper for airlines to sell their cheaper 
flights, and it is really that simple. What companies like 
Travelocity and Sabre, and other CRS systems would like you to 
propose is that they be granted access to those cheaper fares, 
while still charging the exorbitant booking fees that they 
charge for the more expensive fares.
    What is happening today in the market place is that we are 
seeing web fares beginning to appear on Expedia and on other 
on-line sites, and the reason or the way that is happening is 
probably through price negotiation, although while the Orbitz 
system is totally transparent, negotiations between airlines 
and Travelocity and Expedia remain confidential.
    So in fact some kind of competition is taking place, where 
before there was none, and I think you will start to see the 
same fares appear on both sites very shortly as the RS systems 
begin to give way on their monopolistic ways.
    Mr. Towns. Mr. Chairman, I know that my time has expired, 
but I sure would like to hear Mr. Gilliland's answer as well.
    Mr. Stearns. Mr. Gilliland.
    Mr. Gilliland. I appreciate that, Chairman Stearns. First 
of all, let me answer your question directly and then I will 
come to the points that were raised in the answer before me. On 
the question of these fares that you looked at, it is very 
likely that we simply at Travelocity didn't have access to the 
same fares that were being made available to Orbitz, and again 
this is my point earlier.
    If an airline puts a web fare on its own site, it is 
obligated to provide it to Orbitz. If it provides a special 
fare to Travelocity, it is obligated to provide it to Orbitz. 
And that is irrespective of any price competition that the 
other panelists talked about.
    We have gone into the airlines time and time again, and 
asked to get the same fares at reduced costs. We provide the 
booking fees at lower costs to those airlines. American Express 
mentioned last month that they have gone in and done the same 
thing, and in fact they said that we will offer up free 
distribution.
    We will pay all of those fees that you typically pay to the 
CRSs. And did they get access to the fares? No. So the question 
is whether is it a competitive marketplace or an anti-
competitive marketplace, and I think that this really gets back 
to the crux of the issue for us.
    We have competed at Travelocity in the past by getting the 
best fares that we could for consumers. We would get exclusive 
fare sales from those airlines, a very competitive market to 
get at those fares.
    If we enter into an agreement like that today, 
automatically those fares are given to Orbitz. So we have no 
leg up, and we have no competitive benefit, and there is no 
motivation for the airlines to do a deal with us. So we are 
left in a position where our sales force is busting its hump 
engaging with airlines trying to do those deals at lower 
distribution costs to those airlines.
    And when we get them done, the Maytag repair man in Chicago 
at the Orbitz headquarters gets those same fares. It doesn't 
seem like competition to me.
    Mr. Stearns. The gentleman's time has expired. The 
gentleman from Georgia, Mr. Deal.
    Mr. Deal. Thank you, Mr. Chairman. It seems rather 
inconsistent to me on the one hand that people are arguing that 
things are anti-competitive and the reason that they are anti-
competitive is because the cost to consumers is going down.
    That seems to be what competition is supposed to do, is to 
bring the costs down. The heart of this whole issue is as Mr. 
Zuck indicates, is the booking fees that are charged by the 
CRSs. Now, Travelocity is wholly owned by the largest CRS, 
Sabre.
    Seventy-five percent of Sabre's revenues come from booking 
fees. Booking fees are the third largest expense, that is, 
distribution costs, and booking fees is the largest part of 
booking costs or distribution costs.
    They are the third largest cost to airlines behind labor 
and fuel, and so we are talking about something here of 
protecting--if you want to talk about protecting the old 
mechanism, Dr. Cooper, it is designed to protect the old 
mechanism of preserving booking fees.
    What Orbitz has done is to say to these airlines that if 
you will enter into agreements with us, we will rebate up to a 
third of the booking costs as an incentive to do that, and they 
promised over a series of years to continue to lower the 
booking fees.
    Now, I can understand, Mr. Gilliland, why Travelocity, 
being owned by a CRS, doesn't like that. But you, your own 
company, has entered into agreements with Delta and other 
companies to do exactly that have you not?
    Mr. Gilliland. We have provided them with lower 
distribution costs in exchange for web fares, and in fact, we 
get dribs and drabs of web fares from those deals, and we do 
not get the contractual guarantees that are provided to Orbitz 
through this most favored nations clause.
    Mr. Deal. But you and Expedia have both entered into 
agreements for web fares from Delta if you would agree to cut 
some of your booking fee costs aren't you?
    Mr. Gilliland. And in fact we would like to see that same 
type of competition occur in the future. We enter into 
agreements with a single airline to distribute their fares at a 
low distribution cost.
    We don't enter into an agreement with five airlines all at 
once on the same exact economic deal, a price that has been set 
by the airline owners of Orbitz and Orbitz itself.
    Mr. Deal. And part of that is that your system has a built-
in bias if people will pay you for that bias, something that 
was alluded to by some of the others, and I believe you call it 
a preferred carrier.
    In other words, if you have a preferred carrier who pays 
you a fee to be a preferred carrier, when someone uses your 
website, you give them preference, in terms of the pull-up of 
that site, do you not?
    Mr. Gilliland. In fact, a consumer can make a choice to 
show a preferred airline, and a preferred airline display, or 
they can choose not to.
    Mr. Deal. And you get paid a fee if the airline will pay 
you to put a preferred status on your website?
    Mr. Gilliland. We have promotional deals with the airlines. 
That's competition in this marketplace.
    Mr. Deal. And that is what Orbitz doesn't have isn't it?
    Mr. Gilliland. Our site is not biased. Let me explain.
    Mr. Deal. Okay. Go ahead.
    Mr. Gilliland. Our site is not biased. If you look at our 
slight displays today, you will see that Travelocity has 
adopted the same display ordering as the Sabre CRSs, and the 
Sabre CRSs whose displays are governed by the CRS rules. Do we 
offer special promotional fares on some airlines? You bet we 
do.
    When we can get deals with those airlines, we offer special 
promotions, and we will sometimes send promotional e-mails to 
promote those deals. You will not, however, see inferior 
service presented before better service.
    Mr. Deal. Mr. Chairman, I am reclaiming my time. I think 
you have answered the question. Let me ask you this though. 
Isn't it true that you refused to enter into some of these 
agreements for cheaper fares because of your exclusive 
agreements?
    In fact, it was reported in May of this year in Aviation 
Daily that Travelocity and Expedia both turned down a special 
offer of an on-line fare from Northwest Airlines from the U.S. 
to Frankfurt, which they offered lower rates, and the reason 
that you turned it down was because it would interfere with an 
already exclusive agreement that you had with another airline; 
isn't that correct?
    Mr. Gilliland. We promote Northwest fares when we do 
promotional deals with Northwest.
    Mr. Deal. And that is assuming that they don't interfere 
with these preferred contracts that you already have with 
somebody else that you are already getting paid for?
    Mr. Gilliland. Sir, competition in this business--and in 
competition in many marketplaces, and supermarkets as an 
example--is to go out and get the best supplier deal that you 
can get one at a time, and that is what I am talking about 
here.
    We are going out one at a time and getting promotional 
deals and we are offering those deals in our supermarket. It 
sounds like commerce to me, and it sounds like e-commerce to 
me.
    Mr. Deal. And you pay those booking fees back to your 
parent company, Sabre; is that correct?
    Mr. Gilliland. No, we don't pay booking fees back to the 
parent company.
    Mr. Deal. You don't pay booking fees?
    Mr. Gilliland. That is incorrect. We don't have a booking 
fee relationship with our parent company.
    Mr. Deal. You do not have any booking fee arrangements? Are 
you saying that you are not charging any booking fees at all in 
your----
    Mr. Gilliland. We don't charge booking fees. We charge 
distribution fees to the airlines that we have relationships 
with. They are not booking fees.
    Mr. Deal. Well, it is the same thing, but just called by a 
different name isn't it?
    Mr. Gilliland. No.
    Mr. Deal. All right. Let me ask you this. If this 
arrangement that you accuse Orbitz of being involved in is so 
bad, can you explain to me why you are entering into an 
arrangement in Asia, and I believe it is called Zugi, along 
with 18 major airlines there in which you are the exclusive 
booking agency for them?
    Mr. Gilliland. Yes, I can explain that. We are a technology 
service provider to them, and we have licensed our technology, 
and those airlines are running that business, and we simply 
provide the technology, similar to the technology that Orbitz 
has contracted with a company named ITH to provide to them.
    Mr. Deal. So what you have done then in Asia is to 
duplicate what you are complaining about somebody else doing in 
the United States?
    Mr. Gilliland. No, and in fact it is very different. It is 
a technology services relationship.
    Mr. Deal. I see.
    Mr. Gilliland. And we perform technology services with many 
different companies on the Internet today, and as an example, 
Yahoo and AOL.
    Mr. Deal. And when you talk about wanting regulatory 
parity, are you asking this committee to recommend that we 
regulate the Internet in terms of online travel services?
    Mr. Gilliland. What I am simply suggesting is that we apply 
a very common sense approach to the Internet. If I go down to 
the corner drug store and get a prescription, and get drugs, I 
need a prescription. If I go to Drug Store.com, I need a 
prescription.
    And I am simply asking that we apply similar types of rules 
to the Internet, and it is not about new rules. It is simply 
about ensuring that there is effective competition, just as 
that same competition was affected by in the mid-1980's, and in 
1992 with the CRS rule.
    Mr. Deal. Mr. Chairman, I would ask--I realize my time is 
up, but I would ask for unanimous consent to include in the 
record a statement by Mr. Scott Yohe, the Senior Vice President 
of Government Affairs for Delta Airlines, which was his 
testimony on June 26 of this year before the National 
Commission to Ensure Consumer Information Choice of Airline 
Industry.
    Mr. Stearns. By unanimous consent, it is so ordered.
    [The statement follows:]
Prepared Statement of D. Scott Yohe, Senior Vice President--Government 
                     Affairs, Delta Air Lines, Inc.
    Members of the Commission: On behalf of Delta Air Lines, I would 
like to thank you all for the opportunity to provide testimony on the 
important issues being addressed by this Commission.
    I am Senior Vice President--Government Affairs for Delta Air Lines. 
I have worked for Delta for 24 years. During this period, I have seen a 
number of changes in the airline-travel agent relationship, 
particularly in recent years as the e-commerce revolution has 
transformed our industry.
    This Commission has been charged with considering two important 
questions: first, whether the financial condition of travel agents is 
declining, and if so, what effect that decline will have on consumers; 
and second, whether there are impediments to information regarding the 
services and products offered by the airline industry.
    Delta appreciates the opportunity to submit our views to the 
Commission. Ensuring that consumers have full and complete access to 
information about our services is a goal that benefits Delta and our 
customers, and travel agents remain an important part of Delta's 
distribution network.
    In answer to the first question the Commission has been charged 
with considering, Delta has always distributed its tickets in many 
different ways and it is critical to our success that we provide our 
tickets through each distribution channel that our customers want to 
use. Many customers prefer to use the services of traditional travel 
agencies, and therefore traditional travel agencies remain an important 
part of Delta's ticket distribution network. On the other band, the e-
commerce revolution has created new alternatives to traditional travel 
agencies that, in many cases, offer less expensive means to deliver 
airline services to the public--and many customers prefer the 
convenience and flexibility of these new low cost channels.
    These new online alternatives to the traditional travel agency have 
created both challenges and opportunities for traditional agents. Many 
travel agencies have successfully adapted to these changes, finding new 
ways to deliver added value either to their customers or to airlines, 
or both. These agencies will continue to thrive and to play a critical 
role in Delta's ticket distribution system. On the other band, some 
agencies have resisted change, and have failed to develop business 
models that deliver added value that consumers or airlines are willing 
to pay a premium for. Like any business that fails to adapt to change, 
such travel agencies are not likely to succeed.
