[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000 deg.
CRS REGULATIONS AND SMALL BUSINESS IN THE TRAVEL INDUSTRY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON REGULATORY REFORM AND OVERSIGHT
of the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, JUNE 26, 2003
__________
Serial No. 108-22
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
______
92-620 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia CHARLES GONZALEZ, Texas
TODD AKIN, Missouri GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan
J. Matthew Szymanski, Chief of Staff and Chief Counsel
Phil Eskeland, Policy Director
Michael Day, Minority Staff Director
(ii)
?
C O N T E N T S
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Witnesses
Page
Sullivan, Tom, U.S. Small Business Administration................ 3
Ruden, Paul, American Society of Travel Agents................... 5
Cooper, Richard, National Travel Systems......................... 6
Rojahn, David, DTR Travel........................................ 8
Pratt, Norma, Rodgers Travel, Inc................................ 10
Schwarte, David, Sabre Inc....................................... 12
Appendix
Opening statements:
Schrock, Hon. Edward L....................................... 25
Prepared statements:
Sullivan, Tom................................................ 28
Cooper, Richard.............................................. 32
Ruden, Paul.................................................. 37
Pratt, Norma................................................. 58
Schwarte, David.............................................. 61
Rojahn, David................................................ 71
(iii)
CRS REGULATIONS AND SMALL BUSINESS IN THE TRAVEL INDUSTRY
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THURSDAY, JUNE 26, 2003
House of Representatives,
Subcommittee on Regulatory Reform and Oversight,
Committee on Small Business
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:01 a.m. in
Room 2360, Rayburn House Office Building, Hon. Ed Schrock
[Chairman of the Subcommittee] presiding.
Present: Representatives Schrock, Gonzalez and Majette.
Chairman Schrock. We will go ahead and bring the Committee
to order. I am sure other Members will come in. As you just
heard, we are going to have votes in about 15 minutes,
unfortunately. That will be one 15 minute vote and two five
minute votes. Then we will come back in here.
Good morning, ladies and gentlemen. Our hearing today
addresses the Department of Transportation's notice of proposed
rulemaking on computer reservation systems. Computer
reservation systems, or CRSs, are the means by which our
nation's travel agents have automated. They provide the real
time access to airline schedules and seat availability that
travel agents and most internet websites rely on to allow
customers to book airline tickets.
The Department of Transportation regulates the relationship
between the airlines and the IRS's because at one time most
airlines owned CRSs. The circumstances of the industry have
changed, and these rules are supposed to sunset every five
years. The last time they were set to sunset was 1997, and the
travel industry has been waiting since then for an updated set
of rules.
Now as Chairman of the Subcommittee on Regulatory Reform
and Oversight of the House Committee on Small Business, I pay
very close attention to regulations that will have an impact on
small businesses. My mandate, in fact, is to investigate any
and all regulations that will impact small businesses.
The Department of Transportation, as required by law, made
the determination that this rule would significantly impact
small businesses. The problem is they pretty much stopped right
there. They did not quantify how much it might cost small
business or how many it would affect, which they are required
to do.
In fact, the DOT asserts that some of the proposals would
benefit small businesses, and a few of the proposals might
increase cost to travel agencies, but would affect only the
larger travel agencies. The Department provided no information
or analysis to back up their assumptions about the impact on
small business.
Based on the comments from travel agents and other affected
parties, DOT must never have consulted with a single affected
business. Travel agents have consistently, insistently asserted
the exact opposite of the Department's analysis. The Small
Business Administration's independent Office of Advocacy also
asserted that DOT's initial analysis was incomplete and will be
joining us to testify on this matter today.
The travel agents and the CRSs are not the only parties
interested in this rule. Even the Department of Justice has
weighed in with their concerns and suggested that regulations
concerning travel agents be dropped. The National Federation of
Independent Business stated in their comments, and I quote:
``We are concerned that DOT has not conducted a thorough impact
analysis on this rule, and we strongly encourage the Agency to
consider performing one.''
The National Business Travel Association was disappointed
with the initial notice of rulemaking and said: ``The
regulation is supposed to give consumers, not competing
interests, more choice, lower costs and enhanced reliability.''
The NBTA believes it would be a disservice to the traveling
public if the DOT did not direct the implied benefits of CRS
deregulation towards the consumer rather than airlines and
other travel suppliers.
I want to state clearly that this hearing was not scheduled
to pick winners between competing interests and businesses in
this industry. My goal in holding this hearing is to hold an
agency accountable to the standard that Congress and the
President has set for taking small businesses into proper
account during rulemakings. It is also not the job of the
Department of Transportation to pick winners in this
regulation. I hope they realize that as they develop the final
rule.
We have an excellent group of witnesses today who are going
to help shed some light on the Department's analysis of the
rule's impact on their businesses. I look forward to their
testimony.
I was going to move at this point to any other Member
comments, but since they are not here we will just go right on
into the testimony. Before we begin receiving testimony,
however, I want to remind everyone that we would like each of
the witnesses to hold their testimony to five minutes if they
can. In front of you on the table you will see a box that will
let you know when your time is up. When the light turns yellow,
you have one minute to go, and when the red light comes on a
trap door opens.
[Laughter.]
Chairman Schrock. Once the red light is on, the Committee
would like you to wrap up your testimony as soon as you feel it
is comfortable.
Our first person we are going to hear from this morning is
our friend, Tom Sullivan, who is the Chief Counsel in the
Office of Advocacy at the Small Business Administration. We are
happy to have you here, Tom, and look forward to your
testimony.
[Mr. Schrock's statement may be found in the appendix.]
STATEMENT OF THE HONORABLE THOMAS M. SULLIVAN, CHIEF COUNSEL,
OFFICE OF ADVOCACY, U.S. SMALL BUSINESS ADMINISTRATION
Mr. Sullivan. Thank you, Chairman Schrock. Good morning,
and thank you for the opportunity to appear here to address
whether the Department of Transportation is following the Reg
Flex Act in its proposal to revise the rules regarding computer
reservation systems, CRSs.
My name is Tom Sullivan. I am the Chief Counsel for
Advocacy at the United States Small Business Administration.
Pursuant to our statutory authority, Advocacy actively solicits
input from small entities to assist our office in setting
policy priorities and identifying rules that will affect them.
Advocacy's involvement in the CRS rulemaking is a result of
those outreach activities.
Please note that the statement expressed here this morning
independently represents the views of Small Business and does
not necessarily reflect the official position of the
Administration or of the U.S. Small Business Administration.
Mr. Chairman, let me start by expressing my sincere
appreciation for your statements on the House Floor two days
ago in support of H.R. 1772, the Small Business Advocacy
Improvement Act of 2003, which passed the House of
Representatives unanimously. My entire staff was flattered by
your praise, and I want to thank you and assure you that we
will continue to serve as a small business watchdog. We will be
ever more effective once H.R. 1772 is signed into law.
As Chief Counsel for Advocacy, I am charged with monitoring
federal agencies' compliance with the Reg Flex Act, as amended
by the Small Business Reg Enforcement Act of 1996. There is an
acronym called SBREFA. My written testimony provides an
overview of the Reg Flex Act and our office's responsibility.
