[Federal Register Volume 61, Number 158 (Wednesday, August 14, 1996)]
[Proposed Rules]
[Pages 42197-42208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-20737]
-----------------------------------------------------------------------
DEPARTMENT OF TRANSPORTATION
Office of the Secretary
14 CFR Part 255
[Docket No. OST-96-1145 [49812]; Notice No. 96-22]
RIN 2105-AC35
Computer Reservations System (CRS) Regulations
AGENCY: Office of the Secretary, Transportation.
ACTION: Notice of proposed rulemaking
-----------------------------------------------------------------------
SUMMARY: The Department is proposing to adopt a rule that would
prohibit each computer reservations system (CRS) from adopting or
enforcing contract clauses that bar a non-vendor carrier from choosing
a level of participation in that system that would be lower than the
carrier's level of participation in any other system. The Department
believes that this rule is necessary to promote competition in the CRS
and airline industries, since the contract clauses at issue appear to
unreasonably limit an airline's ability to choose how to distribute its
services through travel agencies. The Department will consider creating
an exception from this prohibition so that a CRS could enforce such a
clause against an airline that owns or markets a competing CRS. The
Department is acting on a rulemaking petition filed by Alaska Airlines.
DATES: Comments must be submitted on or before September 13, 1996.
Reply comments must be submitted on or before October 3, 1996. We are
shortening the comment period because our decision on Alaska's
rulemaking petition will resolve an existing controversy between Sabre
and many of its participating airlines, including Alaska, and because
our request for comments on Alaska's petition has already given the
public an opportunity to comment on Alaska's proposal.
ADDRESSES: Comments must be filed in Room PL-401, Docket OST-96-1145
(49812), U.S. Department of Transportation, 400 7th St. SW.,
Washington, DC 20590. Late filed comments will be considered to the
extent possible. To facilitate consideration of comments, each
commenter should file six copies of its comments.
FOR FURTHER INFORMATION CONTACT: Thomas Ray, Office of the General
Counsel, 400 Seventh St. SW., Washington, DC 20590, (202) 366-4731.
SUPPLEMENTARY INFORMATION: Travel agents in the United States largely
rely upon CRSs to determine what airline services and fares are
available in a market, to book seats, and to issue tickets for their
customers, because CRSs can perform these functions much more
efficiently than any other means currently available for gathering
information on airline services, making bookings, and issuing tickets.
Each of the CRSs operating in the United States is owned by or
affiliated with one or more airlines, each of which has the incentive
to use its control of a system to prejudice the competitive position of
other airlines. We found it necessary to adopt regulations governing
CRS operations, 14 CFR Part 255, in order to protect competition in the
airline industry (and to help ensure that consumers obtain accurate and
complete information on airline services). 14 CFR Part 255, adopted by
57 FR 43780 (September 22, 1992), after publication of a notice of
proposed rulemaking, 56 FR 12586 (March 26, 1991). In adopting those
rules, we followed the similar findings made by the Civil Aeronautics
Board (``the Board''), the agency that formerly administered the
economic regulatory provisions of the Federal Aviation Act (``the
Act''), now Subtitle VII of Title 49 of the U.S. Code. 49 FR 11644
(March 27, 1984).
Like the Board, we based our adoption of CRS regulations primarily
on our authority to prevent unfair methods of competition and unfair
and deceptive practices in the marketing of airline transportation
under 49 U.S.C. 41712, formerly section 411 of the Federal Aviation
Act, codified then as 49 U.S.C. 1381. 57 FR at 43789-43791.
Alaska Airlines has petitioned us to adopt a rule barring each CRS
vendor (the owner of a system) from imposing contract terms on
participating carriers that limit a carrier's ability to choose the
level at which it will participate in a system. Alaska wished to
consider lowering its level of participation in Sabre, the largest CRS,
but Sabre claimed that its contract with Alaska barred that airline
from reducing its level of participation in Sabre as long as it planned
to continue participating in any other system at a higher level. Alaska
contends that Sabre's contract clause--and similar clauses imposed by
Worldspan and System One--are contrary to our policies on CRS and
airline competition and should be proscribed (we will refer to these
contract clauses as parity clauses). Alaska's proposed rule would
protect non-vendor airlines (airlines holding no significant CRS
ownership interest) but would not affect the participation obligations
of vendor airlines under section 255.7(a) of our rules.
We issued a notice inviting comments on Alaska's petition. 59 FR
63736 (December 9, 1994). We received comments opposing the petition
from American Airlines; two other CRS vendors, Worldspan and System One
Information Management; the two major travel agency trade associations,
the American Society of Travel Agents (ASTA) and the Association of
Retail Travel Agents (ARTA); and three travel agencies. Alaska and
Galileo International Partnership each submitted reply comments
accompanied by a motion for leave to file the reply comments late. We
will grant the motions.
As described below, our staff has met with two system owners--
American Airlines and Galileo--and with Alaska and another carrier
affected by Sabre's parity clause, Midwest Express Airlines.
In considering the issues raised by Alaska's petition, we are
relying on the comments filed in response to the petition, as well as
Alaska's own arguments in support of its rule proposal. However, we
have also relied on our findings in our 1991-1992 rulemaking and in our
last study of the CRS business, Airline Marketing Practices: Travel
Agencies, Frequent-Flyer Programs, and Computer
[[Page 42198]]
Reservation Systems, prepared by the Secretary's Task Force on
Competition in the Domestic Airline Industry (February 1990) (Airline
Marketing Practices).
We are proposing to adopt the rule requested by Alaska, since the
vendor contract clauses at issue appear to us to be fundamentally
inconsistent with our goals of eliminating unreasonably restrictive
practices in the CRS business that limit competition. By denying each
non-vendor airline an opportunity to change its level of participation
in a system in response to the quality and price of the services
offered by each vendor and the airline's own marketing and operating
needs, the contract clauses unreasonably restrict competition in the
CRS and airline businesses. However, an airline owning or marketing a
system may choose to limit its participation in a competing system in
order to make its own system more attractive to travel agencies.
We are asking for comments on whether the proposed rule should
allow systems to use the contract clauses to deter such conduct by
airlines that own or market a CRS.
Background
Four CRSs operate in the United States. The largest system, Sabre,
is owned by the parent corporation of American Airlines. Apollo, the
second largest system, is operated by Galileo International
Partnership, which is owned by United Air Lines, USAir, Air Canada, and
several European airlines. Worldspan is owned by Delta Air Lines,
Northwest Airlines, Trans World Airlines, and Abacus, a group of Asian
airlines. System One was formerly controlled by an affiliate of
Continental Air Lines, but recently Amadeus, a major European system,
acquired control of the system.
With the exception of Southwest Airlines and several low-fare
carriers, virtually all U.S. airlines have found it essential to
distribute their services through each of the four CRSs operating in
the United States due to two factors: the importance of travel agencies
in the distribution of airline services and each travel agency's
predominant use of a single system.
As we explained in our last CRS rulemaking, at least seventy
percent of all airline bookings are made by travel agencies, and travel
agencies rely almost entirely on CRSs to determine what airline
services are available and to make bookings for their customers. Travel
agencies rely so much on CRSs because of their efficiency. If travel
agency offices commonly used several CRSs, travel agents would be able
to obtain information and make bookings on a carrier even if the
carrier participated in only some of the four systems. Each travel
agency office, however, generally uses only one system for the great
majority of its bookings.
An airline's ability to sell its services will be significantly
impaired if its services are not readily available through a CRS used
by a significant number of travel agents. If the airline does not
participate in one system, the travel agents using that system can
obtain information and make bookings on that carrier only by calling
the carrier, which is substantially less efficient than using a CRS.
The carrier's sales accordingly will be lower than they would otherwise
be. Because of the importance of marginal revenues in the airline
industry, a loss of a few bookings on each flight is likely to
substantially reduce the airline's profitability. Finally, the airline
could not practicably enter the CRS business on its own, for entry
would be extremely costly and the airline would have difficulty
obtaining a significant market share. 57 FR at 43782-43784.
Each carrier's need to participate in each system is reflected in
the vendors' conduct and the terms imposed by each for participation in
its system. Since a vendor has little need to compete with other
systems for airline participants, the terms for airline participation
are not significantly affected by market forces. Among other things,
market forces do not discipline the booking fees charged by each
system. 57 FR 43784-43785.