    It is absolutely clear, however, that the e-commerce revolution 
that is driving these changes will benefit consumers. E-commerce is 
making it much easier than ever before for consumers to get information 
about Delta's services, and it is driving the price of airline ticket 
distribution down. These changes are forcing airlines and travel 
agencies alike to find new ways to deliver value to consumers at a 
lower and lower cost. Competition can be hard for competitors who fail 
to meet the competitive challenge, but competition is good for 
consumers. Any regulatory intervention that blocks these changes or 
restricts this competition will inevitably result in less choice and 
higher prices for consumers.
    The answer to the second question the Commission has been charged 
with considering is simple. The answer is ``No.'' There are no 
significant impediments to the dissemination of information about air 
travel products--to the contrary, the e-commerce revolution has made 
air travel information more available to consumers than ever before.
i. the domestic aviation industry is facing a financial crisis that is 
 forcing delta to find ways to cut costs and improve the efficiency of 
                             our operations
    Before I address in detail the specific questions the panel has 
been charged with considering, it is important to review the current 
financial conditions facing the airline industry. Even in the best of 
times, the economics of the airline industry are fragile--over the last 
fifty years, the industry's net profit margin has been one-half of one 
percent, compared to the average for all industries of approximately 
six percent. But today, our industry is facing one of the most serious 
economic crises in its history--largely as a result of the terrorist 
attacks of September 11 and their aftermath.
    Last year, U.S. airlines collectively lost $7.7 billion--despite 
the federal emergency package enacted by Congress to prevent an 
industry collapse in the immediate aftermath of the attacks. Delta 
alone reported a financial loss of $1 billion in 2001. The total aid 
package covered only a few short weeks of the tremendous losses that 
the airlines continue to sustain.
    In the first quarter of this year, industry losses have continued 
to climb by an additional $2.4 billion. The industry is carrying an on-
balance-sheet debt burden of nearly $110 billion, with debt-to-capital 
ratios more than double those of other industries. Early predictions of 
a return to profitability in 2003 now appear increasingly unlikely, 
with 2004 offering the first ray of hope. Industry revenues are down 20 
percent from where they were a year earlier--and that revenue shows 
little sign of returning any time soon.
    A major cause of this financial crisis is the huge cost of 
complying with the waves of new taxes, government mandates, and other 
new costs that have been imposed on air travel since September 11. For 
Delta alone, the annualized impact of these new costs includes:

 Post 9/11 passenger security taxes: $266 million.
 Increased terrorism insurance premiums, assuming FAA support 
        ends, and the airlines have to rely on the commercial market: 
        $250 million.
 Security-related revenue losses from postal service and cargo 
        restrictions, as well as unreimbursed security costs for 
        cockpit door fortifications, ramp security, checkpoint document 
        verification, screening of catering supplies and material, 
        airport space occupied by TSA, security equipment, personnel 
        training, and airline seating for Federal Air Marshals: $175 
        million.
 And revenue losses due to customers deterred from air travel 
        by the hassle factor: an estimated $600 million.
    Added together, these numbers would total approximately $1.3 
billion in pretax profit impact to Delta.
    With all of the ticket taxes and fees that apply to airline ticket 
purchases, airline tax rates are now among the highest federal 
consumption taxes on any industry. To put this in perspective, the 
consumption taxes on a $100 round-trip airline now exceed 44 percent. 
On a $200 ticket they are over 25 percent; and on a $300 ticket, over 
19 percent. Those figures exceed even the intentionally high federal 
tax rate of 18.2 percent on cigarettes--imposed, in part, to discourage 
consumption. Taxes on airline ticket purchases are nearly triple what 
they were in 1991.
    In addition to these increased costs, the current economic 
conditions have forced down average ticket prices. Today, Delta's 
average domestic round trip fare is $45 lower than it was during the 
same period last year. Delta effectively has no ability to pass these 
new costs on to consumers, which means these new costs have directly 
impacted Delta's bottom line.
    For all of these reasons, the current financial crisis has forced 
Delta to seek ways to cut costs in almost every aspect of our 
operations. We have undergone the agonizing process of reducing our 
workforce by approximately 13,000 positions. Industry wide, some 
100,000 airline employees have lost their jobs. Delta has cut its 
flight schedule back by approximately 15% from pre-September 11 levels, 
and many other U.S. carriers have similarly reduced their own networks. 
U.S. airlines parked or retired some 350 aircraft. Hundreds of aircraft 
orders have been canceled or reduced.
    The financial crisis is placing even greater pressure than ever on 
Delta to find ways to reduce cost and improve the efficiency of 
operations--including the costs of distributing tickets to our 
customers. Like any business, we must constantly find new and more 
efficient ways to deliver our products to our customers. But in the 
current context, this has become a matter of economic survival.
 ii. the information age has dramatically improved consumer access to 
               air travel information and consumer choice
    With that context as background, let me address the specific 
questions the Commission is considering, beginning with the question of 
consumer access to information.
    The e-commerce revolution has dramatically improved the access of 
every consumer to air travel information. Just a few years ago, 
consumers seeking airline fare and schedule information had little 
choice but to call individual airline reservations departments or to 
consult a travel agency that subscribed to one of the complex Global 
Distribution System (GDS) databases to obtain this information. Those 
two traditional options are still available to any consumer who chooses 
to use them, but they are no longer the only options available.
    Today, anyone with a connection to the Internet has direct access 
to every airline's schedule and published fares--information that is as 
sophisticated and complete as that delivered through the old GDS 
computer systems. Since almost any public library offers its patrons 
free Internet access, this wealth of travel information is available at 
little or no cost to any consumer who chooses to take advantage of it. 
Of course, many consumers have Internet access from their home or 
office, and many prefer the convenience and control that these new 
Internet tools make possible.
    Online travel information takes several different forms. For 
example, virtually every major airline has developed an Internet 
website through which it provides detailed information about its own 
services directly to consumers. On delta.com, for instance, with the 
click of a mouse, customers can search for Delta fare and schedule 
information, purchase tickets, make or change seat selections, check on 
the status of flights or airport wait times, check in for a flight and 
print a boarding pass, request notification of flight delays, request 
and receive e-mail notices of special promotions, manage their SkyMiles 
accounts, redeem miles for free tickets, and so on.
    In addition to airline websites like delta.com, several major 
online travel agencies operate websites that provide comprehensive 
travel information from a single online source. The largest of these 
are Travelocity, Expedia and Orbitz, each of which provides quick and 
easy access to schedule and fare information from as many as 450 
different airlines--enabling consumer searches for airline fare and 
schedule information, plus the ability to easily purchase airline 
tickets and a variety of other travel-related goods and services with 
the click of a mouse.
    But airline websites and the largest online travel agencies are 
only the beginning of the wealth of consumer information the Internet 
provides at virtually no cost to the public. The entire Official 
Airline Guide, for example, is available in searchable format for free 
on the Internet. Many traditional ``off-line'' travel agencies have 
also launched their own Internet web sites. A recent search for 
``airline ticket information'' on the Google Internet search engine 
returned some 290,000 websites offering air travel information to the 
public.
    Of course, not all consumers take advantage of the travel resources 
the Internet makes available. Some consumers prefer to deal directly 
with an airline reservations representative, because they are more 
comfortable talking to a live sales representative than interacting 
with the airline via online channels. Many other consumers prefer to 
use the services of a traditional travel agent for a variety of 
different reasons--for example, because they want to take advantage of 
their travel agent's special expertise and experience, or simply 
because they do not want to spend the time or effort doing their own 
travel research. Consumers who value the services of a travel agent 
remain free to hire a travel agent to provide these services, and there 
are tens of thousands of independent travel agents willing to compete 
to provide consumers with these services.
    In other words, there is no impediment to the dissemination of air 
travel information to consumers in the information age. To the 
contrary, the e-commerce revolution has made air travel information 
more available to consumers than ever before.
 iii. the e-commerce revolution has created new competitive pressures 
                         that benefit consumers
    As to the financial condition of traditional travel agents, it is 
clear that the e-commerce revolution is profoundly changing the airline 
ticket distribution system. It is creating new competitive alternatives 
to the expensive, legacy GDS ticket distribution systems and 
traditional travel agencies that rely upon these systems. Like any 
business in any competitive marketplace, traditional travel agencies 
must adapt to change and competition. But while competition can be 
difficult for competitors who fail to meet the challenge, competition 
is always good for consumers.
A. Traditional Offline Travel Agencies Are A Critical Part of Delta's 
        Distribution Network
    Professional travel agents remain important to Delta's success as 
an airline. Traditional offline travel agents currently sell 
approximately 47% of all tickets for travel on Delta, and they generate 
approximately 64% of the revenue from Delta ticket sales. In other 
words, travel agents sell a disproportionate percentage of Delta's 
higher value tickets. These sales are critical to Delta's success, and 
Delta has thousands of valued business relationships with travel 
agencies across the United States.
    For this reason, Delta continues to invest heavily in the sales 
efforts of traditional travel agencies. Claims by some that airlines 
like Delta now pay ``nothing'' for the distribution services of 
traditional travel agents are simply misrepresenting the facts. While 
it is true that Delta no longer pays a flat fixed ``base'' commission 
to every travel agent on every ticket sale, Delta still pays millions 
of dollars every year to subsidize airline ticket sales by traditional 
travel agencies.
    Most notably, nearly all traditional travel agencies rely upon the 
expensive legacy GDS booking systems to book tickets for their clients. 
These GDS systems charge Delta high booking fees for each travel agency 
booking--but they are typically cost-free to the travel agency that 
benefits from the use of the system. Delta's expenditures for GDS 
booking fees totaled over $350 million in 2001, and these booking fees 
have increased from 4-7% every year since 1999, despite the falling 
cost of information processing and computer systems.
    In addition, unlike most store front retailers in other industries, 
travel agents are not required to enter into merchant agreements with 
the major credit card vendors to sell airline tickets. Instead, they 
are authorized to accept credit card payments as an agent on behalf of 
the airline whose ticket they are selling. In this way, Delta 
subsidizes the operations of each agency in every credit card 
transaction, because credit card companies charge the merchant 
accepting these cards up to 3% of the charged amount as fees for the 
transaction. Delta spent approximately $190 million paying these credit 
card merchant fees on behalf of travel agents in 2001.
    Delta also enters into contracts with individual travel agencies to 
pay a sales commission--known as an ``Incentive commission''--designed 
to reward agents who meet sales goals for promoting Delta services. 
Incentive commissions reward those travel agencies who are most 
valuable to Delta's sales efforts. These contracts implement a ``pay 
for performance'' system in Delta's travel agency sales network. They 
set specific sales goals for key travel agencies that are most 
important to Delta's distribution efforts, and reward those agencies 
based upon the sales performance they actually deliver to Delta.
    The bottom line is that Delta wants to be able to sell tickets 
through any distribution channel that its customers want to use to buy 
Delta tickets. Because many Delta customers prefer to use the services 
of a travel agent, Delta fully expects traditional travel agents to 
remain an important part of Delta's ticket distribution network for the 
foreseeable future.
B. E-Commerce Is Creating New Competitive Alternatives to Traditional 
        Travel Agencies
    While traditional travel agencies remain an essential part of 
Delta's distribution network, the e-commerce revolution has created new 
choices for consumers. It has made it possible for customers to choose 
to take control of their own travel needs in ways that were never 
possible before--by interacting directly with Delta via delta.com; by 
using the comprehensive online travel agency websites such as 
Travelocity, Expedia and Orbitz; by bidding for special deals at 
``name-your-own price'' websites such as Priceline.com; or by taking 
advantage of the thousands of other online ticket distribution outlets 
that offer many other unique consumer benefits. As with any other 
technological and competitive developments that create lower cost 
alternatives to existing competitors, the e-commerce revolution has 
created challenges that traditional agencies must meet if they are to 
succeed in the new competitive environment.