My written testimony also details President Bush's attention to
the Reg Flex Act memorialized through Executive Order 13272 and
gives the Committee an update on our progress in implementing
President Bush's Executive Order.
With the Chairman's permission, I would like to submit the
written statement for the record and skip right to matters
related to Transportation CRS rulemaking.
In November 2002, Transportation published the proposed
rule on CRS regulations. The proposal examines whether the
existing CRS rules are necessary and, if so, whether they
should be modified. Transportation's stated intent is to
eliminate some of the existing rules to promote competition in
the airline industry, to lower costs and to provide travel
agencies with protection from costly contracts.
The analysis provided by Transportation in their proposal
lacked some of the elements that we believe should be part of
an initial regulatory flexibility analysis, which is a
requirement under the Reg Flex Act. Although Transportation
admits that the economic impact of the proposal will be
significant, the Agency provides only general statements about
increased cost and potential savings rather than specific
information to provide the public with insight into the
potential magnitude of these costs.
For example, Transportation states that the proposal to
restrict or prohibit productivity pricing may increase CRS
costs for some travel agencies, but the affected travel
agencies would be larger agencies only. Transportation's
analysis should provide insight into how this assumption was
made and what those potential costs could be.
The Reg Flex Act requires an agency to provide a
description of the estimated number and types of small entities
to which the proposed rule will apply. Although Transportation
states that the proposal will have an impact on segments of the
small business community, there appears to be no specific
information on the number of small entities that will be
specifically affected by the rule.
It is my opinion, Mr. Chairman and Mr. Gonzalez, that a
supplemental Reg Flex analysis by Transportation will provide
the public with greater insight into this rulemaking process,
as well as provide the necessary information to achieve
compliance with the Reg Flex Act.
I urge the Department of Transportation to carefully
consider the economic impact of this rule on Small Business and
to examine and fully flush out any alternatives that may
minimize that impact. I further urge Transportation to fully
consider the comments submitted by small businesses, many
represented by the panel this morning, to the rulemaking record
and the testimony provided by small businesses at the hearing
in May that Transportation held on this issue.
The Office of Advocacy is certainly available to work with
Transportation to assure compliance with the Reg Flex Act while
accomplishing their desire to improve the CRS system.
Thank you for the opportunity to appear this morning, and I
am happy to answer any questions that the Subcommittee may
have.
[Mr. Sullivan's statement may be found in the appendix.]
Chairman Schrock. Thank you very much, Tom.
Let me recognize the presence of our Ranking Member, my
good friend from Texas, Mr. Gonzalez.
Mr. Gonzalez. Mr. Chairman, thank you very much. First of
all, I need to apologize to the Chair and to the Committee and
staff, but especially to the witnesses who have taken the time
and trouble to be here to educate us on what is going on with a
very important aspect that we are trying to accomplish here.
I know Mr. Sullivan and I have discussed exactly his role
and some of his frustration, which I think is demonstrated
today. I really do appreciate that you are truly an advocate
and a watchdog for small businesses.
Mr. Chairman, I have another Committee hearing going on
with Homeland Security. They are marking up a bill, so if I get
up it is just to go and vote. I will be back. I promise to
catch up with as much as I can. Again, my apologies and also my
appreciation.
Chairman Schrock. No problem. In fact, the buzzers are
going to ring in a couple minutes. We have three votes on the
Floor, and they understand that. Thank you, Charlie.
Our next witness is Paul Ruden, who is the Senior Vice
President for Legal and Industry Affairs for the American
Society of Travel Agents. Paul, we are happy to have you here.
Thank you.
STATEMENT OF PAUL M. RUDEN, ESQUIRE, SENIOR VICE PRESIDENT,
LEGAL AND INDUSTRY AFFAIRS, AMERICAN SOCIETY OF TRAVEL AGENTS
Mr. Ruden. Thank you, Mr. Chairman, very much. We
appreciate the chance to share our views on the serious
problems that this pending DOT rulemaking on computer
reservation systems is going to pose for our industry.
I also want to thank you at the beginning for the crucial
role that the Small Business Committee played in the recent
extension of the SBA Economic Injury Disaster Loan Program to
qualified agencies throughout the country and the increase in
the size standard that allowed more small businesses to qualify
for those loans. Those actions by your Committee and the
Congress saved the businesses of hundreds of small travel
agencies in the wake of the September 11 attacks.
In a way, today's issue is related to those. You know the
basic history. Mr. Sullivan quite well summarized the problem
of years of delay and the issuance last November of a massive
notice of proposed rulemaking to consider whether to continue
the rules and, if so, what they should be.
This NPRM somewhat uniquely, in my all too long experience,
posed a multitude of conflicting questions and mutually
contradictory outcomes for consideration by the government and
the parties. One of those outcomes was to eliminate the rules
entirely, but DOT then went on to propose a specific set of
regulations.
The adoption of those rules, even for a transition period,
poses the gravest difficulties for our industry. Those rules
are aimed directly at the economic viability of small business
travel agencies, fully 98 percent of our industry.
The proposed rules would make it unlawful for any CRS to
offer a travel agency a payment of any kind or a discount from
its fees or any inducement that is designed or intended to
encourage or reward the Agency's more frequent use of the
system. These commercial inducements are in many cases the
margin of survival for small travel agencies, arising in what
everyone concedes is the most competitive part of the air
transportation marketplace, yet DOT would ban those rewards.
While conceding that the proposed rules have a significant
economic impact on a substantial number of small business
entities, the NPRM, as Mr. Sullivan has testified, does not
identify how many will be affected or how large the effect will
be. Instead, it argues that the rules will increase travel
agency efficiency by providing greater opportunities to use
multiple CRS systems, a concept we labeled in our testimony as
a pipedream.
To the same effect is DOT's treatment of the productivity
pricing provisions whereby travel agencies are able to reduce
the cost of their systems by booking more business. DOT says
that when these payments are forbidden travel agencies will
gain flexibility in switching from one CRS system to another.
While they eventually also recognize that agencies will
lose revenue because of the proposed rules, they say, and again
without providing any data whatsoever, that the losers will all
be the larger agencies and, therefore, presumably of no
concern. Those are the two percent of our industry who are not
small business under existing standards.
Mr. Chairman, this is simply not right. Congress did not
intend the Regulatory Flexibility Act requirements for impact
analysis to be empty formalities or broad recitations of
statutory language followed by general reassurances that all
will be well, but that is pretty much what we have in this
rulemaking.
DOT has the means to obtain very specific information about
the magnitude and the identity of the recipients of the
inducement payments made by the CRSs, and from that data you
could make rational inferences about the likely effects of the
proposed rules. DOT did none of those things in its initial
regulatory analysis. Why not?
That is a very important question because we believe that
the proposed rules will be fatal to many small business travel
agencies. Only DOT has the power to determine how many. It has
the responsibility to collect that information, to do the
analysis and present it on the public record for evaluation and
comment before the final rules are adopted, not afterward, when
the only remedy is going to be a trip to the Court of Appeals.
If that trip were successful, the rulemaking would get
reopened. We would start this whole process over again to the
detriment of everyone.
We hope this Subcommittee will agree with us on this and
call upon DOT to conduct the evaluation that we have suggested
and that Mr. Sullivan has just suggested for each of the rules
that may reduce the revenue stream or raise the cost that our
struggling industry now receives or incurs.