Since each system is entirely or largely owned by one or more
airlines, each system's owners also have an incentive to use the system
to prejudice the competitive position of competing airlines. Otherwise,
CRS business practices would present little competitive concern. For
example, the treatment of rental car companies and hotel companies by
the CRSs had not led to any claims that the vendors' conduct was
contrary to antitrust law principles. 57 FR 43784.
We recognize, however, that some recently-established low-fare
airlines compete successfully while participating in none of the
systems and that Southwest Airlines has succeeded without participating
in any system except Sabre. Nonetheless we believe that the systems
still have market power with regard to the major portion of the airline
industry. Despite the growing number of low-fare airlines, the more
established airlines provide the great majority of domestic airline
service and virtually all of the international service operated by U.S.
airlines. And even Southwest has found it necessary to participate in
Sabre, albeit at a low level (formerly ``call direct'' and now Basic
Booking Request).
Moreover, for a number of years, Southwest's refusal to participate
in any system but Sabre did not entirely prevent travel agents using
those systems from obtaining some information on Southwest's services
and using the systems to write tickets on Southwest. In 1994, however,
the other three systems--Apollo, Worldspan, and System One--changed
their policies on the treatment of non-participating carriers in ways
which made the sale of tickets on Southwest much harder for travel
agents using one of those systems. While section 255.11 of our rules
states that a system must treat all non-paying airlines the same, an
airline that refuses to participate in a system has no right under our
rules to obtain CRS services. Apollo, Worldspan, and System One each
changed its policies on non-paying carriers so that travel agents using
the system no longer had ready access to the schedules offered by any
non-paying carrier and, as to two of the systems, could no longer use
the system to write tickets on such carriers. As a result, agents using
these systems could no longer efficiently serve customers who wanted to
fly on Southwest. ASTA Answer at 2-3. This experience is relevant to
several issues raised by Alaska's petition, as explained below.
Regulatory Background
Because each vendor has the power and the incentive to deny
competing carriers access to its system except on terms which will
prejudice the competitive position of those carriers, we and the Board
determined that regulations restricting the discretion of CRS owners
were necessary to protect airline competition and to ensure that
consumers obtain accurate, complete, and unbiased information on
airline services. 14 CFR Part 255, originally adopted by the Board,
Regulation ER-1385, 49 FR 32540 (August 15, 1984), and readopted by us,
57 FR 43780 (September 22, 1992), after the publication of a notice of
proposed rulemaking, 56 FR 12586 (March 26, 1991). Those rules regulate
several aspects of CRS operations, including CRS contracts between
vendors and participating carriers and between vendors and subscribers
(subscribers are the travel agencies using a system by contract with
the system), although they do not address the issue raised by Alaska's
petition. When we readopted and modified those rules in 1992, one of
our goals was to give carriers (and
[[Page 42199]]
travel agencies) a greater ability to choose alternative means of
electronically transmitting information and making airline bookings. We
reasoned that this would promote competition in the airline and CRS
businesses. 57 FR at 43781, 43797.
To advance this goal, we adopted a rule (section 255.9) giving
travel agency subscribers the right to use CRS terminals not owned by a
vendor to access other systems and databases with airline service
information. We expected that this rule would make it practicable for
carriers to create direct links between the carriers' internal
reservations systems and CRS terminals at travel agencies, which would
enable carriers to bypass CRSs for some transactions. 57 FR at 43796-
43798. We also prohibited certain types of contract clauses imposed by
vendors on subscribers--rollover clauses, minimum use clauses, and
parity clauses--that unreasonably restricted the agency's ability to
use more than one system or to replace one system with another as its
primary system. 57 FR at 43823-43824.
We are proposing to grant Alaska's rulemaking petition, because we
believe that the airline parity clauses challenged by Alaska resemble
the types of restrictive practices currently prohibited by our rules:
the airline parity clauses seemingly lack a legitimate business
justification, and they unduly restrict the business options of the
firms on which they are imposed. While section 255.7 of our rules
requires each airline with a significant ownership share in a CRS to
participate in other systems at the level in which it participates in
its own system, the rationale for that rule does not apply to non-
vendor airlines.
The Vendor Contract Clauses
Sabre, System One and Worldspan, but not Apollo, each requires
every carrier participating in the system to agree that it will
participate at as least as high a level of service as it participates
in any other system. These parity clauses do not excuse the airline
from this requirement if the service offered by the system imposing the
clause is inferior or more expensive than the similar level of service
being purchased by the participating airline from another system (the
Appendix to Alaska's Petition sets forth each system's contract terms
on this issue).
Each CRS offers carriers several levels of participation in its
system. The vendors obtain payments from participating carriers for CRS
services by charging them a fee for each booking made through the
system. The booking fee increases as the carrier's level of
participation increases. For example, when Alaska filed its petition a
carrier could participate in Sabre at the ``call direct'' level, where
the system displayed the carrier's schedules but neither showed whether
seats are available nor enabled the agent to make a booking on the
carrier. When a carrier participates at the ``full availability''
level, travel agents can use the system to learn whether seats are
available on the carrier and make a booking. When Alaska filed its
complaint, Sabre's charge for the full availability level of service
was $2.43 per segment booked and $1.25 per segment for the call direct
level of service. Alaska Petition at 7.
After Alaska filed its petition, Sabre changed its participation
levels by eliminating the call direct level and creating a new level of
service, Basic Booking Request, which allows travel agents to make a
reservation with the participating airline through Sabre; in contrast
to the call direct level, the agent does not need to call the airline
by telephone to make a booking. Sabre does not display availability
information for carriers participating at the Basic Booking Request
level, and any booking request made by a travel agent will take longer
to process than it would for carriers participating at the full
availability level. The fee charged the airline is $1.60 per segment
booked. Alaska Reply Comments at 15.
In addition to the different levels of participation, systems
separately offer different enhancements, such as the ability to display
a seat map of the aircraft used for the flight being booked by a travel
agent or to issue a boarding pass.
Almost all major carriers have participated in each system at the
full availability level or at a higher level involving some form of
direct access. However, in the past some U.S. carriers have limited
their participation in a system in order to save money by avoiding the
higher booking fees charged for higher levels of participation. Airline
Marketing Practices at 68. Galileo represents that more than one
hundred airlines participate in Apollo at a higher level than they do
in Sabre. Galileo Comments at 3. Thus, while participation at some
level in each system appears to be essential for almost all U.S.
airlines, airlines may be able to compete without using all of the
service features offered by a system.
If a system did not impose a parity clause, an airline that had no
significant ownership affiliation with a CRS could participate at a
lower level in that system and at a higher level in other systems. If
an airline and its affiliates own five percent or more of the equity of
one system, that airline, deemed a ``system owner'' under 14 CFR 255.3,
must participate in each other system and its enhancements if the
airline participates in such enhancements in its own system, if the
other systems offer commercially reasonable terms for such
participation. 14 CFR 255.7 (for the rationale for this rule see 57 FR
43800-43801). Nothing in our rules requires other airlines to
participate in any system, although in some circumstances an airline's
refusal to participate could be an unfair method of competition or a
form of discrimination prohibited by the United States' bilateral air
services agreements.
Alaska's Rulemaking Petition
Alaska's rulemaking petition stems from American's efforts to keep
Alaska from lowering its level of participation in Sabre, the system
affiliated with American, while maintaining a higher level of
participation in other systems. American contends that the parity
clause included in Alaska's participation contract with Sabre bars
Alaska from reducing its level of participation in Sabre unless Alaska
similarly reduces its level of participation in all other systems.
Alaska was considering reducing its participation in Sabre from the
full availability level to the call direct level in order to reduce its
costs. Alaska has generally become increasingly dissatisfied with CRS
services, in part due to increased booking fees and in part due to the
ways in which the airlines owning the systems allegedly discriminate
against other airlines. Alaska Petition at 6-7. One of Alaska's major
competitors, Southwest, participates in Sabre at a low level and thus
incurs lower CRS costs than Alaska for Sabre bookings. As explained
above, Sabre charges higher booking fees when a carrier participates in
the system at a higher level. Alaska Petition at 7, 17.