    Many consumers have made clear--by voting with their wallets when 
they buy airline tickets--that they prefer the convenience, control, 
and flexibility that these new online channels provide. Delta ticket 
sales through delta.com generated $1.1 billion in revenue for Delta in 
2001, a 45% ]increase from 2000. Major online agency transactions also 
continue rapid growth. Sales via Expedia grew 54% from 2000 to 2001. 
Sales via Travelocity grew 18% during the same period. Delta currently 
sells approximately 24% of its tickets either through delta.com or 
online travel agencies.
    These e-commerce alternatives provide a means of distributing 
airline tickets to the public that costs less than the traditional 
travel agency distribution channel. The Internet is a highly efficient 
means of selling airline tickets, just like it provides a highly 
efficient way to sell many other services. Perhaps the most direct 
analogy is online financial and investment services websites--where 
major financial services providers have given consumers the power to 
use the Internet to take control of their own finances. Consumers who 
prefer this convenience and control can now make their own stock trades 
on the Internet for less than $10 rather than paying the hundreds of 
dollars in commissions that traditional stock brokers charge.
    The Internet is bringing similar benefits to consumers who want to 
purchase travel services. Like the sale of financial services, airline 
tickets and other travel services are uniquely suited to Internet 
distribution, because electronic ticketing eliminates the need for any 
delivery costs. Travel suppliers who sell their services on the 
Internet--either directly or through online travel agencies--can easily 
deliver their product to any consumer anywhere because there is no 
longer any physical ticket that must be delivered in most cases. 
Electronic ticketing eliminates the need for even the minimal cost of 
mailing a paper ticket. All a consumer needs is the confirmation that 
their electronic ticket has been issued.
    In addition to this efficiency, online distribution channel 
alternatives reduce airline distribution costs because these online 
alternatives have created competition for the dominant GDS systems that 
traditionally controlled the distribution of information on airline 
schedules and published fares. Direct sales through delta.com, for 
example, avoid these high GDS booking costs altogether. These direct 
sales via delta.com are Delta's lowest cost distribution outlet--it 
costs Delta roughly 75% less to sell a ticket via delta.com than 
through a traditional travel agency using the expensive GDS booking 
engines. The savings through other online channels are also 
significant. Because Delta has negotiated significant rebates of the 
GDS booking fees from the major online travel agencies, it costs Delta 
roughly 50% less to sell a ticket through these online agencies as 
through traditional travel agencies.
C. Delta Web Fares Have Benefited Consumers
    Like any other cost savings, these developments are good for 
consumers. They make it possible for airlines to offer lower fares and 
increased services. The lower costs associated with direct distribution 
via the Internet have led Delta and other airlines to offer lower 
prices to consumers in the form of ``web fares''--special discounted 
fares that an airline offers on the Internet but does not publish 
through the traditional GDS system.
    Some traditional travel agents have complained that an airline's 
decision to offer these special fares only on the Internet is 
``unfair'' to traditional travel agents and to consumers who choose not 
to take advantage of the new online channels. These complaints distort 
the facts:
    First, any traditional travel agent can sell Delta web fares to its 
customers. Delta has created a special travel agency-only website--
Delta's ``Online Agency Service Center''--that allows any Delta-
accredited travel agency to book any published Delta fare (including 
any discounted web fare) without using the GDS system that results in 
high booking costs to Delta. Some travel agents may choose not to take 
advantage of this opportunity because they prefer to rely on the high 
cost GDS computer system for booking tickets. The fact that travel 
agencies choose not to take advantage of the tools that Delta has 
created for them to better serve their customers, however, is purely a 
matter of business judgment on the part of each agency.
    Second, there is nothing unique about web fares. Delta (and many 
other airlines) have for many years sold their tickets in many 
different ways. In addition to the published fares in GDS systems that 
any travel agent can sell, Delta has traditionally offered many 
different special prices through privately negotiated arrangements--for 
example, to government agencies, corporate clients, tour and cruise 
operators, ticket consolidators, and so on. Web fares simply represent 
one more way for airlines to market their products.
    Finally, the bottom line is that low fares benefit the consumers 
who choose to take advantage of them. Any regulatory attempt to 
interfere with the free market by prohibiting airlines from offering 
special discounts on the Internet would harm these consumers. The fact 
that some consumers may choose not to shop online does not make it 
``unfair'' to offer discounts to those who do. Many businesses offer 
discounts to consumers who shop through less expensive distribution 
channels, whether that is an Internet web site, a warehouse superstore, 
or a rural factory outlet. Airlines are no different. It is no more 
``unfair'' to offer discount airline tickets on the Internet than it is 
to offer discount commissions for online stock trades or discount 
prices for consumer products in a warehouse superstore.
D. Orbitz Has Benefited Consumers
    Many travel agencies--both traditional and online agencies--have 
also complained about Orbitz, the new online travel agency launched by 
five major airlines. Like the complaints about web fares, these attacks 
on Orbitz by its competitors have seriously distorted the facts:
    Orbitz is a success with customers because it offers a superior web 
site that consumers want to use. The site uses state of the art 
technology to provide consumers with an online tool that instantly 
searches the fares and schedules of some 450 different airlines and 
displays those fares for consumers in a balanced, unbiased and easy-to-
read format. Orbitz is unique among the major online travel agencies in 
that it is a truly unbiased source of travel information.
    Orbitz has also benefited consumers by creating new competition for 
online travel agencies. Most of the distorted criticism of Orbitz is 
really an attempt by its competitors to shield themselves from this 
competition. Prior to the launch of Orbitz, the online agency business 
was dominated by two companies--Travelocity and Expedia--that 
controlled as much as 75% of the agency online market. These two travel 
agencies both continue to enjoy almost twice as much Internet traffic 
as Orbitz:

                       Top Three Travel Web Sites
           (based on the number of visits made in March 2002)
------------------------------------------------------------------------
------------------------------------------------------------------------
Expedia....................................................         11.6
                                                                 million
Travelocity................................................         10.2
                                                                 million
Orbitz.....................................................  6.6 million
------------------------------------------------------------------------
Source: Nielson/Net Ratings

    Most of the criticism of Orbitz has centered around the myth that 
carriers like Delta have given Orbitz an unfair advantage by offering 
Orbitz ``exclusive'' access to their web fares. Delta's contract with 
Orbitz is not exclusive and Orbitz has no unique access to Delta web 
fares. To the contrary, any travel agent can book any Delta web fare 
via the Delta Online Agency Service Center, as I just described. Orbitz 
earned the right to sell Delta's web fares on the Orbitz website by 
offering Delta (and any other airline who chose to participate, whether 
or not the airline was an Orbitz owner) significant rebates of the 
expensive GDS booking fees. Delta has recently signed deals with 
Travelocity and Expedia that allow these agency--like Orbitz--to sell 
Delta web fares on their websites in exchange for rebates on GDS 
booking fees. The beneficiary in all of these arrangements is the 
consumer who is willing to shop in these low cost channels.
E. New Competitive Alternatives & Economic Crisis Led Delta to 
        Eliminate ``Base'' Commissions For Traveling Agents, Allowing 
        Consumers To Choose Whether They Want to Pay for A Travel 
        Agent's Services
    Finally, many travel agents have criticized Delta for one of the 
many cost-cutting moves that Delta took in its efforts to deal with the 
current economic crisis facing the airline industry -the decision that 
effective March 14, 2002, Delta would no longer pay a ``base'' 
commission on travel agency ticket sales in the United States. This 
``base'' commission--a fixed amount paid to any agency who sells a 
Delta ticket, regardless of the value actually delivered by the agency 
to Delta in the ticket sale--was a vestige of the days of airline 
regulation by the Civil Aeronautics Board, which bad mandated a fixed 
industry-wide commission payment. After deregulation, airlines were 
free to offer whatever commission payment they chose to travel 
agencies. One result of this was the creation of the ``Incentive 
commission'' that Delta continues to pay to key agencies--individually 
negotiated commissions that tie payment directly to the agency's sales 
performance, rather than a flat commission paid regardless of the 
agency's actual value as a part of the Delta sales network. A second 
result was that, market forces began to drive down the amount of fixed 
``base'' commissions paid to travel agencies.
    Delta's elimination of ``base commission'' in March 2002 recognized 
the fact that travel agents function as middlemen in the airline ticket 
sale transaction. The provide services both to the airline and to the 
agency's customer. Because travel agency ticket sales benefit Delta, 
Delta continues to invest heavily in supporting the travel agency 
distribution system, both by paying the expensive GDS booking fees that 
subsidize the GDS booking engines travel agents use to sell their 
services, and by paying the merchant fees that allow travel agencies to 
accept credit cards for airline ticket sales at no cost to themselves. 
Delta also continues to reward key travel agencies with targeted 
incentive commission contracts that reward agencies for excellent sales 
performance on Delta's behalf.
    Much of the value that travel agents provide, however, are provided 
not to the airline, but to the travel agency's clients. Researching air 
fare alternatives, planning travel itineraries, providing travel 
management services, and offering the benefit of special travel 
expertise and experience, for example, are all services rendered by the 
travel agent to their customer--not to the airline. Consumers who value 
these services are willing to pay the travel agency for them. Like any 
business, travel agents can and should charge their customers for the 
services they provide. Most U.S. travel agencies have begun doing so, 
and agencies who deliver value to their customers have found that their 
customers are more than willing to pay for it.
    Many consumers, however, do not need or want the services provided 
by a traditional full service travel agent. They prefer to take control 
of their own travel planning, and the e-commerce revolution has 
empowered them to do so. These consumers should not have to pay for the 
services of a full services travel agent--any more than an investor who 
does not need the services of a full service stockbroker should be 
required to pay hundreds of dollars in commission for a stock trade. 
When an airline chooses to pay a flat ``base'' commission to every 
travel agent on every ticket sale, this ``base'' commission is 
necessarily built in to the price of every ticket. In other words, 
every customer ends up paying this commission--regardless of whether 
the customer needs or wants a travel agency's assistance. The 
elimination of base commissions from the ticket price allows each 
customer to make his or her own choice. Those customers who value and 
want the assistance of a travel agent, can choose to pay for it (in the 
form of travel agency service fees). Those who do not want or need that 
assistance.can take control over their own travel needs, and save. 
Either way, the consumer is the ultimate winner.
                               conclusion
    Delta recognizes the valuable contribution travel agents make to 
the travel industry. We have thousands of valued business relationships 
with travel agencies across the United States. We understand that 
travel agents--like airlines--are suffering from reduced revenues in 
the present business environment. But like all businesses, travel 
agencies must compete and deliver value to succeed in a competitive 
marketplace.
    Delta is committed to extending our reach to all consumers, 
including both those chose to use the Internet and those who prefer to 
use the services of traditional agencies. The success of all of our 
distribution partners, whether traditional or online, are key 
components of Delta's overall distribution strategy. The e-commerce 
revolution has increased the amount of information about airline fares 
and services to the public. It has increased consumer choice in airline 
ticket purchases. These developments are good for consumers. Many 
customers still prefer the services provided by traditional travel 
agents, however, and Delta believes that traditional agents who provide 
a level of service that consumers want and are willing to pay for will 
continue to serve an essential role in the sale and distribution of 
Delta tickets for the foreseeable future.

    Mr. Stearns. And I would say to all of the members that we 
will have a second round. I don't think we are going to have 
votes until one o'clock. So we have the unique privilege of 
listening to our panelists without interruptions. The 
gentlelady from California, Ms. Eshoo, is recognized.
    Ms. Eshoo. Thank you, Mr. Chairman. I really appreciate you 
holding this hearing, because I think that there are really a 
plethora of issues for us to examine. As each person at the 
table states their case to each one of us up here, you are 
looking at the ultimate commuters in the country, I think.
    Each one of us is tied to the airlines and reservations in 
some way, shape, or form, regardless of where our district is. 