I mentioned, Mr. Chairman, early on that the DOT had talked
about the alternative of simply eliminating the rules. The
evaluation they purported to do under the Reg Flex Act, of
course, did nothing to help there either, and I have some other
comments I will address during the question and answer period
perhaps.
Thank you very much. I would ask that our full statement be
included in the record, the written statement.
[Mr. Ruden's statement may be found in the appendix.]
Chairman Schrock. Without objection. Thank you very much.
Mr. Ruden. Thank you.
Chairman Schrock. All the way from Lubbock, Texas, where it
is probably as hot there as it is here today, is Richard
Cooper, the president of National Travel Systems. We are
delighted to have you here.
STATEMENT OF RICHARD A. COOPER, PRESIDENT, NATIONAL TRAVEL
SYSTEMS.
Mr. Cooper. Thank you. Chairman Schrock, Representative
Gonzalez, my name is Richard Cooper, president of National
Travel Systems, a small business based in Lubbock, Texas, that
operates travel agency branch locations primarily in west
Texas. Thank you for the opportunity to appear today to share
my views on the impact of the DOT CRS proposal on small
businesses and consumers.
The rules that DOT is proposing will have an immediate
negative impact on travel agents in the communities we serve.
Due to the unprecedented challenges in the travel and tourism
industry over the last decade, travel agencies have been forced
to change their business models continually to survive and
serve the consumer interest.
I believe we have done a remarkable job of adapting despite
many hardships in the economy and in the airline industry and
in an increasingly uncertain world. Despite our progress and
for no sound reason, the DOT is proposing to deliver a major
regulatory blow to us and our future.
What would the DOT's proposed CRS rules do to small travel
agencies like National Travel? Well, there are a number of
things, the worst of which is a senseless outline of
productivity pricing incentives for our travel bookings made
through the CRS.
Since the airlines reduced our commissions to zero, these
incentives, which the CRS pays us to reach booking volume
targets, are an extremely important source of revenue for small
agencies. My understanding is that the DOT is required to
assess the impact of the proposed regulations on small business
and consider whether there are less costly alternatives.
I would like to know which travel agencies the DOT talked
to before publishing the NPRM. I suspect the answer is none. I
do know that every travel agent I have talked to, and I have
talked to plenty, is extremely unhappy about the rules. Without
productivity incentives, our agency would have to shift the
financial burden of each segment booked onto the back of the
consumer.
Today, National Travel charges our clients a $35 service
fee for booking an airline reservation. Without productivity
incentives, National Travel Systems would have to raise the
service fee to as much as $50 just to break even. Many
consumers would find a service fee increase of this magnitude
excessive. This would force consumers away from travel agents
and into the arms of the airline owned distribution systems,
the result that DOT apparently and incredibly wants to
engineer.
Why should anybody care? I am going to tell you why. The
viability of unbiased consumer advice and consumer choice is in
jeopardy. Independent travel agents play an extremely important
role in the travel distribution system. We add value to many
purchasing decisions and often make a difference between a
successful trip and a disaster.
For example, during the 9-11 tragedy a corporate customer
was desperately trying to locate its employees that were
scheduled out that week. At the request of the CEO, we promptly
located all of the staff except for the individuals traveling
using an on-line service. Needless to say, he changed the
policy shortly thereafter.
In this rulemaking, the DOT has put the brand of personal
and consumer oriented service at risk. There is no question
that major airlines have a very tough road ahead to return to
financial health. However, any actions taken by the DOT to help
the airlines should not come at the expense of other travel
industry participants, especially small travel agencies like
mine, and certainly not at the expense of consumer choice and
price.
The proposed CRS rules shift a disproportionate financial
burden to travel agents and are, therefore, anti-competitive.
The NPRM would create an unlevel playing field with a wealth
transfer from traditional, non-airline owned entities to
airline owned channels of distribution. This is not the proper
role of government.
Other issues that the DOT should have considered, but did
not have a negative impact on the NPRM, are small carriers and
other sectors of the travel and tourism industry and on small
American towns and rural areas. I would hope we have a chance
to explore some of these impacts at the hearing.
DOT extols the internet in its rulemaking and, rather than
let market forces work, seeks to engineer its greater use. The
internet is an important source of information for some, but it
is not for everyone. As a father of three and a husband, the
absolute last thing I want to do when I get home is subject
myself to navigational confusion, viruses, spamming,
unsolicited e-mails and knowing Orbitz's pop-ups while surfing
for an airline fare without an opinion about price fairness.
Many consumers, particularly rural consumers, do not have
and cannot afford internet access, let alone high speed access,
or they simply do not own credit cards. Many that do have
credit cards do not want to risk identity theft. Furthermore,
many seniors and baby boomers were raised in an era of doing
business face-to-face with folks you know in your community.
That is a preference worth preserving.
Again, the internet works for some people, but it does not
work for all. The DOT should be trying to preserve consumer
choice instead of undermining it through the NPRM.
In conclusion, the regulation, open markets and consumer
freedom of choice are far better alternatives to defective
rulemaking, which utterly fails to take into account the impact
on small business and consumers and utterly fails to consider
less intrusive alternatives. I hope the process of undoing this
neglect has now begun.
Thank you for the opportunity to share my views.
[Mr. Cooper's statement may be found in the appendix.]
Chairman Schrock. Thank you very much, Mr. Cooper.
I think we are going to recess here for a short time, and
Mr. Gonzalez and I will go do our duty and vote. We will be
back as quickly as we can get back. Thanks.
[Recess.]
Chairman Schrock. Thank you for your indulgence. This is
apparently going to happen every hour or so all day today, so
please bear with us.
We are glad to have David Rojahn here, who is the president
of DTR Travel, Inc. He is from Englewood, Colorado. We are
delighted you are here. Thank you.
STATEMENT OF DAVID L. ROJAHN, PRESIDENT, DTR TRAVEL, INC.
Mr. Rojahn. Thank you. Chairman Schrock, Members of the
Subcommittee. I am honored to have this opportunity to testify
before you today as a small business owner on the notice of
proposed rulemaking on the computer reservation systems pending
before the Department of Transportation.
My name is David Rojahn. I am the president of DTR Travel,
Inc., in Englewood, Colorado, which is a suburb of Denver. My
wife and I opened our agency back in 1993. DTR Travel employs
three travel agents. Our business mix is primarily leisure and
small corporate accounts. DTR is a member of the American
Society of Travel Agents where I have recently served as
president of the Rocky Mountain Chapter.
I request that my written statement be part of the
Subcommittee's hearing record.
Mr. Chairman, I believe my business is pretty typical of
the small businesses that constitute the vast majority of
travel agencies still serving millions of travelers from every
corner of the United States. My business has grown up under CRS
rules that have been in effect since 1984. We have never known
another regime.
The existing CRS rules have worked well. Small travel
agents have obtained more and more services through their CRSs,
and options for subscriber contracts have increased over time.
CRSs have shown flexibility, especially in helping small travel
agents deal with the economic pressures since September 11.
This is not to say that we think continued regulation is
the best approach. In fact, I can tell you that we strongly
share ASTA's view that no regulation at all would be far
preferable to the regulations now being proposed by DOT, which
seem to be aimed squarely at making my business extinct.