Although Sabre has eliminated the call direct level and replaced it
with the Basic Booking Request level, Alaska was still considering
reducing its participation in Sabre. If Alaska participated in Sabre at
the Basic Booking Request level, travel agents could not obtain
availability information on Alaska through the CRS, but they could make
bookings electronically. Alaska Reply Comments at 5, 7.
American told Alaska that reducing its participation level would
violate the parity clause in Alaska's Sabre contract if Alaska
continued to participate at a higher level in any other system, as
Alaska had planned. American filed suit against Alaska to enforce the
parity
[[Page 42200]]
clause. American Airlines v. Alaska Airlines, N.D. Texas Civ. Action
No. 4-94CV-595-Y.
In addition to defending itself in that suit, Alaska has asked us
to adopt a rule invalidating the parity clauses. Alaska's proposed rule
reads as follows:
No system may claim discrimination or require participating
carriers which are not system owners to maintain any particular
level of participation in its system on the basis of participation
levels selected by participating carriers in any other system.
To support its petition, Alaska first notes that we adopted a rule,
section 255.9, in our last CRS rulemaking which gives travel agencies
the right to use their CRS terminals, if not owned by the vendor, to
access other systems and databases. We thereby intended to give non-
vendor airlines some ability to avoid CRS fees by creating direct links
between travel agencies and their internal reservations systems. Alaska
argues that the vendors' parity clauses will discourage carriers from
creating direct links, by keeping them from reducing their level of
participation in one system unless they do so in all systems, which
would be too risky for most carriers. According to Alaska, if a carrier
cannot reduce its booking fee costs by reducing its participation
level, it will have little incentive to incur the costs of creating
direct links between the agencies using that system and the carrier's
own internal reservations system. Alaska Petition at 10-11.
Secondly, Alaska contends that the parity clauses limit a non-
vendor carrier's ability to respond to unacceptable CRS service or
pricing. If a carrier wished to reduce its level of participation in
one system because the system's service was poor or too expensive, the
carrier could not do so unless it simultaneously reduced its level of
participation in other systems, even if the other systems' service and
pricing were superior. Alaska Petition at 13. Alaska, however, has not
alleged that Sabre's service and pricing are in fact inferior to the
service and pricing offered by other systems.
In response to the argument of the parties opposing the petition
that Alaska could avoid the effects of the Sabre clause by suspending
entirely its participation in Sabre, Alaska claims it could never
afford to do that. Alaska relies on travel agencies for 85 percent of
its bookings, so it could not afford to take any action that would
alienate the travel agency community. Alaska Reply Comments at 19-20;
Alaska Reply Comments at 3.
Comments on Alaska's Petition
In response to our request for comments on Alaska's petition, we
received comments opposing Alaska's petition from the three vendors
that use parity clauses, the two major travel agency trade
associations, and three travel agencies. Galileo filed a late comment
supporting Alaska's petition. Our staff has met with American, Galileo,
Alaska, and Midwest Express on the petition and American's enforcement
of the parity clause earlier this year, as discussed below. Midwest
Express supported Alaska's opposition to Sabre's parity clause.
American argues that its contract clause is necessary to prevent a
carrier like Alaska from discriminating in favor of one system by
reducing its level of participation in other systems, that Alaska
unfairly intends to get the benefits of Sabre participation without
paying for them, that travel agencies would be hurt if they could not
make bookings on Alaska through their CRS, and that the contract clause
prevents foreign airlines from discriminating against a U.S. system in
favor of a system with which they have ownership or marketing ties.
American also argues that the clause does not unfairly restrict
Alaska's distribution options, since Alaska is always free to quit
participating in Sabre. Furthermore, some of Alaska's major competitors
participate in Sabre at the full availability level. And, according to
American, the Sabre contract clause is similar to other contract
clauses which the courts have found permissible under the antitrust
laws.
Worldspan argues that we should not attempt to regulate the kind of
contract issue raised by Alaska and that in any event no rule should be
proposed until after the completion of our current investigation into
the CRS business and airline marketing practices. Worldspan also
asserts that the rule proposed by Alaska would harm the smaller
systems, because carriers would be more likely to withdraw from those
systems than from the largest two systems. In opposing Alaska's
petition, System One Information Management focuses on the harm
Alaska's business proposal would cause travel agencies and the
competitive position of the smaller CRSs. System One Information
Management further asserts that the parity clauses are consistent with
antitrust principles and do not unduly restrict Alaska's response to
unsatisfactory CRS service and fees.
While ASTA has supported rules giving travel agencies and airlines
more flexibility in receiving and sending airline information, ASTA
opposes Alaska's petition because travel agencies still must depend on
the systems for airline information and booking capabilities. If an
airline does not fully participate in the system used by an agency, the
agency's alternatives for obtaining information and making bookings on
that airline are quite burdensome, as shown by the recent experience of
many agencies when the policy changes by Apollo, Worldspan, and System
One made it more difficult for agents to book customers on Southwest.
ASTA accordingly cannot support a rule which would make it easier for
other airlines to reduce their level of participation in the CRSs.
Furthermore, ASTA points out that travel agencies would have a
limited ability to switch to another system if a major airline in their
region stopped fully participating in the agencies' CRS. Most travel
agency contracts for CRS services have five-year terms, so an agency
probably would be forced to continue using a system even if the
airline's reduced level of participation substantially reduced the
value of the system used by an agency. As a result, ASTA contends that
we should allow travel agencies to cancel their CRS contracts on short
notice if we grant Alaska's rulemaking petition.
ARTA similarly argues that Alaska's proposal would injure travel
agencies. According to ARTA, over one-third of the agencies in the
Pacific Northwest and Alaska--the regions where Alaska principally
operates--use Sabre, and those agencies will be at a considerable
competitive disadvantage if Alaska reduces its participation in Sabre.
Three travel agencies--Carlson Wagonlit Travel of Minneapolis,
Austin Travel of Melville, New York, and Tyee Travel of Wrangell,
Alaska--wrote to oppose Alaska's petition. Tyee Travel, a Sabre
subscriber, states that Alaska's reduction in the level of
participation in Sabre would seriously damage the agency's ability to
operate and survive. Carlson Wagonlit Travel and Austin Travel contend
that a rule allowing airlines to reduce their participation in one
system would injure travel agencies.
Apollo Travel Services (ATS), which distributes Apollo in the
United States, Mexico, and the Caribbean and manages the system's
distribution in Japan, filed a comment opposing ASTA's requested rule
giving travel agencies the right to terminate a CRS contract before it
expires. ATS claims that its ability to offer travel agencies contracts
with terms as long as five years gives it the ability to recover its
costs over a longer period and thus enables it to offer lower prices to
travel agencies. ATS would
[[Page 42201]]
have to increase its charges to travel agencies if subscribers had the
freedom to cancel contracts before the end of their term.
No one else submitted comments to us on Alaska's petition until
Sabre recently enforced the parity clause against many of the airlines
participating in its system, as described next.
Sabre's Recent Enforcement of Its Parity Clause
While we were considering Alaska's petition, Sabre notified its
participating airlines that Sabre was revising its contractual terms
and that each participating airline had to sign the contract amendment.
Sabre's letter to many of these airlines additionally stated that Sabre
would eliminate the airline's services from Sabre's display on February
1, 1996, unless the airline upgraded its participation level in Sabre,
since the airline allegedly was participating at a higher level in
another system than it was participating in Sabre.
Two of the airlines receiving this letter were Alaska and Midwest
Express, each of which uses Sabre as its internal reservations system.
Since they are ``hosted'' in Sabre, they thought that Sabre provided
its subscribers at least as much functionality for information requests
and booking transactions on themselves as was provided by any other
system. In their view, accordingly, they were already in compliance
with Sabre's parity clause. They asked us to stop Sabre from compelling
them to purchase additional services from Sabre, a demand that they
estimated would raise their booking fee expenses by over ten percent.