I mean, in my case, I commute to California every single week, 
and I have almost without exception for 9\1/2\ years.
    So in my case, it is United Airlines. They are terrific to 
me. They are wonderful for my staff to work with, and the crews 
are terrific, and the reservation people take very good care of 
us.
    We travel on what I think is called a Y-rate. It is a 
government rate, and for those of you that are listening in, 
yes, we get mileage, but I have to tell you that the last thing 
I feel like doing is getting on an airplane when I don't have 
to commute, in terms of earning any kind of mileage.
    We don't get anything that anyone else doesn't get, but I 
guess it is good to have it because it helps us get some 
tickets that we don't have to pay for out of our budget. I 
don't--I say this not so much to state the obvious, whether it 
is United Airlines or Delta Airlines, whomever the airlines are 
that are involved in this, make no mistake about it.
    The Congress in the wake of September 11, one of the first 
steps it took was to put up $20 billion for the airlines. We 
recognized that we had grounded them, and we recognized that we 
needed to step up to home plate.
    We understand what they mean in terms of our Nation's 
economy, commerce, all of it. So it is not whether I fly 
United, or the next person has Delta in their district, or the 
next person has whatever airline.
    It is how business is conducted. I am not a lawyer, but I 
have to tell you that I think that some of this really bumps up 
against some anti-trust. It is just my initial take on it.
    Why? Because when you put major airlines together, in terms 
of a service that others cannot get, and that you are not only 
stepping on the consumer, but that you are essentially cutting 
them out, in terms of getting the best price.
    So I recognize that computerization and computerization of 
reservation services are very important, but you know, if you 
can't get the list in order to put it out there for people to 
take advantage, you are putting a world of hurt on them. I am 
very curious about why Orbitz is not here today. They were 
invited, Mr. Chairman?
    Mr. Stearns. Absolutely. They were invited and the airlines 
were invited, too. And there has been other hearings on this in 
the Senate Commerce Committee.
    Mr. Deal. Would the gentlelady yield on that issue?
    Ms. Eshoo. Well, I am not finished yet, and if I have time, 
I would be more than glad to, to my colleagues. I am troubled 
about what the current state of affairs is, and it is rooted in 
some other things that have troubled me, in terms of what has 
happened with travel agents.
    You have the airlines saying--you know, I have never really 
understood why the airlines are always hanging on by a thread. 
I mean, management and whatever, and it may be very well a 
business that doesn't produce a lot of profit.
    But having said that, I think that they have the right to 
have a service where they get a crack at reservations and the 
profits that come from that. But do I think they should be the 
elephant with the big hoof and consider everyone else an ant 
under that hoof?
    Well, you don't have too much of a chance if you are in 
that position. So let me ask a question and whomever would like 
to take a stab at it. What is the niche that Orbitz in your 
view is trying to fill? When they decided to enter the market 
there were already a few big players, and many little ones 
providing on-line travel services. All of the airlines had and 
still have websites where a customer can buy tickets on-line.
    It doesn't appear, at least to me, that there are cost 
savings, because it is my understanding that Orbitz is losing 
money overall. I mean, I am playing a little devil's advocate, 
but I think that given who is here today, and they are not, 
that maybe you take a stab at that, and whomever wishes to.
    Mr. Gilliland. If I might, I won't speak on behalf of 
Orbitz and would prefer that they, too----
    Ms. Eshoo. Well, you can't.
    Mr. Gilliland. [continuing] could be here as well to speak 
their mind.
    Ms. Eshoo. Yes. I think they are missing a real 
opportunity.
    Mr. Gilliland. Yes. However, I can say that I can talk a 
little bit to the broader market, and the broader market that 
we compete in. And that is to provide very low priced trips, 
whether that includes air, car, hotel, vacation cruise, to 
consumers.
    And this part of the market is very, very price sensitive, 
and in fact a $5 or $10 change in price can often mean the 
difference between making a sale and losing the sale to someone 
else.
    Ms. Eshoo. Sure.
    Mr. Gilliland. Simply because they are a mouse click away. 
Competitors are but a mouse click away. So the importance of 
what we are describing here is that we need to, because of that 
price sensitivity, have the opportunity to get at promotional 
fares.
    And when we do, when we strike deals with airlines, and we 
have done that historically, that is what Expedia, and 
Travelocity, and a number of other independent sites were based 
upon, was competing to provide the consumer with that best 
deal.
    When we get those deals, we would rather they not 
automatically then go to Orbitz.
    Ms. Eshoo. I see.
    Mr. Gilliland. And we think, and we also think that it is 
not good for consumers, because Orbitz charges a $5 service 
fee, which the other independent sites do not charge.
    Ms. Eshoo. That's interesting.
    Mr. Gilliland. And in addition to that, we think it is not 
good for the airlines, and when it ends up not being good for 
the airlines, it is not good for the industry. They are in 
fact----
    Ms. Eshoo. Well, I don't know if they are going to pay 
attention to what you think is good for them or not, but I 
appreciate you answering the question. What is the purpose of--
let me just ask this, because I don't think I have too much 
time left. What is the purpose of the most favored nations 
clause?
    Mr. Stearns. Your time has expired.
    Ms. Eshoo. Can they answer that, Mr. Chairman?
    Mr. Stearns. Okay. Go ahead. Sure.
    Ms. Eshoo. Because it might be constructive.
    Mr. Stearns. We are going to have a second round here, and 
so you are welcome to go ahead.
    Ms. Eshoo. The most favored nations clause; can they just 
tell us what that is?
    Mr. Stearns. Yes.
    Ms. Eshoo. What is the purpose of that?
    Mr. Zuck. Well, I think one way to address that question is 
to segue from your first question. I mean, as Congressman Deal 
mentioned, the third highest cost to airlines is distribution, 
and a lot of this is these booking fees, which were over $2 
billion generally annually.
    So when asked what their purpose was for trying to 
construct Orbitz, it was to cut down their distribution costs. 
So it has a built-in model that rebates back booking fees, and 
makes that distribution cost less so that they save money.
    I mean, it is not--there was not an alteristic motive or 
anything like that. but that they were simply trying to cut 
distribution costs to getting tickets out to consumers. That 
most favored nation status was something that again is a bit of 
a misnomer--it is just sort of an inventory availability 
clause--was simply a guarantee that came as a result of those 
reduced booking fees.
    I mean, in other words, Orbitz was taking a risk by taking 
less money for booking travel and in return asked to get the 
best fares. Those options are available, and we are seeing 
plenty of other sites making use of web fares, et cetera, and 
Orbitz is contractually obligated to show all fares, and not 
just some subset that a mainframe returned.
    And it is contractually obligated to show them in an 
unbiased way. We get mislead a lot by talking about different 
kinds of fees. Well, there is a booking fee that they charge, 
and that another company doesn't, but at the same time, 
companies like Travelocity get paid volume booking rewards and 
things like that.
    Everyone finds a way to get paid, and I think it is 
important that we keep that in mind as well. But the problem is 
that if the way that you are finding to get paid involves 
essentially biasing your display, or promoting one fare over 
another, that is less pro-consumer than actually just getting 
paid a flat fee.
    Let's make sure that we talk about things in the same 
terms. Everybody is getting paid in this, and the airlines are 
simply trying to pay less to sell airline tickets, and in an 
environment in which they are losing money.
    Mr. Cooper. Let me try the reverse of that. Jonathan and I 
have been on opposite sides on a lot of issues. The essential 
threat to cartel behavior is cheating, and now you have a 
guaranteed flaw that it disenchants cheating.
    And you can tell me why you were doing this to induce 
people to put your tickets there, but the effect is to 
disenchant people from cheating, from cutting that individual 
one-on-one deal that gets somebody a better price.
    And that leads me to your first question, which is why do 
they come to this? They came to this for a simple reason. All 
hell was breaking loose out there. I mean, people thought they 
could name their own price.
    They were getting resistance, alternative means of 
distribution, and this is an industry that clearly engages in 
cartel behavior. And cartels need to discipline, and so the 
answer is that you discipline by establishing a joint venture, 
and that dampens down the ability of all these people popping 
up in cyberspace to cut a side deal and offer a lower price.
    And I will tell you that the 12 bucks difference between 
the CRS and what Orbitz is charging is peanuts compared to the 
$200 and $300 differences that you heard here. So you are 
disciplining the hundreds of dollars by diminishing the 
likelihood for deals to pop up in cyberspace.
    Mr. Stearns. Mr. Wolff, you might want to reply to that and 
then we will close up the debate and go on to Mr. Terry. Mr. 
Wolff, you will get the last word here.
    Mr. Wolff. Okay. Since this subject is supplier owned on-
line sites, and the hotel site is an important entity, when 
words like cartel are distributed out, I want to make sure that 
there is no misunderstanding about how we operate.
    First of all, we have a very narrow MFN, and it only says 
that if you are going to deal on TravelWeb and give us a rate, 
we would like to make sure that our big competitors don't get a 
better rate. It does not restrict them in any way from giving 
better rates on their own site, or through other channels. It 
is a very narrow MFN.
    And so that this does not discourage competition through 
any other channel, and we want to make sure that our process 
here is very clear to everyone, and that we don't see ourselves 
operating as a cartel in any way, shape, or form. This is just 
handling one small segment of distribution, less than 1 percent 
of our business.
    Mr. Stearns. Thank you, Mr. Wolff. The gentleman from 
Nebraska, Mr. Terry, is recognized.
    Mr. Terry. Thank you, Mr. Chairman. I will follow up on 
these comments though. Let me just quickly outline why I think 
this smacks or smells of anti-competitive behavior here. First 
of all, you have an entity that is started up by the airlines. 
Right away, that will catch my attention.
    Then they agree amongst themselves that on this website, 
through this most favored nation clause, that they will make 
sure that on this site is the lowest fare. This ensures though 
as they market Orbitz that we as consumers are then trained to 
automatically go to Orbitz because that will automatically have 
the lowest fare.
    Now, we can say in the immediate sense that that is good 
for consumers, because that means that they will have the $290 
fare, and you are guarantee this cheap seat on the airlines, 
but then what happens when they become the 800 pound gorilla 
and there is no more Travelocity or others?
    Then the only thing on Orbitz is the $490 seat or the $415 
seat. That's why you have to be on top of this type of anti-
competitive behavior at the beginning. At the beginning, it 
looks pro-consumer, but you have to look down the line.
    So first of all, I want to ask Mr. Zuck. I am very curious 
about what the Association for Competitive Technology is, but I 
will ask it another time, because your passion for Orbitz makes 
you look less independent than the name of the organization.
    Mr. Zuck. Well, now I feel compelled to answer.
    Mr. Terry. Well, don't talk, because I am speaking, please, 
and I have only a few minutes here. In your industry speech 
that I was trying to interpret, and in Mr. Towns' great 
question and research between Travelocity's price and Orbitz's 
price, there is a difference of $122.50 that you--that I 
interpreted from your answer as blaming on the CRS, the 
computer reservation system, and their pricing.
    Are you saying that there is $122.50 difference simply 
because of the type of reservation technology that they use, 
and their $5 or whatever, their $17 fee that they put on? I am 
at a loss of what you are really trying to tell us. So if you 
could further explain the $122.50 in layman's words?
    Mr. Zuck. Sure. Thank you, Congressman, and I look forward 
to the opportunity to talk to you about the Association for 
Competitive Technology, that is mostly made up of small 
businesses, who would like nothing worse than to see imposed 
distribution channels put in place where they are not 
necessary.
    So I would love to have that conversation, but to try and 
clarify this issue. First of all, we hear all the time that you 
don't always find the cheapest fares on Orbitz. So to some 
extent, what Congressman Towns found could be an anomaly, and I 
can't seek to explain a single fare, or where that anomaly 
comes from.
