[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]


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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

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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