After meeting with these two airlines, Patrick V. Murphy, the Deputy
Assistant Secretary for Aviation and International Affairs, wrote Sabre
and obtained its agreement that Sabre temporarily would not compel
either airline (or any other airline hosted in Sabre) to upgrade its
participation level. Although Alaska and Midwest focused at the meeting
on Sabre's demands that each airline upgrade its participation in
Sabre, Alaska also noted that it was no longer considering reducing its
level of participation in Sabre. Alaska still asked us to prohibit
parity clauses, since it did not wish to be compelled by contract to
buy CRS services that it preferred not to use.
Soon after Alaska and Midwest Express had presented their
complaint, Galileo complained in writing to Mr. Murphy that Sabre's
threats to participating airlines were causing some airlines to comply
with Sabre's demands by reducing their level of participation in
Galileo rather than increasing their level of participation in Sabre.
Galileo thereafter filed a comment supporting Alaska's petition.
Galileo complains that Sabre's parity clause restricts CRS competition,
since the clause prevents airlines from choosing their participation
level and other features in each system on the basis of price and
quality. Since an airline's Sabre fee expenses will increase if the
airline increases its participation level in Sabre, an airline will be
reluctant to maintain a higher level of participation in Apollo (or
another system) if the airline must then increase its participation
level in Sabre and thereby incur higher CRS costs. As a result, Sabre's
threats have forced some airlines to reduce the amount of services they
are purchasing from Galileo, which reduces Galileo's revenues, even
though those airlines would prefer to buy a higher level of CRS
services from Galileo.
In response to Mr. Murphy's letter, American and Sabre met with him
and Department staff members to discuss American's rationale for the
parity clause. Sabre stated that it had begun requiring parity and non-
discrimination clauses in its participation agreements with several
European airlines, since the refusal of some European carriers to
participate in Sabre at the full availability level had injured Sabre's
marketing efforts with European travel agencies. Sabre also feared that
some foreign airlines might otherwise deny commissions to travel
agencies in the airlines' homelands if they used Sabre to make bookings
on the foreign flag carrier. Within the past year Sabre has
successfully invoked the parity clause against several foreign airlines
that participated at a high level in a competing system marketed by
those carriers while participating in Sabre at a relatively low level.
Although Sabre developed the parity and non-discrimination clauses
to protect its ability to market its services in foreign countries,
Sabre believes that a U.S. airline like Alaska with a large market
share in some regions could distort CRS competition by reducing its
level of participation in some systems but not others. If a carrier did
that, travel agencies in regions where that airline was a major airline
would be compelled to choose a system where the airline participated at
a higher level. American claimed, for example, that Sabre would have to
abandon the Seattle market if Alaska did not participate fully in the
system.
In a later meeting with our staff on the issue, Galileo stated that
four carriers had lowered their level of participation in its Apollo
system due to Sabre's threats to enforce the parity clause and that
Galileo believed more carriers would do so since Sabre had given a
number of carriers more time to decide how to respond to Sabre's
demands to either upgrade their participation in Sabre or downgrade
their participation in Apollo. Galileo believes that it is a leader in
developing higher-level functionality and that many airlines therefore
will choose to participate in Apollo at a higher level than in other
systems if they are free to do so.
The Need for a Rule Barring Airline Parity Clauses
After considering the comments, we have determined to propose the
rule requested by Alaska. As shown in our last rulemaking (and in the
Board's rulemaking), the CRSs have a substantial ability to impose
onerous contract terms on participating airlines, for the systems have
little need to compete for airline participants. Almost all major
airlines are compelled to participate in each system, even if the CRS
imposes unreasonable terms for participation. Thus a participating
carrier has little, if any, bargaining power on contract issues like
the airline parity clause demanded by Sabre.
We believe that the use of parity clauses should be resolved
through a rulemaking proceeding, rather than through enforcement. Since
three of the four CRSs in the United States use parity clauses, the
question of the legality of their use raises an industry-wide issue
more appropriately considered in a rulemaking proceeding. In a
rulemaking all potentially interested persons can submit factual
information and legal and policy arguments.
While we have been reluctant to regulate CRS contracts in detail,
the parity clauses substantially--and unfairly--restrict a non-vendor
airline's ability to choose the level at which it is willing to
participate in a system. Under those clauses, each vendor in effect is
stating that it refuses to do business with a customer unless that
customer buys the same level of services from it that the customer buys
from any competing system. Furthermore, the clauses used by some
systems bar an airline like Alaska from reducing its level of
participation even if the system imposing that requirement offers lower
quality service or charges higher prices. If Worldspan's charges for
participation at the full availability level, for example, were much
higher than Apollo's charges for the same level of service, the
Worldspan contract would still compel Alaska to maintain its Worldspan
[[Page 42202]]
participation at the full availability level, as long as Alaska
participated at that level in Apollo.
The contract clauses, moreover, unreasonably restrict Alaska's
ability to choose its participation level in different systems. Sabre's
contract with Alaska, for example, gives Alaska only three choices: it
can maintain its participation at the full availability level, since it
participates in other systems at that level; it can maintain its
participation at the full availability level in one or more of the
other systems and withdraw entirely from Sabre; or it can reduce its
level of participation in every system below the full availability
level. Alaska thus cannot respond to its changing distribution needs by
lowering its participation level in Sabre (and hence its costs) while
maintaining its participation at the full availability level in one or
more other systems.
Although the commenters claim that Alaska could easily resolve its
alleged dissatisfaction with Sabre's full availability level service by
withdrawing entirely from Sabre, see, e.g., American Response at 16,
Alaska explains that this is not a realistic option. Alaska depends on
travel agency bookings for the great majority of its total revenues,
and, if it withdrew entirely from Sabre, the many travel agencies using
Sabre as their primary system would find it so difficult to obtain
information on Alaska's services that its bookings from those agencies
would fall sharply. Alaska Reply Comments at 7-8. We found in our last
rulemaking that few carriers could afford to stop participating
entirely in a system, since a carrier taking that action would lose a
substantial portion of its bookings from that system's subscribers. 57
Fed. Reg. at 43783. None of the parties opposing Alaska's petition has
shown that complete withdrawal from Sabre would be an acceptable
business option for an airline like Alaska.
While complete withdrawal from a system is not a practicable option
for a non-vendor airline, a reduction in its level of participation
might be a reasonable business strategy. While no major airline except
Southwest has chosen not to participate at all in one or more systems,
some major airlines have limited their participation in CRSs. Airline
Marketing Practices at 68. The parity clauses, as shown, unreasonably
restrict an airline's ability to choose this option.
American's claim that complete withdrawal from a system is an
acceptable alternative for a dissatisfied participating airline is
inconsistent with American's other claim that parity clauses are needed
to protect travel agencies from the loss of functionality in booking
airlines important to an agency's business. Obviously travel agencies
will become much more inefficient if such an airline withdraws
completely from a system than if it lowers its level of participation
in the system. Non-vendor airlines should be free to make their own
decisions on their level of participation in each system. In making
such decisions, those airlines will consider the impact of their
choices about CRS participation on the travel agencies' ability to
market their services.
Furthermore, the parity clauses discourage airlines from creating
direct electronic links between their own reservations systems and
travel agencies. As Alaska explains, if an airline otherwise willing to
bear the costs of establishing such links still had to pay the costs of
CRS participation at a high level, the airline would have less economic
incentive to create direct links. Alaska Petition at 10-11. By
discouraging airlines from creating direct links between travel
agencies and their internal reservations systems, the parity clauses
frustrate one of the major goals of our last rulemaking, making it
possible for airlines and travel agencies to develop alternative means
of transmitting airline information and making bookings. 57 FR at
43781, 43797. The parity clauses, moreover, reduce airline competition,
since the carriers owning the systems are restricting other airlines
from reducing their distribution costs by creating alternatives to full
CRS participation. If other airlines could reduce their participation
in one or more systems, they would reduce their booking fee costs. The
parity clauses prevent airlines like Alaska from lowering their costs
and improving their distribution methods by restricting their ability
to choose the level of CRS services best suited to their needs.
In addition to injuring non-vendor participating airlines like
Alaska, the parity clauses also injure CRS competition. As shown by
Galileo's comments, a system offering more attractive prices and
services may obtain less business than it otherwise would, because some
airlines will be unwilling to purchase a higher level of that system's
services when doing so will force them to increase their purchases from
other systems, even if the latter offer lower quality services or
charge higher fees.