    And there is a number of different possible reasons that 
that occurred, but taking the worst case scenario, which is in 
fact that there was a fare that was offered to Orbitz that 
wasn't offered to Travelocity, if that is where the site was.
    Let's say that it is that worst case scenario and how would 
I explain that. What I was trying to say is that the reason 
that the airlines started offering these so-called web fares, 
fares that they only offer on their sites, is that they had 
distress inventory that they were offering at reduced prices.
    In other words, cutting their profit out of that seat in 
order to simply fill seats on an airplane. They wanted to try 
and eliminate the distribution costs or minimize the 
distribution costs of those cheaper seats.
    Orbitz's business model is about lowering those 
distribution costs. It is not comparing $12 to $120. It is 
comparing what the profit on that seat would have been, and if 
that profit has gone away, and that $12, which adds up to $2 
billion, makes an awful lot of difference.
    So Orbitz's business model is about selling airline seats 
more cheaply, and that is why they are getting some of these 
lower fares. To address your other comment about our sort of 
psychic predictions about anti-competitive conduct, I would 
remind you that the Department of Justice has guidelines for 
companies to get together to create distribution competition 
that Orbitz has followed and is under perpetual scrutiny from 
both the Department of Justice and the Department of 
Transportation.
    And I can't for a moment imagine that Dr. Cooper would 
stand silent the minute that suddenly they were raising fares 
because they were the only on-line travel site, which seems 
very unlikely to begin with.
    Mr. Stearns. The gentleman's time has expired. Mr. Rush is 
recognized for questions.
    Mr. Rush. Thank you so much, Mr. Chairman. Mr. Gilliland, 
from the standborne of size and market penetration, Sabre and 
the other computer reservation system companies are much larger 
and far more profitable than Orbitz. Do you share that 
conclusion?
    Mr. Gilliland. That is correct. Orbitz is unprofitable.
    Mr. Rush. In fact, Mr. Deal said in his opening statement 
that Orbitz sold only 2 percent of all tickets last year, why 
Sabre and the other computer reservation systems sold 70 
percent of all tickets. Do you agree with Mr. Deal's figures?
    Mr. Gilliland. I don't know if that is the exact math. I 
would say that largely speaking most tickets are sold through 
computer reservation systems, and even Orbitz uses the computer 
reservation system for much of the work that it has to do in 
the booking process on behalf of the consumer.
    Orbitz is, although it wants to be in the CRS business, and 
therefore we think, great, let them come into the CRS business, 
and let them be governed by the same rules that the CRSs are. 
They are relatively small compared to the CRSs. They have only 
been in operation for 6 months, and CRSs have been in business 
for 20 years.
    So it is kind of a striking comparison, both in terms of 
time, and time in market, and capabilities.
    Mr. Rush. Well, now I am trying to understand what the--
well, who is the elephant and who is the ant here? Is the 
Elephant Orbitz or is the elephant Sabre? Who is the elephant 
and who is the ant here?
    Mr. Gilliland. Well, I think the issue, and what we are 
laying out here for you, is that we are concerned about maybe 
not step No. 1 of what has occurred here, but step two. What 
does this mean in terms of the consumer, and what will happen 
to consumer pricing if all of these fares are available in one 
place.
    It seems to me that in fact if all of these fares are 
available in one place, it will discourage airlines from 
actually discounting as they have in the past. They are in the 
business of doing selective discounting, promotional fares, and 
that is how they compete. That is how they attract and 
stimulate demand.
    They can't do that across the broader market and if in fact 
Orbitz continues with the success that it has seen and in fact 
it is depending on what stats you see, the No. 2 or the No. 3 
on-line travel agency in just 6 months, our concern is that 
over time the same discounts that you see today may simply not 
be available, and again, not good for the consumer.
    Mr. Rush. Should we use another kind of standard, or 
another type of measurement stick other than--well, let's look 
at the employees. I mean, Orbitz has less than 200 employees, 
and Sabre has about 11,000 employees.
    Mr. Gilliland. Yes.
    Mr. Rush. Is that wrong for us to draw some conclusions 
based on those kind of measurement sticks?
    Mr. Gilliland. Well, Orbitz operates in one country and 
Sabre operates in 112 countries, and so again I don't really 
see the comparison there. If you are going to make comparisons 
between Orbitz, you might talk about its direct competitors 
today, which are Travelocity and Expedia, which have very 
similar numbers of employees working there today.
    Again, you know, if Orbitz--and certainly it is indicated 
that it wants to be in the CRS business, would like to compete 
in that business, we welcome them. We welcome them under the 
jurisdiction of the CRS rules, which we have to comply with and 
have for many years, simply because we found, and the 
government found back in the mid-1980's, and early 1990's, that 
it made sense to ensure that there was effective competition 
between the large carriers and the small carriers; small 
carriers being disadvantaged back in that time by the airline-
owned CRSs.
    Mr. Rush. Let me ask you another question. What about the--
well, we have gotten a report that Orbitz had a large operating 
loss last year, and expects to lose money for several years to 
come.
    And on the other hand, Sabre had a large profit increase in 
their first quarter of this year, compared to the first quarter 
of last year. And Sabre's first operating profit increase this 
year, compared to last year's, was about 25 percent of an 
increase.
    Mr. Gilliland. Yes.
    Mr. Rush. So where is the problem at?
    Mr. Gilliland. Well, let me first talk to Travelocity, who 
we posted our earnings today at Sabre and Travelocity, and 
Travelocity posted a loss this quarter. So things aren't going 
really as they should be for Travelocity.
    Sabre, I am not going to apologize for as well-managed 
business. We have seen our revenues decline. If you look at the 
first quarter, our revenues declined by almost 6 percent. Our 
expenses, we took expenses out, and it is a very painful 
process that involves our employees, and we took over 20 
percent of our expenses out.
    It is about managing the business and managing the business 
in the technology sector. Technology companies--and we have 
done the studies--typically get better margins than airlines. 
And again that is not something that we are going to apologize 
about.
    I want the airlines to do well. They have to do well for 
our business to do well.
    Mr. Rush. Thank you, and I yield back the balance of my 
time.
    Mr. Stearns. The gentleman's time has expired, and the 
gentleman from New Hampshire, Mr. Bass, is recognized.
    Mr. Bass. Thank you, Mr. Chairman, and I don't have a dog 
in this fight. I have been listening with interest to this 
testimony, and there are clearly some inconsistencies of logic.
    I think it would be helpful if Mr. Towns sent the printouts 
of his inquiry to the Internet to Orbitz and asked them for an 
explanation so we could make it a part of the record.
    Mr. Towns. Would the gentleman yield?
    Mr. Bass. Yes, sir.
    Mr. Towns. I think it would be more important if Orbitz 
would come here and become a witness, and I think they should 
come here. That would be the real way to do this.
    Mr. Bass. Well, reclaiming my time, it is my understanding 
from the opening statement of Mr. Deal----
    Mr. Terry. Would the gentleman yield for a minute?
    Mr. Bass. Certainly.
    Mr. Terry. I will submit what Mr. Towns provided me for the 
record, which is just a printout from Travelocity and Orbitz.
    Mr. Stearns. With unanimous consent, it is so ordered.
    [The information referred to follows:]
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    Mr. Bass. It is my understanding that there may be an 
opportunity for Orbitz to appear here today. I understand from 
Mr. Deal's opening statement that perhaps they did not have 
adequate time from the point when they were invited to prepare.
    Second, if I can continue here, I understand that the 
Travelocity website boasts of them having the lowest fares on 
the one hand, and then apparently that is not the case 
according to the testimony today.
    Third, Mr. Deal asked Mr. Gilliland about the Zugi 
question, and instead of answering it, he said, well, we aren't 
really partners, even though their own website says that they 
are a proud and full participant in this joint venture.
    And it is clear that Zugi is doing exactly what apparently 
you, Mr. Gilliland, are objecting to Orbitz doing. Third, it is 
my understanding that Orbitz is going to have an initial public 
offering, and although it is alleged that the management of 
Orbitz will continue to act in the alleged anti-competitive 
fashion, an IPO is an IPO.
    And other people get involved in the management of the 
business, and you can't say for sure what will happen. I could 
ask these three questions, these questions of the witnesses 
here, but I think instead that I will yield the balance of my 
time to Mr. Deal.
    Mr. Deal. I thank the gentleman for yielding. If I could 
just follow up briefly with the comments of Ms. Eshoo with 
regard to why is all of this happening. There seems to be a 
presumption on the part of some people that airlines don't want 
to sell tickets on their aircraft.
    I think quite the opposite is true for an industry that has 
lost almost $7.7 billion last year, and they want to sell every 
seat they can. I realize that this use of most favored nation 
terminology is difficult to understand, but as I understand it, 
what it simply says is that if you enter into an agreement with 
us, you agree that you will offer to us the same low fares that 
you offer in any other venue.
    Now what that simply does is it makes the lowest fares 
available in more venue sites, and that is the whole concept 
behind trade when we use the most favored nations status in the 
international trade atmosphere. It is a technique to bring down 
the cost to the consumer.
    It is also the technique that is designed to bring down in 
this instance the cost to the airline consumer. But I still 
think that there is a huge problem here, and that is with 
regard to these booking fees of the CRS.
    And, Mr. Ruden, I would ask you, and my information is, 
that you and your industry have advocated that there needs to 
be some rules to strengthen the role of travel agents, and to 
get them out from under some of these binding agreements and 
contracts they have with these CRSs. Is that correct?
    Mr. Ruden. Yes, sir. We have been advocating to the 
Department of Transportation for more than 5 years that they do 
the job that they originally were assigned to do by themselves, 
to review those regulations, which were set to expire in 1997, 
and which are still in place, to give travel agents the freedom 
from those restrictions so that they could be more adaptive 
rather than less adaptive to changes in the marketplace, among 
the major ones of which is the Internet.
    Mr. Deal. And the cost of these booking fees is part of 
what makes the travel agent less competitive is it not?
    Mr. Ruden. Well, we hear Orbitz talking about that, and I 
think that the entire debate on this subject of booking fees is 
guilty of a gross oversimplification. One of the things that is 
not brought out about booking fees is that the booking fee is 
charged only on the final transaction, and the process leading 
up to that, of loading fares and doing all the things that have 
to be done in order to make a transaction possible, are not 
charged for separately.
    I don't know that the airlines want to face the day when 
the CRSs are unbundling their prices the way that the airlines 
are trying to unbundle their prices to consumers. So it is a 
very complicated subject, and it is not at all clear I think 
that the pricing problems that Orbitz presents have anything to 
do with costs.
    Mr. Deal. Well, isn't it true that 46 percent of the travel 
agents in this country are under contract with Sabre as their 
CRS, the parent company of Travelocity?
    Mr. Ruden. That may be. I wouldn't argue with that 
percentage. It is a significant number.
    Mr. Deal. And isn't it true that booking fees through the 
CRSs have gone up at an average of 4 to 7 percent over the last 
10 years?
    Mr. Ruden. Within that range, that is probably right.
    Mr. Deal. Yes, sir, and that has got to play a part in 
making somebody competitive and somebody non-competitive does 
it not?
    Mr. Ruden. Well, it is a relevant consideration, but there 
are many, many other considerations, and you cannot explain, I 
suggest, this issue about this fair comparison, for example.
    There are documented cases in the Department of 
Transportation records, countless cases, in which the fair 
disparity is hundreds and hundreds of dollars, and those cannot 
be explained on any cost factor, especially not CRS booking 
fees. There is another explanation for what the airlines are 
doing, and it has nothing to do with costs of distribution.
    Mr. Stearns. The gentleman's time has expired. The 
gentleman from Massachusetts is recognized, Mr. Markey.
    Mr. Markey. Thank you, Mr. Chairman, very much. I wish that 
Orbitz was here today, the five airline consortium, but they 
said they had travel problems and they couldn't figure out how 
to get here. They only had 2 weeks notice, and it was hard for 
them to figure out how to get anybody from Orbitz, anybody, 
anybody from Orbitz, to come here and to testify today.