The proposed rules seem to be heavily weighted in favor of
the largest airlines and Orbitz. This seems unhealthy, and it
will likely have a negative effect on CRS services and the
economics of small travel agencies. As Paul Ruden testified on
May 22 before the DOT, the large airlines are the problem, not
the CRSs. The airlines are attempting to take as much business
away from small agencies as they can. The proposed rules
support the large airlines in this regard and should not be
adopted.
Specifically, the proposal to prohibit productivity pricing
and other CRS incentives is inappropriate. Productivity bonuses
are a means by which the CRSs share rewards of good performance
by the agency, something that the large network airlines seem
to be determined to avoid. They want to keep the rewards a more
efficient means of doing business for themselves and to shut
out travel agencies from any meaningful source of supplier paid
revenue.
A small travel agent may decide that another type of
contract is preferable, but all agents have and should continue
to have the option of choosing productivity pricing if it makes
good business sense.
Also, small travel agents have subscriber contract options
that allow them to choose the model that best fits their needs.
Small agents on the Galileo system, for example, can choose the
Select and Connect option and avoid production requirements
altogether. Moreover, agents can choose different contract
lengths that are available, and an agent should be able to
choose the length that best fits their needs.
Some small agents still prefer a five year contract, which
provides stability and better economics, while others want more
flexibility. The CRSs have generally provided that flexibility,
a business approach that once again seems lacking in the large
network of airlines.
DOT says it needs to make some changes in order to allow
travel agents to use alternatives to CRSs. Though I embrace
having many alternatives to include in my tool kit, it does not
make sense for a small travel agent to use more than one CRS,
for the training would be costly and unproductive, not to
mention the additional technical cost to support multiple
network connections.
Subscriber contracts provide room to use such alternatives
if the travel agent wishes. As technology develops, maybe this
will make more sense as a practical matter, but changes in the
rules to prevent travel agents from making deals with the CRSs
are absolutely inappropriate.
DOT and some parties suggest that travel agents should pay
for more of the CRS cost and fees. Airlines are the ones that
derive the primary benefit from CRS services, and they should
pay the lion's share. Travel agents are just agents of the
airlines. Small travel agents should not and could not pay more
since they are financially stretched, particularly since
airlines stopped paying base commissions and small agents have
a limited opportunity for revenue from override commissions.
The idea that we or our customers can or should pay
directly the airlines' booking fee expenses is uniquely a bad
idea and one that I understand even the Justice Department is
no longer pressing.
Travel agents need access to a broad inventory to service
their customers well and retain their base of business. We do
not want to be pawns in the power struggle between the airlines
and the CRSs over listing and delisting.
Mr. Chairman, I am not a lawyer nor an expert on CRS rules.
What I am is a small businessman who understands what he needs
to do business in today's technology based world. It is beyond
the understanding that the Department of Transportation, with
no apparent study to the specific consequences for businesses
like mine, would propose to ban CRSs, the area of the
marketplace where the competition is strong.
In conclusion, I thank the Subcommittee for the opportunity
to testify today on DOT's proposed CRS rules. I strongly urge
the Small Business committee to convince DOT any new CRS rules
should retain flexibility in the travel agent agreements with
the CRSs, especially productivity and other incentives.
Thank you.
[Mr. Rojahn's statement may be found in the appendix.]
Chairman Schrock. Thank you very much. You do not have to
apologize for not being a lawyer. I am not either.
Mr. Rojahn. Okay.
Chairman Schrock. There is nothing to apologize for. Thank
you.
Our next witness Norma Pratt, who is the president of
Rodgers Travel in Philadelphia, Pennsylvania. We are glad to
have you here. Thank you.
STATEMENT OF NORMA R. PRATT, PRESIDENT, RODGERS TRAVEL, INC.
Ms. Pratt. Yes, Mr. Chairman. My name is Norma Pratt, and I
am president of Rodgers Travel in Philadelphia. Rodgers Travel
is the oldest African-American travel------.
Chairman Schrock. Mr. Pratt, could you please pull the
microphone closer?
Ms. Pratt. Sorry.
Chairman Schrock. It is not the greatest system in the
world. We are doing it on the cheap, which should make the
taxpayer feel happy.
Ms. Pratt. Rodgers Travel is the oldest African-American
travel agency in the United States. Our agency is an 8(a) firm
and holds several DOD and GSA contracts to perform services for
federal agencies in California, Colorado, Delaware, New Jersey
and some other states. We also are certified locally and
regionally for other minority type things. We are also long-
term members of ASTA and SGTP and ITAS.
Since our founding in 1949, Rodgers Travel has been
dedicated to providing professional and cost efficient travel
services to government, corporate and leisure travelers
worldwide. I have been personally active in Rodgers Travel
since 1974.
Today, we employ 40 persons. We have worked hard to build a
business that is important to our community, to our customers
and to our employees, but it has not been easy. We have stayed
in business and continued to serve our customers by being
innovative, flexible, patient and always focused on those
things that cause people to want to do business with us, but
the obstacles have been high and the hours long.
Most of our problems have been caused by the airlines'
inability to conduct their business as efficiently and as
innovative as I run mine. Perhaps they should pay more
attention to those things that cause people to want to do
business with them rather than paying attention to their stock
options and undeserved bonuses.
My company, Rodgers Travel, has gone from handwriting
tickets for walk-in customers to having our own website, yet we
estimate that 50 percent of our traditional African-American
clients and a very large percentage of the military enlisted
personnel we serve do not have internet access, and for them
our agency is the only place in their immediate neighborhood
where they can learn about all their options and independently
exercise the freedom to select travel methods of their own
choosing.
We need to be able to continue to provide objective advice
to our traditional walk-in clients and our government clients
nationwide, yet under DOT's proposal airlines will be able to
put their fares only on some CRSs and not in others. I believe
that all airlines should be required to put all of their fares
in all CRSs. This will help ensure that the lower income folks
are not being discriminated against because they do not have
personal internet access to all airlines and all fares. Travel
agencies need all fares and all inventory content in one CRS to
make this happen.
Our customers tell us that they appreciate the value we
give them, even when we are forced to start charging them a fee
that became necessary when the airlines told us they would not
pay us for selling their seats.
If the Department of Transportation's proposed changes in
the rules governing travel distribution are allowed to go
forward as proposed, not only would lower income people without
internet access be denied fare access equality, but also small
businesses such as ours will be harmed in many ways, harm that
is unnecessary and completely preventable.
Under our present CRS contracts, the more productively we
use the CRS system the more money we either make or save
depending on our volume. In effect, we are paid a commission by
our CRS vendor for each booking. This is a vital source of
revenue for our company and for most other travel agencies.
Without this income, we will be forced again to raise the cost
of an airline ticket to those who can least afford it, or the
travel agency will be out of business.
Mr. Chairman, I cannot understand why the DOT believes that
it should prohibit us from being paid based on our performance,
which I always thought was a hallmark of the free enterprise
system. In other words, I cannot understand why the government
would pick winners and losers in the travel distribution area,
and the losers would be us, the small businesses that are the
backbone of our nation's economy.
As I see it, there can only be one possible explanation for
these proposals. DOT does not have a clue about how the travel
distribution system works and how it affects Americans in the
real world. I understand that DOT is supposed to fully consider
the impact of rulemaking on small business, but it seems
obvious to me that DOT has not spent 10 minutes thinking about
Rodgers Travel and other small businesses like mine.