Indeed, the parity clauses imposed on participating airlines are
quite similar in effect to the parity clauses formerly imposed on
travel agency subscribers. Those clauses required an agency to use a
number of terminals for one system comparable to the number of
terminals used to access other systems. In our rulemaking we found that
the clauses discouraged agencies from using more than one system. We
therefore prohibited such clauses. 56 FR at 12624-12625; 57 FR at
43826.
Finally, we doubt that firms in any competitive industry could
unilaterally impose any similar requirement on their customers. While
purchasers often agree with suppliers in competitive industries to
requirements contracts or contracts requiring purchases in large
quantities or over long periods of time, in those situations the
purchaser typically obtains offsetting benefits, such as a guaranteed
supply or a lower price. Cf. Barry Wright Corp. v. ITT Grinnell Corp.,
724 F.2d 227, 237 (1st Cir. 1983) (Breyer, J.). Here the commenters
claim neither that participating airlines obtain any benefit from the
clauses nor that such airlines have obtained other benefits in exchange
for accepting the clauses.
Legal Authority for Adopting the Proposed Rule
Under 49 U.S.C. 41712, formerly section 411 of the Federal Aviation
Act (and codified then as 49 U.S.C. 1381), we may investigate and
determine whether any air carrier or ticket agent has been or is
engaged in unfair methods of competition in the sale of air
transportation. That section, modelled on section 5 of the Federal
Trade Commission Act, 15 U.S.C. 45, does not confine unfair methods of
competition to those practices constituting a violation of the
antitrust laws. For example, we have the authority to ban practices
well before they become serious enough to violate the antitrust laws,
as the Seventh Circuit held when it affirmed the Board's adoption of
CRS rules, United Air Lines, 766 F.2d 1107, 1114 (7th Cir. 1985):
Although none of the airline owners of computerized reservation
systems has a conventional monopoly position in the market for that
service, and they are not accused of colluding, the Board found that
some of them, anyway, had substantial market power. This finding * *
* would bring their competitive practices within the broad reach of
section 411. We know from many decisions under both that section and
its progenitor, section 5 of the Federal Trade Commission Act, that
the Board can forbid anticompetitive practices before they become
serious enough to violate the Sherman Act.
We may therefore define a practice as an unfair method of
competition and prohibit it without finding that it is in fact a
violation of the antitrust laws. Nonetheless, we doubt that we could
[[Page 42203]]
prohibit a business practice on competitive grounds unless the practice
is comparable to practices that would violate the spirit or the letter
of the antitrust laws.
See, e.g., E.I. Du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d
Cir. 1984). Here we find that we may proscribe the parity clauses,
because these clauses appear comparable to impermissible tying
arrangements, violations of the essential facility doctrine, and
attempts to monopolize the electronic distribution of information on
airline services to travel agencies.
CRS Market Power. As the predicate for the findings that the
contract clauses are similar to conduct prohibited by the antitrust
laws, we find that each of the systems has market power, which the
Supreme Court has defined as the power ``to force a purchaser to do
something that he would not do in a competitive market,'' Jefferson
Parish Hospital v. Hyde, 466 U.S. 2, 14 (1984); Eastman Kodak Co. v.
Image Technical Services, 504 U.S. 451, 464 (1992).
Each vendor has market power over other carriers, because most
carriers have no adequate alternative to the travel agency system for
efficiently distributing their services, because travel agents have no
alternative to CRSs for quickly and efficiently obtaining information
and bookings on airline services, because the great majority of
agencies use only one system (or predominantly only one system) at each
location, and because entry into the CRS business under current
conditions would be extremely difficult. As the Department of Justice
explained in our earlier rulemaking, each system as a practical matter
holds a monopoly over the carriers' access to its subscribers. See 57
FR at 43783-43784, quoting the Justice Department's comments on the
advanced notice of proposed rulemaking at 10-11. Since the economics of
the airline business make it difficult for a carrier to operate
successfully if its services cannot be readily marketed by a
significant group of distributors, each major airline must participate
in each system. 57 FR 43783-43784.
And, as discussed above, we believe the systems' ability to impose
the type of contract clause challenged by Alaska is itself evidence of
their market power. We recognize, however, that each vendor has made
major improvements to its system in recent years and that those
improvements have benefited participating airlines by giving travel
agents a greater ability to obtain current information and to complete
bookings and other transactions without errors or delays. Nonetheless,
the systems' development of improvements that benefit participating
airlines along with travel agents does not disprove our finding that
each system has market power. Cf. 57 FR at 43781.
As noted earlier, some recently-established low-fare carriers
compete while participating in none of the systems. The systems
nonetheless still have market power with regard to more established
airlines. And even Southwest apparently has found it necessary to
participate in one system, Sabre, albeit at a low level.
Tying Arrangements. Parity clauses are analogous to the kind of
tying contracts prohibited by the antitrust laws, since they result
from a system's use of its market power to force each participating
airline to purchase services that it may not want as a condition to
obtaining any services. The Supreme Court held in Eastman Kodak Co.,
supra, 504 U.S. at 461-462 (1992), that a tying arrangement--a seller's
agreement to sell one product only on condition that the buyer purchase
a second product from the seller (or promise not to buy the product
from another seller)--is a per se violation of the Sherman Act if the
seller has appreciable market power in the tying product and if the
arrangement affects a substantial volume of commerce in the tied
product. Tying arrangements are objectionable because they force buyers
to accept conditions that they would not accept in a competitive
market. See, e.g., Jefferson Parish Hospital, 466 U.S. at 12-15.
As a result of the parity clause, a system like Sabre will provide
no CRS services to a participating airline unless the airline purchases
at least as high a level of services from Sabre as it purchases from
other systems. Sabre, for example, would not allow Alaska to buy any
CRS services unless Alaska buys services at the full availability
level, as long as Alaska participates at the full availability level of
service in any other system. Sabre has taken that position even though
Sabre marketed the call direct level--and now Basic Booking Request--as
a separate product and sold it to other airlines, most notably
Southwest.
Monopolization. A vendor like Sabre essentially holds a monopoly
over the electronic provision of information and booking capabilities
on airline services to its subscribers, as explained above. 57 FR
43783; ASTA Answer at 2-3. By requiring an airline to participate in
Sabre at a higher level than it prefers, Sabre simultaneously
discourages the airline from creating alternative electronic channels
for information and bookings for Sabre subscribers and reduces its
subscribers' incentives to use alternative channels. Sabre achieves
this goal by requiring the airline to purchase a specified level of
services from Sabre without regard to price or quality. As a result,
the parity clause helps to maintain Sabre's existing monopoly over
electronic access to its subscribers. The clause accordingly is
comparable to conduct designed to maintain or create a monopoly, which
would be unlawful under section 2 of the Sherman Act.
The Essential Facility Doctrine. Under the essential facility
doctrine, a firm that controls a facility essential for competition
must give its competitors access to the facility on reasonable terms.
The firm's denial of access will violate section 2 of the Sherman Act.
A facility is essential if it cannot be feasibly duplicated by a
competitor and if the competitor's inability to use it will severely
handicap its ability to compete. See, e.g., Aspen Skiing Co. v. Aspen
Highlands Skiing Corp., 472 U.S. 585 (1985); Delaware & Hudson Ry. v.
Consolidated Rail Corp., 902 F.2d 174 (2d Cir. 1990), cert. denied, 111
S. Ct. 2041.
We concluded in our rulemaking that each of the systems is
comparable to an essential facility. Each system must therefore offer
airlines access to its services on reasonable terms. 57 FR at 43790.
While the Ninth Circuit ruled in a private antitrust suit, Alaska
Airlines v. United Air Lines, 948 F.2d 536 (9th Cir. 1991), that CRSs
were not essential facilities, its decision appeared to be inconsistent
with decisions by other circuits and in any event did not limit our
authority to determine that CRS practices constitute unfair methods of
competition which we may prohibit, as we explained in our last
rulemaking. 57 FR 43791.
We believe that a system is denying access on reasonable terms if
it makes a non-owner airline's participation contingent on the
airline's agreement to purchase at least as high a level of services
from that system as it does from any other system, without regard for
the price or quality of the system's services.