    And that is not good, Mr. Zuck, you know. They should be 
able to figure out how to do that, and I know that you are 
sitting here saying that you can't really represent them. So 
there is no point in asking you any questions since you are not 
qualified to answer questions about them, not that that was 
your job anyway.
    So we are left here without anybody from the organization 
that is causing this problem; that is, the concentration of 
power in one place.
    Mr. Stearns. Would the gentleman yield for just a 
statement?
    Mr. Markey. I would be glad to.
    Mr. Stearns. Mr. Wolff is here from TravelWeb, which is--he 
represents--there is five hotels, Marriott, Hilton, Hyatt, 
Sheraton, and Holiday Inn, have formed this website. and as we 
pointed out earlier in the committee, we are thinking not just 
in terms of Orbitz, or even TravelWeb for the hotels.
    But in general what is the implications when large 
companies get together to have a website? Does it benefit the 
consumers because there is better pricing, or is it in the long 
term to the disadvantage of the consumers. So why Orbitz is not 
here, Mr. Wolff has been kind enough to step up to the plate 
and argue for the concept and the nuances here.
    So in the broader question, Mr. Wolff is here to help solve 
some of these questions.
    Mr. Markey. Well, the beauty, and we appreciate that, Mr. 
Wolff, and I am sure that you would have helped Orbitz, the 
airlines find, a low cost room here in DC if they had been 
willing to fly in.
    So it probably wasn't the fact that they couldn't find a 
low price airline fare, or a low price room in Washington, that 
kept them from being here. It was that no one who works for 
Orbitz could make it on 2 weeks notice, because we told them 
that they could come this week, or we would even put the 
hearing----
    Mr. Stearns. Would the gentleman yield once again?
    Mr. Markey. Yes.
    Mr. Stearns. They really had just a 1-week notice. and 
that----
    Mr. Markey. But we could have had the hearing next week for 
them.
    Mr. Stearns. We were willing for the airlines to delay it a 
week, but in all fairness, your statement that Orbitz had 2 
weeks notice is not true. They had perhaps--it was just under a 
week.
    So in fairness I have to correct that, and I wish I could 
have given them more notice. I think if they had contacted us, 
we would have delayed it 1 week.
    Mr. Markey. You would have had it 1 week later.
    Mr. Stearns. One week, next week, and obviously our 
communication with Orbitz was not fluid.
    Mr. Markey. You know what is interesting though, Mr. 
Chairman, is that when the airlines wanted $20 billion out of 
us last September, the chairman of every airline was willing to 
show up any day of the week at any time for as long as it took 
to get the $20 billion.
    And now just the chairman of each airline, but every other 
employee of the airline was willing to walk up and down the 
corridors of the Rayburn Building for as long as it took to get 
the $20 billion for those corporations.
    Now what we are talking about is explaining what the 
benefits are for the passengers of those airlines, and none of 
their employees are available on 1 weeks notice, or 2 weeks 
notice, to testify before this committee. And I find that to be 
troubling.
    Mr. Wolff. Does that mean that I get the $20 billion?
    Mr. Markey. Well, in fact, one of the things that we never 
did address was what happens to the tourism industry after 
September 11. That was a question that many people said we 
should be discussing simultaneously.
    Mr. Wolff. Well, I am also on the board of Travel Industry 
of America, whose primary concern is the impact of tourism on 
America.
    Mr. Markey. But there was no money for you.
    Mr. Wolff. I know that.
    Mr. Markey. It went to the airlines. So, I guess part of 
what the promise of the Internet was, was a word--it is a 
complicated word. It is a difficult word to say. It is called 
disintermediation.
    Put simply and in terms that I heard in my house from age 
9, 10, or 11 on, was getting rid of the middleman. That is what 
it is all about, getting rid of the middleman. And what happens 
here it seems to me is that as the Internet makes it possible 
to get rid of the middleman so that you can start to cut your 
own deals, all of the big companies say wait a minute. We don't 
want to get rid of the middleman. Let's all band together and 
make them all come to us.
    So that 80 percent of any one industry is now consolidating 
the website so that you have got to go to them, and make it 
tough for anyone to get around the fact that the Internet makes 
it possible to get around the middleman. Now, I understand that 
from a big company's perspective. Now they say on the one hand 
that----
    Mr. Stearns. The gentleman's time has expired. We are going 
to do a second round of questions here.
    Mr. Markey. Well, half of my time was having a conversation 
with you, Mr. Chairman. So if you don't--I mean, I am not 
trying to be a wise guy there, but you did help to explain why 
it is that we don't have anyone here that I can ask a question 
from.
    Mr. Stearns. Well, would the gentleman like for unanimous 
consent for an additional 1 minute?
    Mr. Markey. Well, actually, I think we had about a 2\1/2\ 
minute conversation, and I am only beginning now to ask my 
question.
    Mr. Stearns. Well, historically I have been in many 
hearings with you.
    Mr. Markey. Well, how about we negotiate, because we don't 
need any middleman in this, but how about we negotiate like 2 
minutes?
    Mr. Stearns. Two minutes. What is your booking fee? By 
unanimous consent, 2 minutes.
    Mr. Markey. I thank you. So, Mr. Cooper, if you could, 
because you represent the consumer here, what is the long term 
implication of having these huge corporations now use the 
Internet not as a way for consumers to bargain for themselves, 
but to only go to an oligopoly approved website.
    And somehow or another that is going to lead to lower 
prices for consumers and the consumers are beginning to cap 
arched eyebrows toward the very companies who they thought they 
were going to be able to use the Internet to play one off 
against the other.
    Mr. Cooper. Well, the fundamental proposition here is that 
as I said, we loved the many to many of the Internet.
    Mr. Markey. The many to many, what does that mean?
    Mr. Cooper. Well, it means that in a sense that if you 
think about there is many people on this side of the 
transaction, and many people on that side of the transaction.
    Mr. Markey. You are saying that we liked the idea that 
every consumer has a chance of going to every airline and 
figuring out amongst----
    Mr. Cooper. Or every producer has a chance to go to every 
consumer. Every producer.
    Mr. Markey. And who is the producer?
    Mr. Cooper. The airlines apparently.
    Mr. Markey. So you mean every airline.
    Mr. Cooper. And I like the thought of, and Mr. Zuck said, 
well, the airlines have got distress seats, and he wants to see 
sell them, and the answer was it is really neat when each 
individual airline tries as hard as heck to sell those seats to 
each individual consumer, instead of making a deal that says 
when I cut a price, I have got to put it on this joint venture 
website.
    That chills the willingness to cheat, to try and find with 
emotion----
    Mr. Markey. But I thought, Mr. Cooper, that putting up 
websites were a very inexpensive thing to do. Why would the 
airlines have to band together on the least expensive thing?
    Mr. Cooper. The interesting thing is that if there had not 
been websites developing independently beforehand, then it 
would be an interesting proposition. That here is a new 
efficiency we are introducing, but they were the last guys in 
the market.
    The other folks had already come up with their websites, 
and so people knew how to exploit the efficiencies of the 
Internet, and then along comes the airlines that say, wait a 
minute, we are going to have ours, too, and lo and behold, 
supply is going to start to dry up on the other guy's website. 
So there was not a market failure here.
    Mr. Markey. Every kid in America, Mr. Cooper, can set up 
their own website. So it is not that expensive for each airline 
to have their own website. Why do they have to band together on 
the least expensive thing that actually occurs in America?
    Mr. Stearns. The gentleman's time has expired.
    Mr. Cooper. And the answer was that I believe that they 
were trying to discipline the chaos of cyberspace by 
restricting supply.
    Mr. Markey. You are saying don't let the consumer get lower 
prices; is that what you mean, in disciplining the chaos of 
cyberspace?
    Mr. Cooper. No, look, let me be clear. The prices might be 
lower, but they are not nearly as low as they could have been--
--
    Mr. Stearns. The gentleman's time has expired.
    Mr. Markey. Okay. Thank you.
    Mr. Stearns. And I urge him to stay around for a second 
round. Mr. Zuck, let me see if I can get some more nitty-gritty 
here, and you can help on this matter. I beg your pardon. Mr. 
Boucher is recognized.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
commend each of these witnesses for the careful preparation of 
their testimony and for taking time here to discuss these 
important matters with us. Mr. Gilliland, I would like to get 
from you a description, please, of how the most favored nation 
clause that is in the contract between Orbitz and the carriers 
that originated Orbitz disadvantages Travelocity.com.
    And by disadvantaging you, also disadvantages the public 
that is consuming Internet-based air fares?
    Mr. Gilliland. Well, thank you for the opportunity. Let me 
just describe again the Orbitz MFN. There are really two 
important components of that MFN, one in which is called, and 
which we term the third-party MFN component, where every fare 
given to a third-party site like Travelocity, or Expedia, must 
also be given to Orbitz.
    The second element or component of that MFN is what we call 
the airline website MFN, where every fare on the airlines' 
website must be given to Orbitz. And this becomes a serious 
deterrent in my view to airlines offering price discounts to 
other distributors, and let me tell you the marketplace 
dynamic.
    Before Orbitz had launched, airlines could and did very--
and similar to what you see in other types of supermarkets on-
line or off-line--they would post exclusive fares on their own 
websites and occasionally gave short term exclusive fares or 
promotional fares to third-party sites, really as a way of 
competing.
    It drove the market dynamic for discounting. They would try 
to acquire new customers, and try to take share away from their 
competitors, and a very competitive dynamic. Those tactics 
might tend to lead to larger fare initiatives, or fare wars, 
across the airlines, thereby reducing prices to consumers.
    But discounts I think as we all have seen in the events 
after September 11 can be costly to air carriers if they can't 
limit their reach. It becomes very dilative, and they can't 
make a profit.
    When airlines decide to do fare sales, they weigh the 
stimulative effects of those fare sales against the revenue 
dilution, and it doesn't want promotional discounts to be 
readily available everywhere, because it dilutes selling 
opportunities for higher priced tickets.
    Orbitz precludes this type of selective price discounting. 
So they are not motivated as they were before to promote price 
competition that I described, because all fares and all 
inventory, regardless of the deals that we strike, and what we 
think is a clandestine fashion with the airlines, are then made 
available to Orbitz.
    So the airlines become less motivated to do these types of 
deals with the independent travel sites, and less motivated to 
make those discounts available because they are proliferated in 
many respects much further than they had ever intended them to 
go.
    Mr. Boucher. When you and your sales staff talk to the 
airline carriers that participate in Orbitz, and you ask them 
about the possibility of entering into special promotions with 
you that would benefit the traveling public, what kind of 
response do you get? To what extent are you even able to have 
these negotiations with those carriers today?
    Mr. Gilliland. Well, we negotiate, and we negotiate 
vigorously, and in fact a part of that is how do we drive down 
their distribution costs as a part of that, and also how do we 
get access to fares that might not be distributed across 
multiple distributors, and therefore go to Orbitz.
    With some airlines, we have very productive discussions and 
even relationships. I think the concern again that we have is 
that we typically don't get guarantees as to the quantity of 
fares that they make available to us; whereas, contractual 
obligations are within this Orbitz's MFN that they get these 
quantities, these large quantities of fares that we simply 
don't have access to.
    So we get dribs and drabs. We get crumbs, and not a slice 
of the cake, and not the cake. And it makes it very difficult 
for us to compete in that environment when it is a very price 
sensitive shopper on the Internet.
    Mr. Boucher. The Department of Transportation as a rule 
that says that in the off-line world with regard to companies 
that have an ownership interest in computer reservation 
systems, when they give a fare to the computer reservation 
system in which they have an ownership interest, they also 
under this Department of Transportation rule have to give that 
same fare to the other computer reservation systems.