Neither have they spent any time considering how it will
affect the internet unconnected Americans. It seems to me that
it will only help the airlines continue to operate their
businesses poorly.
The end.
[Ms. Pratt's statement may be found in the appendix.]
Chairman Schrock. Thank you very much. Your next paragraph
was going to be very interesting, but I will make sure it is in
the record as well.
Ms. Pratt. Okay.
Chairman Schrock. Our last witness this morning is David
Schwarte, who is the Executive Vice President and General
Counsel for Sabre Holdings Corporation. We welcome you, David.
Thanks for being here.
STATEMENT OF DAVID A. SCHWARTE, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, SABRE HOLDINGS CORPORATION
Mr. Schwarte. Thank you. Good morning, Mr. Chairman and
Congressman Gonzalez. Thank you for the opportunity to appear
here this morning.
Through the Sabre computer reservation system, we provide
automated tools for selling all types of travel products for
our travel agency customers. In the United States, about 5,600
of those are small businesses. The Sabre CRS is one of four
systems that competes across the globe. We are not a small
business ourselves, but we are intimately involved in helping
small businesses, like the witnesses here this morning,
succeed.
Sabre's bottom line is this. First, the Department of
Transportation's NPRM is headed in exactly the wrong direction.
It is designed to favor the large carriers over all others in
the industry, including small businesses. If adopted, the NPRM
would have an enormously detrimental effect on many in the
travel industry, particularly our smaller travel agency
customers, and you have heard much about that already this
morning. The NPRM is nothing more than pork barrel regulation
at its worst.
Second, because of the tremendous changes that have
occurred in the CRS industry since the rules were last
readopted in 1992, rules are no longer needed in the United
States in our view, period, full stop. Worse yet, the rules
actually distort the market.
As the Department of Justice recently noted, nearly all of
the provisions of the CRS have been ineffective, and they carry
an unjustifiable cost burden for consumers. To be blunt, the
CRS industry is the poster child for the law of unintended
consequences of government regulation.
This industry is so dynamic that it is simply impossible
for any regulator to accurately predict the consequences of
new, more intrusive rules. It should be lost on no one that
core provisions of the existing rules that DOT thought were
essential in its first draft of the NPRM in April 2002 it now
says actually hurt competition.
A simpler, better alternative to the NPRM is to deregulate
this industry once and for all. A solution that relies on the
free marketplace will produce a far better outcome than
bureaucratic central planning.
Mr. Chairman, what is fatally wrong with the NPRM and why
is it met with a tsunami of criticism? The answer is that DOT
has constructed a proposed rule that is imbalanced and
misguided. With respect to airlines, it seeks to eliminate the
present obligations of fair dealing that large carriers have
under the CRS rules. In addition, the NPRM would forbid CRSs
from negotiating contract terms with airlines that provide
safeguards for our travel agent users.
For example, DOT proposes to prohibit systems from
negotiating deals with even the largest airlines that would
insure access to all of those airlines' fares, including web
fares, for our travel agency users. Travel agents cannot serve
their customers if they are denied the ability to offer those
customers the full range of travel options. How can such an
attempt by DOT to hand greater leverage to some of the largest
carriers in the world be in the best interest of consumers or
travel agents or, for that matter, anybody but the large
airlines?
In sharp contrast, DOT seeks to increase the regulatory
burden on travel agents and CRSs. You have heard much about
that this morning, but let me elaborate for a minute. Among
other things, the Department of Transportation has suggested
that it might shorten by decree the length of contracts we and
travel agents are allowed to negotiate to perhaps three years
and maybe one, irrespective of what the CRSs or the travel
agents think is in their best interest as a business.
Even though the travel agents have been badly bloodied by
the airline industry deciding to pay them zero for the valuable
services that they render, DOT wants to inflict a further wound
by restricting CRSs from compensating subscribers for making
productive use of our systems. Take away this income stream,
and many travel agents would be forced to close their doors.
In six years in which this rulemaking has dragged on, the
marketplace for travel distribution has changed dramatically.
Once nearly 90 percent of all tickets were sold through the
CRSs. Today, it is just over half. Even more importantly,
airlines have shed their interest in the CRSs, and if the World
Span sale closes as announced this summer the vertical
integration between airlines and CRSs that was the reason the
rules were adopted in the first place will have evaporated.
With that link having evaporated, the need for regulation will
have disappeared as well.
In conclusion, Mr. Chairman, the NPRM is fatally flawed. It
should not be adopted in any form. DOT should simply let the
rules lapse on January 31, 2004, when they are scheduled to
expire. There is no market failure in this industry that would
justify continued command and control regulation.
Like every other industry in America, vigorous enforcement
of antitrust laws and unfair competition laws by the Department
of Justice and by the FTC will be more than adequate to assure
that any misconduct is dealt with if it arises in a deregulated
environment.
I thank you very much for your attention and look forward
to answering your questions.
[Mr. Schwarte's statement may be found in the appendix.]
Chairman Schrock. Thank you very much, and thank you all
for your testimony. It was very good.
Tom, your office filed comments on this rule letting the
Department of Transportation know that its analysis was
inadequate. You offered your assistance.
I am curious. Has the Department of Transportation
responded to your assistance, and do any other agencies require
your assistance from time to time on certain issues?
Mr. Sullivan. Mr. Chairman, with regard to this specific
rule, no, the Department of Transportation has not requested
our assistance in moving forward on the CRS regulations. They
have received our comments certainly offering our assistance,
but, no, they have not taken us up on this.
With regards to other agencies taking advantage of the
resources that we have in the Office of Advocacy, the answer is
yes, other agencies do contact us frequently, and those
requests range from help doing regulatory analysis, because we
do have a team of regulatory economists on staff, all the way
through to folks just in the regulatory community wondering
what types of small businesses may be affected.
From time to time, agencies do call us and ask whether or
not we can put together a round table of small business groups
so that they can flush out how certain proposals will affect
broad members of the small business community, which really
benefits the ultimate decisionmaking that we see lacking in
this particular rule.
Chairman Schrock. Why do some agencies do it and DOT, for
instance, does not? Any ideas?
Mr. Sullivan. I do not know, Mr. Chairman.
Chairman Schrock. Okay. I do not either.
What would a really good reg flex analysis have looked
like, and how would it have helped us notice a proposed
rulemaking?
Mr. Sullivan. Mr. Chairman, with your permission I will
answer and also turn it over to the panel to answer if you
would like------.
Chairman Schrock. Sure.
Mr. Sullivan.--because they know how this rule will impact
their own businesses.
We are starting to train government agencies on what
constitutes a good reg flex analysis, and we actually have a
training guide that uses as an example a Federal Trade
Commission rule. In that training document, it lays out what
constitutes good analysis. That is simply dollar amounts,
burden amounts of what different regulatory approaches would
mean to a small business.
For instance, if the Department of Transportation says that
efficiencies will lead to lower airline prices, ticket prices,
then that should be backed up with some economic analysis of
what those lower prices would mean.
What we see are statements, Mr. Chairman, but not backed up
with economic analysis that should be part of their submission
under the Regulatory Flexibility Act.