The Commenters' Defenses for the Airline Parity Clauses
The commenters opposing Alaska's rulemaking petition argue that we
should not prohibit parity clauses, since they allegedly promote CRS
competition and benefit travel agencies. American, supported by
Worldspan and System One Information Management, also contends that the
clauses are consistent with the antitrust laws. We have carefully
considered these parties' arguments, particularly those relating to the
proposed rule's impact on travel
[[Page 42204]]
agencies, but we believe that these arguments do not outweigh the
reasons for granting Alaska's petition. We will discuss first
American's antitrust arguments and then the arguments that the rule
would be harmful.
Before addressing these arguments, we will address the claims made
by American and other commenters that the clauses prevent
``discrimination'' and ``free-riding'' by participating airlines. In
making these claims, these commenters are effectively arguing that any
firm choosing one supplier over another is ``discriminating'' against
other suppliers and that a firm engages in ``free-riding'' by choosing
to buy one level of service offered by a supplier rather than a more
expensive level of service.
The discrimination claim is based on the theory that an airline
like Alaska would choose to distort CRS competition by participating in
a favored system at a higher level than it participates in one or more
other systems. See, e.g., American Response at 27. This could be of
concern, of course, if the airline were trying to promote the market
position of a system which it owned or marketed. That type of
discrimination caused us to adopt the mandatory participation rule for
carriers that directly or through an affiliate hold a significant
ownership position in a CRS.
Alaska, however, neither owns any share of a CRS nor promotes the
marketing of any CRS. Thus Alaska's so-called ``discrimination'' is
only its wish to exercise the normal freedom of a purchaser in a
competitive market to choose its suppliers and the quantity of goods or
services that it will buy from each. This does not constitute
discrimination.
In an effort to cast doubt on the legitimacy of Alaska's approach
on reducing its distribution costs, American and System One Information
Management accused Alaska of ``free-riding''. According to them, when
Alaska planned to participate in Sabre only at the call direct level
and to provide direct electronic links between Sabre subscribers and
its internal reservations system, Alaska sought to use Sabre to provide
schedule and fare information to travel agencies while avoiding any
booking fee obligation, since the bookings would be made through the
direct link. American Response at 13-14, 18; System One Reply at 3-4.
This argument has an obvious flaw--Alaska must pay fees set by American
for its participation in Sabre at the call direct level. According to
Alaska, Sabre would then receive a booking fee whenever a travel agent
used Sabre to issue a ticket on Alaska, even if the booking was
initially made through a direct link. Alaska Reply at 16. Alaska
therefore will not be getting a free ride. Indeed Alaska would only be
doing what other airlines using the lower level of participation are
already doing.
American's ``free riding'' argument is thus refuted by its own
conduct. If American really thought carriers using the call direct
level of participation were free riders--carriers obtaining valuable
CRS services without paying their share of the system's costs--then
American presumably would never have offered that level of service or
would have charged carriers higher fees for using it.
Furthermore, while Sabre will not obtain the higher fee payable for
participation at the full availability level if Alaska lowers its level
of participation, Sabre also will not incur the cost of transmitting
booking messages. The systems must believe there is a significant cost
created by such message transmissions, since most U.S. systems now
charge participating carriers fees based on separate transactions
rather than a single fee per booking. Sabre in fact recently imposed a
cancellation charge for all levels of participation except Basic
Booking Request. As a result, the ``free riding'' claim is
unpersuasive.
American's Antitrust Defense. In arguing that the parity clauses
are consistent with the antitrust laws, American claims that the
clauses are not unusual, that they prevent discrimination, and that
they are pro-competitive. American Response at 24. American contends
that the clauses are legitimate even if analyzed under our past
findings on the CRS business and each vendor's market power, findings
with which American disagrees. American Response at 24.
In defending the parity clauses, American primarily relies upon a
decision holding that a monopolist health insurance company did not
violate the antitrust laws when it required physicians to give its
customers prices as low as those given customers of a rival insurance
firm. Ocean State Physicians Health Plan v. Blue Cross, 883 F.2d 1101
(1st Cir. 1989), cert. denied, 494 U.S. 1027. On the theory that the
Blue Cross conduct at issue represented a firm's efforts to prevent
discrimination against it, American alleges that its parity clause is
equally valid, since the clause is designed only to prevent
discrimination against Sabre. American Response at 25-26. See also Blue
Cross & Blue Shield v. Marshfield Clinic, 65 F.3d 1406, 1415 (7th Cir.
1995), cert. denied, 64 U.S.L.W. 3624 (March 19, 1996).
American's reliance on Ocean State Physicians appears to be
misplaced. First, as Alaska has pointed out, the court's decision is
inconsistent with the Justice Department's position in two recent cases
that ``most favored nation'' clauses of the type at issue in Ocean
State Physicians are anticompetitive because they reduce price
competition. Alaska Reply Comments at 27, citing the proposed consent
decrees in United States v. Vision Service Plan and United States v.
Delta Dental Plan of Arizona, published respectively at 60 F.R. 5210
(January 26, 1995) and 60 F.R. 47349 (September 15, 1994).
Furthermore, the parity clauses are not like the ``most favored
nation'' clause upheld in Ocean State Physicians. The court held that
the conduct challenged in Ocean State Physicians was not exclusionary
because it represented a buyer's insistence on obtaining the lowest
price, a practice which tended to further competition on the merits.
883 F.2d at 1110. The court additionally noted that Blue Cross' conduct
benefited consumers by giving them lower prices. 883 F.2d at 1111. Cf.
Blue Cross & Blue Shield, supra, 65 F.3d at 1415. Here, in contrast,
the parity clauses are imposed by sellers, not by buyers, and the
clauses do not act as a means of providing low prices to the affected
consumers, which here are the participating airlines. Instead, as
shown, the clauses require airlines to participate at a high level in a
vendor's system, merely because they participate in other systems at
that level.
American's other antitrust arguments are also unpersuasive.
American correctly notes that a firm with market power may legitimately
seek to increase its market share; a firm will not violate the
antitrust laws, for example, by developing new products. See, e.g.,
Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534, 544-546 (9th
Cir. 1983), cert. denied, 465 U.S. 1038. But a firm with market power
may not strengthen its market position by engaging in coercive conduct.
The parity clauses appear comparable to the kind of coercive conduct
prohibited by the antitrust laws. In contrast, of course, American is
free to continue improving Sabre without running the risk of antitrust
liability.
Furthermore, while American claims the clauses are not unusual, it
has cited no examples of similar contract restrictions in other
industries.
The Commenters' Other Justifications for Airline Parity Clauses:
CRS Industry Effects. In defending the parity clauses,
[[Page 42205]]
the commenters opposing Alaska's petition argue that the clauses
promote competition, at least in the CRS and travel agency businesses,
and benefit the public. We find these arguments unpersuasive.
Worldspan and System One Information Management claim the airline
parity clauses promote CRS competition by keeping airlines from
reducing their level of participation in the smaller systems, Worldspan
and System One. According to their comments, if a smaller system could
not impose contract terms preventing a participating airline from
reducing its participation in that system, some airlines would reduce
their level of participation in the smaller systems while maintaining a
higher level of participation in the larger systems, Sabre and Apollo.
The smaller systems would then be unable to offer subscribers as
complete a coverage of the airline industry as the larger systems and
would therefore lose subscribers to one of the larger systems.
However, the airline participants in a smaller system will continue
purchasing a high level of service from that system if it offered
attractive service and prices. Furthermore, even if an airline reduces
its participation in a system, the system presumably would still
provide information on the airline's schedules and other capabilities,
such as the ability to write tickets through the CRS.
The smaller vendors' own conduct indicates that the loss of
subscriber access to booking and ticketing capabilities on some
airlines may not damage CRS competition. As discussed earlier, in 1994
System One, Worldspan, and Apollo each changed its policies on the
treatment of carriers that chose not to participate in the system. As a
result, their subscribers found it much more difficult to obtain
information and make bookings on non-participating airlines. Southwest,
a major airline in many markets, does not participate in these systems
(but does participate in Sabre). Southwest accounts for more than ten
percent of domestic enplanements, although its share of travel agency
bookings for domestic travel is lower. The policy change by Apollo,
Worldspan, and System One should have made those systems much less
attractive than Sabre for many travel agencies. Even though Southwest,
the major non-participating airline, continued to refuse to participate
in these systems, the smaller systems--and Apollo--nonetheless went
ahead with the change in policy. If the smaller systems were willing to
take that action, we do not see how allowing airlines to reduce their
level of participation in a system could cause them significant
competitive harm.