    Now, this strikes me as a sensible rule that promotes 
competition and makes sure that all of the computer reservation 
systems have an opportunity to have a roughly equal place in 
the market, and to attract business. Why wouldn't that kind of 
rulemake sense in the Internet world also, and if we have that 
kind of rule in place, would that resolve most of the concerns 
that you are addressing here today?
    Mr. Gilliland. I think it would solve a lot of the 
concerns. I do think that we would solve a lot simply by 
removing the same as them language. However, I think that 
applying some of these same regulatory actions to this case on 
the Internet makes a lot of sense.
    And really I think the intent there again would be that if 
they make fares available in one system, one distribution 
system, whether it is on-line or whether it is through the 
traditional CRSs, that it be made available in other places.
    I think though that we have to--and if you think back to 
the history behind those rules, you had an airline industry 
that was very quickly expanding, and building hubs, and 
building distribution hubs as well. Distribution through these 
CRSs.
    And I think that what we found and why the government chose 
to implement the CRS rules is that they became an anti-
competitive type of--they had an anti-competitive effect, 
particularly with the smaller airlines.
    Mr. Boucher. Mr. Gilliland, thank you. Mr. Cooper, let me 
just ask you to comment if you would on that same question. I 
know that you----
    Mr. Cooper. The gentleman's time has expired, and I welcome 
him for another round if he wants.
    Mr. Boucher. Could I get a short comment from Dr. Cooper?
    Mr. Stearns. Sure, go ahead.
    Mr. Boucher. Very briefly, Dr. Cooper.
    Mr. Cooper. What was the question again?
    Mr. Boucher. On the Department of Transportation rule that 
requires that the air carriers that have an ownership in 
computer reservation systems and make a fare available to that 
system, make the same fare available to the other computer 
reservation systems, would this be a good rule to apply in 
principal to Internet transactions as well?
    Mr. Cooper. Well, you want to take out the vertical 
leverage that the airline is seeking to obtain. So if that 
removes--and it has been described to me, but if that removes 
the disincentive to discount, and levels the playing field, 
that is more of a long term question, and that if we lose the 
independent sites, then we will watch the floor rise very 
quickly.
    So we think that it is important to worry about that 
leverage, and obviously the interesting thing is that the 
elephant and the ant analogy is not quite right. I think the 
way that we need to think about it is that because Orbitz is 
connected to the rest of the elephant, we ought to see it as 
the tusk of the elephant.
    And it is small, and it is growing, but when it gets big, 
it can in fact destroy everything around it. So it would be 
different if it were a separate beast, but it is not. It is 
part of the elephant, and that is what is important.
    Mr. Boucher. Thank you very much, Mr. Chairman.
    Mr. Stearns. I thank my colleague, and I will start this 
second round of questioning. Mr. Wolff, you seem to want to 
anticipate Mr. Boucher's question. Perhaps you want to speak 
after Dr. Cooper, and so I will give you fair game here.
    Is there anything that you want to add after hearing Dr. 
Cooper? Because he is pretty much saying what is true for 
Orbitz is true for yours, too.
    Mr. Wolff. I'm sorry, but I don't believe we should be 
painted with the same brush because we are different 
industries, and I think that this is a very important issue. 
People think of travel because it affects you. You travel, you 
fly, you stay in a hotel, and you rent a car.
    So they think of it as one industry, but we are vastly 
different industries, and that the hotel industry is a highly 
unconcentrated industry, with thousands of independent players, 
making independent business and pricing decisions, with not a 
very inhomogeneous product.
    This morning, like all of us, it appears that we did our 
little homework on the web, and on my way here I stopped with 
someone who was completely unfamiliar with the web or making 
reservations, and in a matter of 2 minutes, she went on-line.
    And she went to one of the sites that we have been 
discussing, and she found 198 hotels within 10 miles of Reagan 
Airport that are available today to check in, 198 hotels.
    So this is not a concentrated industry. This is a very 
diffuse industry, and it is different in its nature. So a few 
hotel companies getting together does not provide any issues 
that we see with respect to the very important issue here of 
antitrust.
    I understand how important antitrust is, and now in light 
of the concerns over accounting issues, et cetera, it should be 
of concern to all of us. And Mr. Chairman, and Congressman 
Terry, and Congressman Boucher, and other people have mentioned 
that when suppliers get together, it raises bells.
    And it should raise bells, and we understand that. So if 
you just grant me 1 minute, let me share why I think in 
addition to an industry that is not ripe for collusion, the 
steps that TravelWeb has taken to ensure that collusion isn't 
and won't take place.
    First of all, before we met, each of us met with our 
individual counsels, and got instructions to make sure that we 
were careful with respect to antitrust concerns, legitimate 
antitrust concerns. Second, the very first action of the entity 
was to hire outside counsel to attend every meeting and every 
conference call to make sure that nothing was ever said or 
contemplated.
    They gave us instructions and they made sure that nothing 
was said or contemplated that would be of an antitrust nature. 
Now you can imagine the early meetings where every member of 
the parties had their own personal lawyer and the entity had a 
lawyer, to make sure that nothing was said out of bounds and no 
actions were taken.
    We established rules of engagements and rules of the 
operation so that, for example, even as chairman of the 
organization, I am not privy to certain information about what 
other's rates are, or what those deals are. So we have very 
strict rules and guidelines.
    We have made our offering available to all competitors. So 
that while we offer--and Congressman Boucher legitimately said 
that he is concerned about creating something and then not 
making it available, rates available to others.
    We have addressed that, and we have eliminated exclusivity, 
and we have made sure that competitors can come in and 
participate in this. So we have given our entire brief to the 
Federal Trade Commission and to the Department of Justice 
before our launch.
    And that's why I am here today, and frankly at a lot of 
personal distress, but we have gone every step to make sure 
that legitimate concerns about antitrust are addressed.
    Mr. Stearns. Well, that's fine, Mr. Wolff, and I wanted to 
give you a lot of my time after Dr. Cooper.
    Mr. Wolff. Than you.
    Mr. Stearns. And let me continue, Dr. Cooper. I wanted to 
make sure that you had every ample opportunity, because what 
was implied here, I think you have made clear and correct from 
your standpoint.
    Mr. Cooper. Right.
    Mr. Stearns. But, Mr. Zuck, let's say, for example, that 
Orbitz has some unique technology that gives it a special 
advantage, and is it true, or isn't it true, that Orbitz has a 
technology different from its competitors, and that this 
comparative advantage would give advantages to the consumer?
    I mean, is that possible, and maybe you want to explore 
that.
    Mr. Zuck. Well, I mean, it sure is. I wish I could shop for 
turbans the same place that Mr. Cooper and Mr. Markey do. It is 
probably where Johnnie Carson shops, but I can't predict 
whether or not there will be lower prices as a result of new 
technology.
    I can only hope that that new technology is allowed to 
exist, and is allowed to flourish in the marketplace to see if 
it ends up delivering benefits to consumers. What we are seeing 
in the short term is lower prices for consumers, and so our 
only indicators that we have thus far are pro-competitive and 
pro-consumer.
    There is a new search technology that Orbitz is using and 
in a more efficient sort of server base technology, that allows 
them to bring up more fares at once. The CRS system is based on 
their own mainframe software, and brings up a subset of fares 
at once, and can't actually search the entire universe of fares 
with each search. It is cost insufficient for them to do so.
    So certainly in theory this new technology contains the 
potential to deliver additional value to consumers, and so all 
we ask in the IT industry is that new technologies be allowed 
to attempt to deliver value to consumers, and see what happens.
    Mr. Stearns. My time has expired. The ranking member, Mr. 
Towns, is recognized.
    Mr. Towns. Thank you very much, Mr. Chairman. Mr. Ruden, 
let me sort of reverse the situations here. This is really an 
unfair mess that we have here. What can we do to correct it?
    What advice do you have to us as to what we might do to 
correct this?
    Mr. Ruden. Well, if the Department of Justice does not act 
soon, it would be our view, and it has been our view for some 
time that Congress needs to step in, and to address this 
aggregation of market power, which I think is probably 
unprecedented in American history, certainly in modern times.
    And we have advocated legislation, for example, that would 
buy on its face and assure consumers the ability to choose the 
channel they want to buy through, and having chosen that 
channel, to find there all of the fares that are available from 
the airline.
    That is a drastic remedy without question, but if we don't 
do something, then what Dr. Cooper correctly described as the 
tusk will become an instrument for the destruction of most of 
the third-party distribution system that is out there.
    And I have to say, Congressman, that there is a lot of talk 
about low fares and discount fares, as if that were 
independently a value that should be sought here as a matter of 
government policy.
    And I would suggest that the value is a competitive system. 
Prices are supposed to be set by competition, and those prices 
end up bearing a relationship to costs, and provide a 
reasonable return on profit when they are the product of 
competition.
    And you may look at a set of prices that come from that 
process and say, gee, those are kind of high prices. But if 
they are properly related to costs, and provide a reasonable 
return on investment, they are the correct prices.
    And you want a system that allows firms in that marketplace 
to strive for opportunities with what Dr. Cooper would call 
cheating, and I would simply say taking the initiative to try 
to capture some more business by finding price initiatives, 
ways to reduce costs further, ways to repackage and rebundle.
    Those are the things that you are looking for, and the 
problem that Orbitz is addressing has nothing to do with costs 
as I said before. If you look at their S-1 registration 
statement, the return to the airlines, the five founders, in 
return booking feels for the first year was $6 million on 6 
million transactions.
    Those are their numbers and not mine. That is a dollar a 
transaction. That is what the airlines got back, and surely 
this $200 million investment, of which $153 million has been 
lost, is not about getting $6 million back, or even $12 million 
back.
    It is about displacing the independent distributors. That's 
why these multi-brand sites that Mr. Wolff correctly stated, 
and I don't know enough frankly about the hotel site to comment 
directly about it.
    But to the question of why these multi-brand sites are so 
important to the producers all of a sudden, it is precisely 
because they saw the independent people moving into the 
Internet space, and making creative, pro-consumer use of it, 
and they decided that we don't want that to happen. We are 
losing control.
    And so we are going to take control back, and they formed 
Orbitz to get that done.
    Mr. Towns. Thank you very much. Mr. Wolff, I would like for 
you to just sort of clear up something. You know, you used or 
you started out by saying that you felt that privacy was 
extremely important.
    And then in your last statement the last time around, you 
said that you make everything available to your competition. 
Now, how do you do both?
    Mr. Wolff. Oh, I'm sorry. For clarity, privacy is 
important, and we protect the data that we create very 
carefully, and we make sure that we only accept data that is 
necessary, and only transmit it to people who are important.
    What I said about the competition is we are going to make 
available to the competition the opportunity to participate on 
this website. So choice hotels and other hotels can be on the 
website, and can be sold through our website. But we are not 
going to be giving them information that isn't appropriate to 
them.
    Mr. Towns. Thank you for clearing that up. I must admit 
that I was troubled by that. Thank you very much, Mr. Chairman, 
and I yield back.
    Mr. Stearns. The gentleman yields back. The gentleman from 
Georgia, Mr. Deal, is recognized.
    Mr. Deal. Thank you, Mr. Chairman. Mr. Ruden, did I 
understand you to say that you were not familiar with the 
website that Mr. Wolff is here representing in the hotel area?
    Mr. Ruden. I am aware of it, but I am not familiar with the 
internal contractual relations that they have developed in the 
same way that I am familiar with the Orbitz website.
    Mr. Deal. So you prepared yourself to focus on Orbitz for 
this testimony today; is that right?
    Mr. Ruden. Well, yes, my testimony does address their 
website, the written testimony.
    Ms. Eshoo. Mr. Chairman, excuse me, but can you turn your 
mike on? It is hard for me to hear your answer. I can hear the 
question, but not the answer.
    Mr. Stearns. Do you have your mike on?