Chairman Schrock. Mr. Sullivan suggested you all might want
to have a crack at that. Any of you want to comment on that?
Paul?
Mr. Ruden. Mr. Chairman, I mentioned in my testimony that
the amounts of money at stake in the productivity/ signing
bonus/incentives area, of which there are many different
approaches. The marketplace is very vibrant and dynamic in this
respect. A lot of negotiating goes on and so these payments and
cost reductions take many forms, but they are not particularly
mysterious. We are not talking about secret formulas.
Had DOT reached out to the CRSs and to the airlines, they
could quantify to a very substantial degree, if not 100
percent, exactly how much money is involved, which agencies are
getting it, and we are not suggesting that they name the names
obviously. They would aggregate the data in an appropriate
manner to protect the confidentiality of business information.
They have the power to get that information, and it is
there. It is there to be had. It is the essence really. Each
one of these rules will have identified effects on streams of
income or cost burdens that can have numbers put to them. They
also, it seems to me, should be asking and looking into the
extent to which travel agents, small businesses, already hang
on the edge of failure because of all the consequences.
We hear this in the airlines all the time about how much
money they are losing and they were hurt by 9-11 and hurt by
the economy and hurt by the war and hurt by SARS. They are not
alone. The entire industry has been impacted in exactly the
same way by those things, and so they alone should not be the
people who get taken care of.
All we are asking in this respect is that the government do
their homework, and then if they can still justify these rules
so be it. We will have a nice argument about that at that
point, but it would not be an argument just about philosophy.
Chairman Schrock. Any other comments? Mr. Cooper?
Mr. Cooper. Mr. Chairman, I would like to bring it to a
different framework, and that is the area where my travel
agency and our branch locations operate.
Generally the rules are about economies of scale, and if
you look at where my branch locations are west of Dallas to El
Paso, north of San Antonio to the top of the panhandle, there
are numerous communities, very few of them over 200,000. My
headquarters happens to be in Lubbock, Texas. Amarillo, Texas,
is 200,000. You have Midland. I know Odessa, Texas, is about
200,000, but everything else in between that area is generally
anywhere from 5,000 to 50,000 in population.
The financial burden that is being shifted in these rules
proposed will cause basic business analysis to go forth, and
consolidation will continue. I have full service, independent
travel agents in these marketplaces, and right now the
financial pressure that we are under if these rules are put in
place, I am not so sure that I would be able to operate in any
community under 100,000 at least. That would be a very
troublesome thing.
You are taking, in my opinion, away choice. The people of
this area make up anywhere around say 100 plus counties. It is
two point some odd million in population, and I think these
folks deserve to have human interaction and human choice and
unbiased opinions.
If DOT shifts these rules back onto us and forces us to
have that financial burden passed back down to the consumer, we
are going to have to make changes, and we are going to have to
deny some of these folks obviously travel opinion.
Chairman Schrock. Sure. Thank you. My time has expired.
Before I turn it over to Mr. Gonzalez, let me welcome
Congresswoman Majette from Georgia. We are glad to have you
here, Judge. Thanks.
Mr. Gonzalez?
Mr. Gonzalez. Thank you very much, Mr. Chairman.
There really is just the threshold question that is before
us today, even though I understand the testimony of the
witnesses other than Mr. Sullivan. That obviously tells us that
DOT did not inquire of the small business community the
potential impact of the changes, which is a requirement.
I think Mr. Sullivan is putting us on notice that it has
been inadequate. There needs to be a supplemental study, again
an analysis, an evaluation. It does not appear that we really
do have all the evidence before us.
The lawyers would know what I am talking about. My
colleague to my left was a former Judge, and I know you had
said there is no reason to apologize not being a lawyer. There
is no reason to apologize for being a lawyer.
[Laughter.]
Mr. Gonzalez. That really is a question before the
Committee, and we take it very seriously. I do appreciate the
way this was presented.
I do not want to take sides over what size travel agency a
reg will help or what it does in the industry. I do not want
anything to be unfair. I love a level playing field, and then
your own talent and industry will decide whether you succeed in
this wonderful capital system. That is what this is all about,
that before the government promulgates this regulation that we
understand the impact.
I think there was one statement made, and I think it was
the ability to offer a full range of travel options. Are we
going to have regulations that will actually impact that? That
serves the consumer. All the testimony from the individuals
that have their own outfits, their own enterprise, seems to
point out that none of this was taken into consideration. I am
convinced that it was not, and I will base that not just on the
testimony of what I refer to as the lay witnesses, but from
counsel.
I do not really have a whole lot to add to this whole
discussion other than I would join counsel, and I appreciate,
Mr. Sullivan, the fine job that you continue doing. We were
trying to figure out how we would give you more independence
and such, but you are doing a great job, and I appreciate your
analysis and would be joining you in your request and look
forward to working with you.
Again to the witnesses, thank you very, very much.
Chairman Schrock. Thank you.
Judge Majette?
Ms. Majette. Good morning, ladies and gentlemen. I
apologize. I was not here for the oral testimony. I do have a
question for Mr. Sullivan, though.
Other than the letter that you sent to Secretary Mineta
that would urge the Agency to prepare the supplemental IRFA,
what additional steps do you foresee you could take to ensure
that the DOT complies with the Reg Flex Act in the context of
this rulemaking process and otherwise?
Mr. Sullivan. Judge Majette and Judge Gonzalez and Mr.
Chairman, this certainly is a distinguished panel with two
Judges and a distinguished Chair.
You asked a very good question about what else can we do. I
think I would like to start even before the March letter. My
office does not send over comment letters prior to contacting
the agencies in the first place. I think it is just
professional courtesy that you give a heads to agencies to say
look, we do not think you are proceeding the right way. That
happens within the federal decision making before the public
has an opportunity to see proposals.
We actually take great pride in that because the changes
that occur that help small businesses usually can be
accomplished before the ink is dry on a regulatory proposal. We
are very proud of the fact that we do accomplish tremendous
victories that no one really knows about, but I guess Small
Business most of the time can sleep well at night knowing that
that work is going on behind the scenes before a rulemaking is
proposed.
Once the rule is proposed then we do comment, and you have
seen our comments in March. We then follow up with the
regulatory agencies to make sure, one, that they received the
comment letter and, two, whether or not there is an opportunity
to help the Department get it right.
In this particular instance, I think there is a tremendous
amount of activity by the small businesses and the folks that
the small businesses have to represent them in Washington, D.C.
to actually fill in the gaps. I mean, we can talk about the
need for regulatory analysis, but we do not necessarily have
all the numbers and all the impact.
The folks here that are represented at this table, they
know how this rule is going to impact them, and they rose to
the occasion to tell the Department of Transportation exactly
how this will impact them and pleaded with them to take those
comments into account before finalizing the rule.
Now, in addition to echoing those types of things and
certainly working with this Subcommittee to impress upon the
record and impress upon Department of Transportation, who
undoubtedly is aware of this hearing, we then will let that
decisionmaking take its course with the optimistic hope that
these comments be incorporated into their final approach,
whatever that final approach may be.
Ms. Majette. Thank you. Maybe you just need to get another
press secretary so you can get the word out about the wonderful
work that you do that perhaps goes unappreciated.