The Commenters' Other Justifications for Parity Clauses: Travel
Agency Effects. The parties opposing Alaska's petition generally argue
that Alaska's proposed rule would harm many travel agencies. If a major
airline decided to reduce its level of participation in a system,
travel agencies using that system will have more difficulty obtaining
information and making bookings on that airline through their system.
If, for example, Alaska participated in Sabre at the Basic Booking
Request level, a travel agency in Alaska or the Pacific Northwest using
Sabre will have higher costs booking Alaska, an airline used by many of
its customers, since Alaska bookings would take longer and since the
CRS would no longer display availability information for Alaska. If
Alaska reduced its participation in another system to the equivalent of
the call direct level formerly offered by Sabre, an agency using that
system could not book Alaska through the CRS at all and therefore would
operate less efficiently than competing agencies using other systems.
The increased difficulty of obtaining information and conducting
transactions would not matter much if travel agencies commonly used
more than one system or if the vendors offered them short-term
contracts. Short-term contracts would enable agencies to switch systems
relatively soon after deciding that other vendors offered better
service. However, the vendors have traditionally insisted on long-term
contracts (usually five-year contracts) and on other contractual
restrictions which discourage the use of multiple systems. In
particular, most travel agencies obtain their CRS terminals from a
vendor, and each vendor commonly bars its subscribers from using the
terminals to access any other system or database. 57 F.R. at 43796,
43822-43824; Airline Marketing Practices at 85-91. While travel
agencies would be reluctant in any event to switch systems or to use
multiple systems due to the cost of doing so, Airline Marketing
Practices at 26, 87, the vendor contract clauses additionally
discourage travel agencies from switching systems or using several
systems.
ASTA and ARTA specifically complain that a rule barring airline
parity clauses will impair competition in the travel agency industry
and injure the business position of many agencies. They base this
contention on their expectation that the rule will cause some airlines
to reduce their participation in some systems below the full
availability level and thereby injure travel agencies by making their
operations less efficient, as explained above. An agency using a system
which no longer provides the ability to conveniently make bookings on a
significant airline in the agency's business area will be less able to
compete with agencies using other systems.
Tyee Travel, a travel agency in Wrangell, Alaska, complains that
Alaska's proposed reduction in Sabre participation to the call direct
level would be devastating for it. Tyee Travel has three years left on
its Sabre contract and cannot switch to another system. It also makes
many more bookings on Alaska Airlines than it does on all other
airlines combined. If the agency were forced to make its bookings on
Alaska by telephone, the agency's expenses would be much higher.
We are sympathetic to these concerns. However, we believe that
travel agencies will ultimately benefit if airlines--and travel
agencies--have a variety of options for electronic communications
between airline reservations systems and airline and travel databases,
on the one hand, and travel agencies, on the other hand. The rule
proposed by Alaska will promote that goal in the long run, since it
will make it easier for airlines to set up alternative methods of
providing information and transactional capabilities to travel
agencies. Although ASTA opposes Alaska's proposal, it agrees with the
principle that travel agencies will benefit if they have more
alternatives for obtaining travel information and making airline
transactions electronically. ASTA Answer at 2. Alaska, moreover, states
that its dependence on travel agencies for bookings will ensure that it
takes steps to offset the impact of its reduced level of participation.
Alaska Reply Comments at 2, 3. Alaska notes that 85 percent of its
bookings came from travel agencies in 1994. Id. at 22, n. 9.
Insofar as travel agencies using Sabre are concerned, Sabre's
replacement of the call direct level of service with Basic Booking
Request will substantially alleviate the loss of efficiency when a
major airline lowers its participation from the full availability
level. If the airline participates at the Basic Booking Request level,
an agent using Sabre can still obtain a display of the airline's
schedules and can book the airline electronically. This is more
efficient for travel agents than direct call would have been. Moreover,
although not critical to our analysis, Alaska has advised us that it is
not planning to reduce the level of its participation in Sabre,
although it does wish to avoid purchasing some
[[Page 42206]]
features from Sabre that it apparently purchases from other systems.
In addition, travel agencies using Apollo, Worldspan, or System One
recently had similar difficulties when each of those systems changed
its policies on non-participating carriers and thereby made it harder
for those agencies to obtain information and make bookings on
Southwest. Southwest created direct electronic links with some of the
affected travel agencies and has changed its procedures in other ways
(for example, by creating ticketless travel) to offset the impact of
its non-participation in the systems besides Sabre. Even so,
Southwest's non-participation reduces the efficiency of travel agencies
using Apollo, Worldspan, or System One. Nonetheless, we have never
required non-vendor airlines to participate in CRSs, even though an
airline's non-participation will decrease the efficiency of travel
agency operations. We do not believe that we should allow a CRS to
dictate a non-vendor airline's level of participation, even though that
could benefit travel agencies using that system.
In any event, we currently believe that we should not protect the
short-term interests of travel agencies by allowing vendors to restrict
the distribution options of non-vendor airlines. We are also unwilling
at this point to propose ASTA's solution for this problem, a rule
giving travel agencies the right to terminate their CRS contract on
short notice so they can switch to a system offering better service. We
recognize that longterm subscriber contracts keep travel agencies from
switching systems even if their existing system becomes less desirable
for any reason. However, we considered this issue at length in our last
rulemaking and determined that longer term contracts could be
economically efficient and enable travel agency subscribers to obtain
lower CRS prices. 57 FR at 43825. We prefer not to reopen that issue,
at least not until after we complete our current study of the CRS
business and related airline marketing issues.
Potential Unfair Conduct by Foreign Airlines. American has raised a
legitimate concern over one possible effect of Alaska's rule proposal.
American contends that the parity clauses increase CRS competition in
international markets by keeping foreign airlines from reducing their
participation in a U.S. system in order to promote the marketing of
systems affiliated with those foreign airlines. As an example, American
cites Avensa, a major Venezuelan airline, which is reducing its
participation in Sabre to the call direct level while participating in
a competing system at the full availability level, allegedly in order
to promote the other system that Avensa is marketing in Venezuela. This
will cause Venezuelan agencies to prefer the latter system over Sabre.
American Response at 9-10.
When American met with our staff, it stated that Sabre has recently
invoked the parity clause to resolve problems with some other Latin
American airlines that were marketing competing CRSs. As in the Avensa
example, the airlines participated in Sabre at a low level while
participating at a substantially higher level in the systems they
sponsored in their home countries. After Sabre invoked the parity
clause, these airlines upgraded their participation level in Sabre.
We sympathize with this effect of the parity clause, for several
foreign airlines in the past have limited their participation in a U.S.
system in an apparent effort to deny the U.S. system a fair opportunity
to compete in their homelands against systems they owned. The foreign
airlines' conduct injured the competitive position of the U.S. airline
marketing its system. See, e.g., Complaint of American Airlines against
British Airways, Order 88-7-11 (July 8, 1988). While the past cases
each involved a foreign airline with an ownership interest in the CRS,
a foreign airline responsible for marketing a system in its homeland
would have the same incentive to reduce its participation in the U.S.
system. Although we may impose countermeasures under the International
Air Transportation Fair Competitive Practices Act against a foreign
airline whose discrimination denies a U.S. airline a fair and equal
opportunity to compete, a vendor's use of contract terms preventing
that kind of discrimination can be more effective and more likely to
prevent disputes between the United States and foreign governments. 57
FR at 43819. Our mandatory participation rule, moreover, only covers
airlines owning five percent or more of the equity of a system
operating in the United States.
We are unwilling to deny Alaska's petition to preserve Sabre's
ability to prevent unfair practices by foreign airlines, since the
parity clauses injure CRS and airline competition within the United
States. Nonetheless, allowing a system to enforce a parity clause
against airlines that own or market a competing CRS may be reasonable.