    Mr. Ruden. It is on now, and what I said essentially was 
that my written testimony did address briefly the hotel website 
issue, but we do not have and have not had the access to the 
contractual information about how that thing works, and I will 
tell you that I am concerned every time I hear about most 
favored nation clauses. And we will be taking another look at 
that issue.
    Mr. Deal. I just thought it strange that someone 
representing the travel agents weren't familiar with the issue 
relating to hotel websites.
    Mr. Ruden. Well, perhaps I spoke too broadly in saying not 
familiar. I am not familiar as I said with the contractual 
details of it.
    Mr. Deal. Mr. Gilliland, let me ask you just a few 
straightforward questions to see if you can clarify in my mind 
where we stand here. Do I understand that you are contending 
that you as Travelocity could not set up a website that 
operates exactly like Orbitz, with most favored-nation clauses 
in it?
    Mr. Gilliland. What I am saying is that--and this is kind 
of a peculiarity of the agreements that have been set up, is 
that----
    Mr. Deal. Which agreements?
    Mr. Gilliland. The Orbitz agreements, and so the question 
you are asking me is could we set up agreements that are 
similar to what Orbitz has done. The peculiarity that I find in 
it is simply that those agreements were put in place with a 
company that had no bookings, and had no share of the market, 
and had no presence.
    Mr. Deal. And that is the CRS that they used that you are 
speaking of?
    Mr. Gilliland. No, no, I am talking about Orbitz. When they 
were setting up the agreements, you had a company that was 
getting these very favorable types of agreements set up with 
particularly these five airlines, and that was happening in an 
environment where thy had no bookings. They had no share.
    Typically when you are competing in this market, and you 
are attempting to get those types of agreements, and put those 
types of agreements in place, they are generally given to 
those--those aggressive types of agreements are given to those 
distributors that are providing lots of volume to those 
suppliers, and very similar to what you would see really in any 
industry.
    So that is what I am calling out, is that first of all, is 
that peculiarity. And I think again this point that says that 
we have no problem with Orbitz operating, and we have no 
problem with the Orbitz ownership. We do have a problem with 
the fact that we have these agreements in place.
    Mr. Deal. Well, to specifically try to answer my question, 
is there anything that prohibits you from going to the five 
major airlines, or the 37 smaller airlines that are associates 
with them, and say if you will enter into an agreement with 
Travelocity, we will employ the same most favor nation 
language. Is there anything that prohibits you from doing that?
    Mr. Gilliland. Nothing that prohibits me. Unfortunately, no 
progress, as we have attempted to provide lower distribution 
costs to them through our site.
    Mr. Deal. Have you ever made that offer to any of these 
airlines?
    Mr. Gilliland. We have made those types of offers, and I 
think it is in the record, that American Express has made the 
offers to provide for free distribution of those same types of 
fares for which they got a no answer at least so far.
    Mr. Deal. But you are not willing at the same time to give 
up your payment system for someone who would pay you to give 
them a biased or preferred customer status; isn't that correct?
    Mr. Gilliland. We have been extremely aggressive to try and 
go out and get the same types of deals that Orbitz has. The 
very issue here I think is that we do that one by one, we 
compete in the marketplace, and we have this singular 
agreement, this MFN agreement, which provides all of that to 
Orbitz at one time.
    And as a part of that, you have the owner airlines and 
Orbitz setting the price for distribution, and setting the 
price for distribution collectively.
    Mr. Deal. And what do you mean by that?
    Mr. Gilliland. They had agreed to what the price of 
distribution would be through Orbitz for the next--for what I 
understand are 10 year agreements.
    Mr. Deal. That is the declining fee schedule?
    Mr. Gilliland. It is a declining fee schedule.
    Mr. Deal. Well, Sabre is the largest CRS and it also fixes 
the costs, and there is no incentive to decrease your costs 
over the next 10 years. In fact, to follow your 10 year 
history, it would go up 5 percent a year; isn't that right?
    Mr. Gilliland. In fact, it has gone up 4.8 percent over the 
last 10 years, while air fares have gone up 5 percent, 5.1 
percent over that same period on an annual basis. Now, let me 
just talk to the costs for just a minute.
    The airlines have taken commissions to zero as you know for 
all travel agencies, and therefore, through that process the 
cost of distribution through a mom and pop travel agency 
connected to a CRS, Sabre or otherwise, on average costs $11.
    That is every element of cost that an airline pays for 
distribution for that mom and pop agency connected to a CRS, is 
about $11 on average.
    That same comparison made through Orbitz today on that fee 
schedule is $14. It just does not make any sense, and I think 
that we are competing on distribution costs, and we are in with 
those airlines every day, and we want to continue to engage in 
those types of competitive activities with the airlines.
    Mr. Deal. I just have trouble understanding how somebody 
can complain about a provision of a plan that continues to 
reduce the costs of booking fees, and at the same time holding 
their own and increasing theirs every year, and complain and 
point the finger at the one who is reducing the costs. That 
doesn't make any sense to me in a competitive environment.
    Mr. Gilliland. Yes, and let me just describe what doesn't 
make any sense to me, and that is that you have a set of 
competitors coming together to set distribution price. That 
just doesn't sound right to me.
    Mr. Deal. And that distribution price has to be the lowest 
price that is offered anywhere in the marketplace, which can't 
be harmful to the consumer.
    Mr. Gilliland. The lowest price for an unprofitable 
company, and in the end the consumer issue comes back to the 
availability of the fares. It has nothing to do as Mr. Ruden 
said with the distribution costs. It has to do with the 
competition that needs to----
    Mr. Deal. Are you saying that in your capacity for 
Travelocity or in your capacity for your parent company, Sabre?
    Mr. Gilliland. Well, I am representing both Travelocity and 
Sabre.
    Mr. Deal. Oh, so they are both represented in your 
testimony today?
    Mr. Gilliland. They are.
    Mr. Deal. Thank you, sir. Thank you, Mr. Chairman.
    Mr. Stearns. I thank the gentleman. The gentlelady from 
California, Ms. Eshoo, is recognized.
    Ms. Eshoo. Thank you, Mr. Chairman. One of the advantages 
of going around from member to member is that you get to listen 
to not only the questions that are asked, but the answers that 
are given, or the responses that are given, and in my view, 
there is a big difference between an answer and a response.
    I have heard both, and I would like to compliment you on 
the professionalism of your testimony. You helped to answer 
questions when you speak.
    Mr. Gilliland. Thank you, Congresswoman.
    Ms. Eshoo. Each one of us here on the subcommittee 
represents about 650,000 people, and so we have a lot of 
customers, too. We call them constituents, but they are our 
customers.
    There has been a lot of talk about booking fees, and what 
these various organizations--small, medium, large, consortium, 
bumping up against the antitrust organization in my view. I 
mean, the more I listen, the more I am convinced of it. So you 
have not unraveled this thing. You have convinced me that this 
is an elephant's hoof in terms of Orbitz.
    My constituents look at--and so do I, and so do my kids, my 
young adult children, they look at the basic price. I know that 
there is a booking fee that is attached to the ticket, but that 
is not what they go to first.
    They look at the lowest and the best price, and then the 
schedule, the time, in terms of travel. And let me say 
something else about travel. Since our country was attacked, 
whether they are people of means, and I have plenty of them in 
my district in the heart of Silicon Valley, and throughout our 
region in the Bay Area, as well as the most extraordinary 
ordinary family, they are not looking to go abroad.
    They are nervous about it. They want to stay either within 
our State, which is the Nation's State of California, or see 
and take advantage of those things that our country has to 
give.
    And so what you are doing speaks to our time, and I think 
the cost of those tickets and the best bang for the buck, and 
who can bring it to them, is central to what we are doing here 
today.
    Now, I am not asking a question. I am giving my 
observations based on what each one of you have said, and in 
cases what the responses are. I know that there are many 
intricacies to this, but really as I pull the lens back, it is 
what this thing is about.
    I really believe, Mr. Chairman, that we should be taking a 
look at writing legislation to correct this. I don't think the 
consumer is getting the benefit of the doubt when the five 
largest outfits, and in this case they are airlines, come 
together. There is a squeeze going on here.
    And I wasn't a travel agent in my past life, and I probably 
won't be one in my future life, but I will be a consumer all of 
my life. Take a look at my credit cards and yo can see that.
    But when I go to consume, I want the best price and so do 
my constituents. I think there is an effort here in terms of 
the squeeze of the market, and I think there really is an 
adherent danger in having the entity or the entities that 
control the inventory also in charge of distribution.
    And I think that is what this thing is about. I really 
think that is what this thing is all about. So, hats off to the 
big five. You thought of something, but I don't think it is 
fair. I don't think it is fair, and I don't think the consumer 
is getting the best of what they should get.
    Many years ago, and it was before I came to the Congress, 
and it was in this committee, there was an issue about 
controlling inventory and being in charge of the distribution. 
It was Medicare, but there was also Medicare Gap policies.
    Well, you know what? They used the coin of the realm, which 
is the word Medicare. But you know what? They all didn't offer 
the same thing, but people went to them because they thought 
they were.
    Congress stepped in, and I remember my father saying, or I 
chided my father, and I said why are you buying that Medicare 
or Medi-gap policy, and he said, well, god rest his soul, both 
of them, both my father and Danny Thomas, he said, do you think 
that Danny Thomas is going to lie to me?
    So the Congress stepped in and it was this committee that 
did it first, and said, look, you have got to be fair to 
people. You offer these prices, and in your case, it is the 
cost of an airline ticket for travel, then everybody has to 
have access to this, and you compete.
    So while some may not like the analogy, I don't think it is 
such a bad one. I remember it from many years ago. So I am not 
going to ask any questions. You have just heard my 
observations, and I think that our ranking member has stated it 
well in a very brief sentence.
    This is a mess, and I think that we have the responsibility 
on behalf of our constituents who do travel. You know, my 
constituents come to Washington, DC, and it is a pretty costly 
ticket. They are looking for the best deal.
    The teachers and the schools that are trying to bring the 
students here so they can see how democracy works, even though 
it is kind of messy, they need the best price for those 
tickets. Otherwise, they can't come here.
    They are average families, and these are not easy things 
for them to do. So if I pull back from all of the complications 
and the sophisticated language that has been used here, I 
really think that is what the issue is, Mr. Chairman.
    I think you have brought us a long distance today in a 
short period of time by having this hearing, because I have 
learned a lot, and the witnesses, whether they intended it to 
be the case or not, have really been highly instructive in 
terms of my forming my opinion here.
    So I think we need to take a look a legislation to fix this 
and clean it up, and make it better for the consumer and for 
our constituents. Thank you.
    Mr. Stearns. I thank the gentlelady, and we have completed 
our hearing. And let me thank the witnesses for their 
attendance. Most of you got a notice--it was less than a week, 
and so you were kind enough to come and we want to thank you.
    I think the hearing has brought out that it is a lot more 
complicated issue. I think we start to understand most favored 
nation status, and some of these clauses, that we didn't have 
any inkling or understanding before. So you have done a lot to 
educate us as the gentlelady from California has mentioned.
    And, of course, we will continue to follow this. I think it 
is complicated. Mr. Wolff, we appreciate you coming here and 
some of your comments, and we have to look at this at the macro 
level. I mean, it is not just the airline industry and it is 
not just the hotel industry.
    There is a possibility of the music industry doing this, 
and the movie industry, and the currency exchange industry is 
doing this. So when you look from a macro standpoint, there is 
much larger issues than just Orbitz, or just one particular 
site, or one particular industry.
    It is a larger issue that we as members should be cognizant 
of, and so I think this hearing went a long ways to doing that, 
and again we thank you for your support, and your attention, 
and your participation, and the subcommittee is adjourned.
    [Whereupon, at 12:10 p.m., the subcommittee was adjourned.]

                              

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