With respect to the effect of these regulations on the day-
to-day operations of travel agents, and I guess you all can in
the time remaining jump in and address that for me, but it
seems to me that it becomes increasingly burdensome to impose
fees or to charge fees on individual clients who want to use
the services that you offer.
Just speaking from a personal perspective, sometimes I go
on the internet and will make travel arrangements, but I like
it when there is somebody that I can talk to who will sort of
do that work for me and work through the situation and give me
lots of options that perhaps I was not aware of and really
provide that important customer service.
I think it is important that we preserve that. What do you
really think that we can do about this situation with
increasing numbers, increasing amounts of fees? Is there a way
that we can get rid of that?
Mr. Ruden. Judge, I can offer a couple thoughts about that.
I think there is a widespread belief now in the industry that
fees have reached pretty much the limit of consumer tolerance.
The airlines' objective when they began, the very first
announcement of the commission caps in 1995 in February put out
by Delta Airlines said this will not be a problem capping your
commissions because you can get the money back from the
consumers. They put that in the very first announcement of the
cuts that led to a series of five or six major reductions to
the point where we have now reached zero.
Their objective was clear--to shift off of their financial
books the cost of that particular part of distribution expense
and make consumers pay it directly. Now we see this repeating
itself, and it is reflected in this rulemaking, the notion to
pursue a goal that, as I said in my testimony earlier, was a
pipedream of having travel agencies have two and three
different CRS systems. The average agency is, you know, four or
five people.
Ms. Majette. Right.
Mr. Ruden. They are never going to do that no matter what
the rules say. They are chasing a solution that simply has no
commercial reality behind it on the theory that the public can
have these additional costs like CRS booking fees shifted down
to them as well.
This is why this analysis is really so important. It comes
at the end of every rulemaking. It is interesting. You read 65
pages of Federal Register fine print about all the rules in the
marketplace and the market power and the abuses and the
history, and then only at the very end do you come to the
regulatory flexibility part.
I think it is a fair conclusion here that they simply did
not take it seriously. Their constituency is airlines, not
travel agencies, not small businesses. That is what they are
focused on. I think this Committee could do an enormous public
service by communicating to the Department its view that they
simply have not done the homework.
It is not enough to do it at the very end. You have to do
it in time for the agency, community and anyone else who is
interested to comment upon the analysis as to whether it was
adequate, whether the numbers they came up with are correct,
and then and only then can they proceed to adopt regulations
that impose these kinds of burdens.
Ms. Majette. Thank you. I see that my time has expired. If
any of you want to address it more fully, I would certainly
appreciate receiving any written comments that you would like
to submit, with the Chair's permission.
Chairman Schrock. We will have another round here in just a
few minutes. Thank you, Judge.
Let me ask a question of Mr. Rojahn, Ms. Pratt and Mr.
Schwarte. What exactly would these rules do to your business if
they are implemented? Could you all survive, and could your
fellow agents survive?
Mr. Rojahn. Mr. Chairman, I will start. We could survive,
but it would be extremely difficult. I think there is a
misperception that some of the productivity incentives that a
small agency receives is a windfall profit. That is completely
wrong.
What a lot of these incentive fees, and productivity is the
key word. We do not get paid unless we produce. It is used for
capital investment. A lot of small agencies use that revenue,
one, to get through poor months like December and/or invest in
new PCs to be more efficient in order to serve our customers
better.
I would like to just follow up on Mr. Ruden's statement
that we have reached our threshold as far as fees. Our market
would not bear us increasing fees any more. In fact, our
revenue stream for small companies and leisure travelers, we
are already above what the market would bear, so we would have
to actually charge a fee lower than our cost in order to
attract some of that business back.
We have already reached that threshold, and we could not
bear the cost of additional fees being passed on to our
business. Thank you.
Chairman Schrock. Mr. Pratt?
Ms. Pratt. Yes. Well, there is no way. We do specialize in
government, mostly government, GSA and DOD. The government does
not even pay as high a fee as the general public pays. There is
no way that my company would be able to remain in business.
I do not think the government is willing to pay us any more
money. They would have to if they still want our services and
our management reports and all the things the government
requires. Without a doubt, Rodgers Travel depends quite a bit
on the monies that we receive from our CRS system, and we would
not be able to survive at all.
We have been in business since 1949, and we managed through
all these changes to do okay. This would probably be the nail
in the coffin that would put us out.
Chairman Schrock. Thank you.
Mr. Schwarte. Mr. Chairman, thank you for the question. We,
of course, are a larger company, and we have other lines of
business as well. We would survive, but let me not understate
the fact that the rules would hurt us pretty badly.
In fact, I think they are designed to do just that and
transfer wealth from the independent computer reservation
systems to the airlines that once owned them, sold them off,
collected the money and then went on their merry way.
What I would be really worried about, however, is that what
the rules seem to be designed to do is to lessen the role of
the independent and neutral distributors of travel information
in the field of distributing air travel and driving people to
the biased airline websites and other airline controlled
ventures.
As independent distributors of air travel, folks like Sabre
are really aligned with the interests of consumers. We make our
money selling airline tickets. We do not care on what airline.
We actually like low fares because we sell more tickets. We
design features and functions that help you find ways to find
low fares quicker.
If the NPRM succeeds in making this business unattractive
to independent channels, then we will end up pouring less money
into developing features that are good for travel agents and
good for consumers. I think at the end of the day the real
loser, in addition to the small business, is the traveling
public because they will have to depend on air carriers to buy
their air tickets. Let me assure you, the air carriers are not
looking to sell you cheap tickets.
Thank you.
Chairman Schrock. Anybody else want to comment on that?
Paul, let me ask you. Would it have been difficult for the
Department of Transportation to collect information on your
industry to approve their analysis?
Mr. Ruden. It would not be difficult at all, Mr. Chairman.
There are only four CRS companies operating in the United
States, and DOT knows who they are and how to find them and how
to communicate with them. They have information that would bear
upon this subject.
The airlines own the Airline Reporting Corporation, which
produces data that might help in that analysis, and the
Department knows those folks pretty well, too, so I think
really this is not mysterious stuff.
It is basic homework that you have to do under the law and
under common sense before you put at risk any further a
business enterprise, a collection of enterprises that is so
important to so many tens and hundreds of millions of people. A
simple letter would have sufficed to each of those entities
asking for the relevant information. Then they would have to
do, you know, a little work and analysis, but that is what they
are there for.
Chairman Schrock. I am assuming you all agree.
Judge? No questions? That is fine. Everybody has a busy day
today. There are a lot of markups, and there is a lot of stuff
going on on the Floor.
Let me ask one final question. Tom, DOT has proposed to
improve their analysis and the final rule. Is this typical, or
is this something they should do now?
Mr. Sullivan. I am not sure if the Chairman is asking of
the typical nature of agencies' responses to these types of
requests where we have asked to do a supplemental or not or if
the Chair is asking if this is typical of Department of
Transportation.
Chairman Schrock. I guess all agencies really, yes.
Mr. Sullivan. Certain agencies do supplemental analyses.
Actually, the one analysis that we are using as an example in
our training guide from the FTC is in fact a supplemental
request for information.
The answer to the Chairman's question is some agencies do
actually put out additional requests for information. Sometimes
the agencies do additional analyses. Other agencies produce,
once they realize that they have not done the appropriate
amount of analyses, actually do a supplemental reg flex
analysis in the final rule.