We ask for comments on whether the proposed rule should be modified to
prevent the potential harm cited by American, perhaps by barring
airline parity clauses except insofar as they apply to a carrier
affiliated with another system as an owner or marketer. In addition,
commenters should address whether the rule should exclude any airline
with a CRS ownership interest rather than only system owners, carriers
defined by our rules as owning directly or indirectly five percent or
more of the equity of a CRS that operates in the United States.
Allowing a CRS to enforce a parity clause against an airline that
owns or markets a competing CRS would be consistent with one of our
rules, section 255.7(a). That rule requires carriers with a significant
ownership interest in a U.S. CRS to participate in each other system
and each of its enhancements (to the extent that such carrier
participates in those features in its own system). Our adoption of a
rule barring a system from contractually requiring airlines that
neither own nor market a system to participate in the system at a
higher level would not conflict with our existing mandatory
participation rule, which covers only airlines with significant CRS
ownership interests. American accordingly is completely wrong in
suggesting that we excluded airlines with a small ownership share from
the mandatory participation rule since the vendors through contractual
means could prevent such airlines from discriminating against a system.
American Response at 8. We instead stated that an airline with a small
ownership share in one system should have little incentive or ability
to limit its participation in a competing system in order to promote
the marketing of the former system. 57 FR at 43795.
Evidentiary Basis for Our Proposed Rule
As noted above, we are relying in part on our last study of airline
marketing issues, Airline Marketing Practices, and our findings in our
last CRS rulemaking. We believe that the CRS and airline businesses
have not changed in ways that would undermine the findings made in the
study and the rulemaking that are relevant to this rulemaking. We note,
moreover, that none of the comments in this proceeding contends that
changes in these industries have affected our earlier conclusions. If
any parties believe that developments over the last three years have
affected those findings, they may, of course, say so in their comments.
We have also decided to act on Alaska's petition without waiting
for the completion of our current study of airline marketing practices,
the CRS business, and the rules adopted in 1992, which was begun by
Order 94-9-35 (September 26, 1994). Since the parity
[[Page 42207]]
clauses seem to frustrate competition without a legitimate reason, we
doubt that our ultimate decision on Alaska's petition would be affected
by the findings of our study. Any party, of course, may present any
relevant information to us in its comments.
Regulatory Process Matters
Regulatory Assessment
This rule is a significant regulatory action under section 3(f) of
Executive Order 12866 and has been reviewed by the Office of Management
and Budget under that order. Executive Order 12866 requires each
executive agency to prepare an assessment of costs and benefits under
section 6(a)(3) of that order. The proposal is also significant under
the regulatory policies and procedures of the Department of
Transportation, 44 FR 11034.
The proposed rule should benefit competition and innovation. It
would give non-owner participating airlines a greater ability to choose
the distribution methods that best meet their needs. The proposed rule
also would not require any CRS to change its business methods in a way
which impose a significant cost burden on the system. The rule would
merely give participating carriers more flexibility in choosing among
the participation levels offered by a vendor, although the exercise of
that flexibility could reduce the revenues of a system. We doubt that
our rule will significantly affect the vendors' revenues, since an
airline lowering its level of participation in a system will still be
paying fees to that system, and the system will incur lower costs
serving that airline. It also seems unlikely that many airlines will
choose to radically lower their participation level in some but not all
systems.
If some airlines used the rule to reduce their level of
participation in one or more systems, the travel agencies using those
systems would be affected, since their operations would be somewhat
less efficient. However, we expect that an airline reducing its level
of participation will take steps to offset much of the impact on travel
agencies. If a system offers a level of service like Sabre's Basic
Booking Request, moreover, the agencies using that CRS could still make
bookings through the CRS on the airline. The only agencies that would
be seriously affected would be agencies in regions where the airline
accounts for a substantial portion of the area's airline service. And
again, we doubt that many airlines will choose to exercise this option
to drastically reduce their level of participation. Alaska itself has
decided not to reduce its level of participation in Sabre, although it
prefers not to purchase some enhancements from Sabre that it may wish
to purchase from other systems.
The Department does not believe that there are any alternatives to
this proposed rule which would accomplish the goal of giving each
participating carrier (other than carriers with a significant ownership
interest in a CRS, which remain bound by section 255.7(a)) the ability
to choose its level of participation in each system.
The costs and benefits of the proposed rule appear to be
unquantifiable. The Department asks interested persons to provide
information on the costs and benefits.
This rule does not impose unfunded mandates or requirements that
will have any impact on the quality of the human environment.
Initial Regulatory Flexibility Analysis
The Regulatory Flexibility Act of 1980, 5 U.S.C. 601 et seq., was
enacted by Congress to ensure that small entities are not unnecessarily
and disproportionately burdened by government regulations. The act
requires agencies to review proposed regulations that may have a
significant economic impact on a substantial number of small entities.
For purposes of this rule, small entities include smaller U.S. and
foreign airlines and smaller travel agencies. Our notice of proposed
rulemaking sets forth the reasons for our consideration of Alaska's
rule proposal and the objectives and legal basis for our proposed rule.
The proposed rule will, as explained above, give more flexibility
to smaller non-owner airlines by barring the use of airline parity
clauses. When a system imposes a parity clause, the clause prevents an
airline participating in the system from participating in that system
at a lower level than its participation level in any other system. If
we make the clauses unlawful, airlines could choose different levels of
participation in different systems. Smaller non-owner airlines would
then have a better opportunity to choose how they will distribute their
services and thus a greater ability to control their costs.
Although the proposed rule would not directly affect travel
agencies, it could affect the operations of smaller travel agencies. If
an airline reduces its level of participation in one or more systems
without reducing its level of participation in all of the systems,
agencies using a system in which the airline reduced its level of
participation would not be able to operate as efficiently as before,
since they will be unable to obtain as much information and conduct
transactions as efficiently as before. That loss in efficiency would be
significant for an agency only if the airline provided a substantial
amount of the airline service in the area where the agency conducts its
business. Since the system almost certainly would still be able to
provide some information and enable the agency to conduct some
transactions through the system, the agency would still obtain some of
the efficiency advantages of using a CRS as to that carrier.
Furthermore, we do not expect many airlines to substantially reduce
their participation level, so the likelihood that many travel agencies
would be significantly affected appears small.
In addition, the proposed rule should encourage airlines and other
firms to develop alternative means of transmitting information on
airline services and enabling travel agencies to carry out booking
transactions. In the long term these developments would benefit travel
agencies.
Our proposed rule contains no direct reporting, record-keeping, or
other compliance requirements that would affect small entities. There
are no other federal rules that duplicate, overlap, or conflict with
our proposed rules.
Interested persons may address our tentative conclusions under the
Regulatory Flexibility Act in their comments submitted in response to
this notice of proposed rulemaking.
The Department certifies under section 605(b) of the Regulatory
Flexibility Act (5 U.S.C. et seq.) that this regulation will not have a
significant economic impact on a substantial number of small entities.
Paperwork Reduction Act
This proposal contains no collection-of-information requirements
subject to the Paperwork Reduction Act, Public Law No. 96-511, 44
U.S.C. Chapter 35.
Federalism Implications
The rule proposed by this notice will have no substantial direct
effects on the States, on the relationship between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. Therefore, in
accordance with Executive Order 12812, we have determined that the
proposed rule does not have sufficient federalism implications to
warrant preparation of a Federalism Assessment.
List of Subjects in 14 CFR Part 255
Air carriers, Antitrust, Reporting and recordkeeping requirements.
Accordingly, the Department of Transportation proposes to amend 14
[[Page 42208]]
CFR part 255, Carrier-owned Computer Reservations Systems as follows:
PART 255--[AMENDED]
1.The authority citation for part 255 continues to read as follows:
Authority: 49 U.S.C. 1301, 1302, 1324, 1381, 1502.
2. Section 255.6 is amended by adding paragraph (e) to read as
follows:
Sec. 255.6 Contracts with participating carriers.
* * * * *
(e) No system may require a carrier to maintain any particular
level of participation in its system on the basis of participation
levels selected by that carrier in any other system.
Issued in Washington, DC, on August 8, 1996.
Federico F. Pena,
Secretary of Transportation.
[FR Doc. 96-20737 Filed 8-13-96; 8:45 am]
BILLING CODE 4910-62-P