We would prefer that the agencies produce a separate
regulatory analysis and then receive comment on that rather
than producing it in the final rule. What we have found is that
many times if that supplemental analysis is done at the final
action then it precludes significant change to help small
business in conjunction with a final decision.
Chairman Schrock. Let me ask a second final question, and I
would like you all to kind of answer this.
If all these regulations went away, what would protect the
travel agents from being treated unfairly by you?
Mr. Schwarte. What would protect them?
Chairman Schrock. What would protect the travel agents from
being treated unfairly by you all?
Mr. Schwarte. Thank you. The hearing is not what it used to
be.
Chairman Schrock. Mine is not either.
Mr. Schwarte. There are two things, Mr. Chairman, and thank
you for the question.
First of all, our business is------.
Chairman Schrock. David, if you could pull that closer?
Thank you. My hearing is not good either, and you will have to
turn it on.
Mr. Schwarte. Is it on now?
Chairman Schrock. I think it is, yes.
Mr. Schwarte. Thank you. Thank you for the question, Mr.
Chairman.
There are two things. First of all, our business interests
are not at odds with the travel agency interests at all. I
think they are almost totally aligned. We only succeed if our
travel agency customers succeed. Our future is dependent on our
travel agencies staying in business and, better yet, being
healthy.
I think that the history of the last six years in this
industry has shown that CRSs have gotten very user friendly for
travel agents. We offer a variety of lengths of contracts. We
offer deals that have productivity bonuses in them or out,
depending upon what the agency wants. I think that was pretty
well documented in the Department of Transportation record.
The first thing is our natural alignment is with the travel
agencies' interest. The second thing, of course, is in a
deregulated environment you have the possibility for vigorous
antitrust enforcement and unfair competition enforcement by the
FTC.
This business has been treated, unlike most businesses in
the United States, since 1984 at first for good reason. When
the airlines owned the systems, they had both the means and the
incentives to use those systems to distort competition in the
airline field, they had market power over the travel agencies,
and they had the incentive to use that as well.
In today's environment, with independent systems that are
free of airline control, we should be treated, I think, just
like every other business in America. The Department of Justice
and FTC have ample laws that they can use if there are abuses
that should, contrary to the fact that our interests are
aligned with the travel agents.
If a CRS should engage in misconduct, then the FTC or the
Department of Justice could step in immediately to stop that
sort of behavior, Mr. Chairman.
Chairman Schrock. Ms. Pratt? Could you pull the microphone
close to you? Thanks.
Ms. Pratt. Would you repeat the question really?
Chairman Schrock. Yes. If the regulations went away, what
would prevent people like Sabre Corporation, for instance, from
treating you all unfairly?
Ms. Pratt. That is a very interesting question, and I
really have to put my mind to that actually. Generally, I agree
with what Sabre is saying. There would be no reason for them,
if we are producing the business for them. If we are producing
the segments, the flights, then Sabre has to be on our side
because we are giving them their business.
At this point, I do not see anything. I think that the
statement that he made is correct. That is something I would
have to think about more fully, but on first thought I really
believe that all of the CRS systems, if they continue the way
they have been doing now, and there is no reason why they
should not other than this DOT business. I is the best thing
for travel agents.
Chairman Schrock. What I hear you saying is if you win,
they win. If they win, you win.
Ms. Pratt. Right.
Chairman Schrock. Any other comments you all might want to
make?
Mr. Ruden. Yes, I am afraid there is. I said when I gave my
formal testimony earlier that the issue of deregulation had
been put into this rulemaking and that we had a position on
that, which was that deregulation was superior as an outcome to
what they are proposing to do, but there are conditions to that
superiority.
One is the notion that the airlines are in fact no longer
able to influence the CRSs either through ownership or through
market agreements. There are marketing agreements in place
between the CRSs and many of the major network carriers that
have never been vetted on any public record. No one knows what
they say. No one has ever had a chance to comment on their
implications, so we think that is an essential step the DOT is
also failing to do.
To your point, the third thought we have about this matter
of deregulation is it is not just the CRSs who get deregulated
here. As has been said, the original rules were created because
of airline conduct. The airlines owned the CRSs and controlled
their behavior. They invented the very things that they now
complain bitterly to the government should be reversed in their
favor. It was their conduct that was the concern originally,
and for us it is still a concern.
Now, the Department of Transportation has some very capable
people, and I do not want to be misunderstood to suggest
otherwise, but they have not historically had the resources and
perhaps, therefore, not the zeal to engage in a lot of
enforcement activity. Most of their time seems to be spent
addressing advertising infractions.
Small business people cannot sit around for three years
waiting for the Department to decide whether a complaint should
be moved forward and then another year or two while it moves
forward. By then the complaining party is dead.
One of the crucial things that has to happen here if we are
going to move down deregulation road is that the government,
DOT and any other agencies that are going to be involved must
have a plan for getting those resources and a commitment to
zealously use them in a very efficient and aggressive way.
Ordinary antitrust enforcement is not going to solve these
kinds of problems that may arise as a result of what the
airlines may do.
Chairman Schrock. I gather you agree with that?
Mr. Schwarte. Yes, I do. The Department of Transportation
has the enforcement power, if it chooses to use it, to police
misconduct by airlines.
I have noted as an observer in this industry that mainly of
the complaints that ASTA has filed have taken an inordinately
long time to have processed, so I think Mr. Ruden's worry about
having misbehavior not corrected quickly at the Department of
Transportation with respect to the airlines is not unjustified.
Chairman Schrock. Paul, if all these rules went away
tomorrow what impact would it have on what is clearly a
beleaguered airline industry?
Mr. Ruden. Well, the airlines themselves are quite divided
on that issue. It is very interesting. Some of them are
advocating immediate and total deregulation. Others are saying
oh, no. You cannot do that because the CRSs have residual
market power that they will use against us.
American Airlines, for example, is a primary advocate of
that position, and they argue that booking fees--this was the
old Justice Department proposal, which Justice has now backed
away from. American wants travel agents and, therefore,
consumers directly to pay the booking fees for booking their
services, to me a remarkable economic idea, but they are very
serious about it and advocating it in this proceeding.
I think the airlines' problems are so fundamental this
rulemaking is not the make and break for their economic future.
The network carriers have got difficulties that go so far
beyond the question of distribution. The distribution system--
even in DOT's rulemaking they notice and say repeatedly--has
been enormously efficient and effective in selling air carrier
network services.
As long as they do not foul it all up, they are still going
to have an enormously creative, small business focused, widely
dispersed network of distributors to sell their services to the
American public. Deregulation in the proper circumstances I
described is not going to harm, in our view, the airlines. They
have much bigger problems to deal with.
Chairman Schrock. Let me thank you all for being here
today. This is a topic that gets increasingly more interesting
for me every day that goes by and everything I hear.
We are led to believe that the rule will come out before
the end of the year, and we are going to be watching that very
clearly and am very anxious to see what the rule says and then
maybe give you all a ring again to see what the impact will be.
I appreciate your testimony. I appreciate you coming here,
some of you great distances. We hope to see you again.
This Committee is adjourned.
[Whereupon, at 11:52 a.m. the Subcommittee was adjourned.]
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