[Federal Register Volume 62, Number 214 (Wednesday, November 5, 1997)]
[Rules and Regulations]
[Pages 59784-59802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29295]
-----------------------------------------------------------------------
DEPARTMENT OF TRANSPORTATION
Office of the Secretary
14 CFR Part 255
[Docket OST-96-1145 [49812]]
RIN 2105-AC35
Computer Reservations System (CRS) Regulations
AGENCY: Office of the Secretary (DOT).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Department is adopting a rule that will prohibit each
computer reservations system (CRS) from adopting or enforcing contract
clauses that bar a 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, if neither the carrier nor any
affiliate of the carrier owns or markets a CRS. The Department believes
that this rule is necessary to promote competition in the CRS and
airline industries, since the contract clauses at issue unreasonably
limit the ability of airlines without CRS interests to choose how to
distribute their services through travel agencies. This rule will allow
a CRS to enforce such a contract clause against an airline that owns or
markets a competing CRS or that has an affiliate that owns or markets a
CRS. The Department is acting on a rulemaking petition filed by Alaska
Airlines.
DATES: This rule is effective December 5, 1997.
FOR FURTHER INFORMATION CONTACT: Thomas Ray, Office of the General
Counsel, 400 Seventh St. SW., Washington, DC 20590, (202) 366-4731.
SUPPLEMENTARY INFORMATION:
Introduction
Almost all airlines in the United States depend heavily on travel
agencies for the distribution of their services, and travel agencies in
turn rely heavily on computer reservations systems (CRSs) in responding
to their customers' requests for information on airline services and
for booking seats. The large majority of travel agencies use only one
CRS (the agencies using a system are called ``subscribers''). As a
result, virtually every airline must make its services available
through each of the four CRSs operating in the United States in order
to distribute its services through the travel agencies using each
system (the airlines that make their services available through a
system are called ``participating airlines''). Because each airline
must participate in each system, the systems do not compete with each
other for airline participants and have long been able to dictate the
terms for participation (in contrast, the systems compete for travel
agency users). Each of the systems is controlled by one or more
airlines or airline affiliates, which can use their market power over
airline participants to distort airline competition. We therefore have
rules regulating CRS operations. 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.
Alaska Airlines asked us to amend those rules by adding a
prohibition of parity clauses--contract terms imposed by three of the
four CRSs operating in the United States that require a participating
airline to purchase at least as high a level of service from it as the
airline does from any other system. We issued a notice of proposed
rulemaking that tentatively determined to adopt such a rule. 61 FR
42197, August 14, 1996. Our proposed rule stated: ``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.'' We tentatively determined that the
proposed rule would make airline operations more efficient and promote
competition in the CRS and airline industries.
However, airlines that own or market a CRS (or have an affiliate
that does so) may limit their participation in a competing system in
order to frustrate that system's ability to obtain travel agency
subscribers. Our notice therefore asked whether we should allow a
system to enforce a parity clause against an airline that owned or
marketed a competing system.
After considering the comments and reply comments, we have
determined to prohibit parity clauses, subject to an exception allowing
a system to impose such a clause on an airline that owns or markets a
competing system (this reference to airlines that own or market a
system, and other such references in this document, include airlines
with affiliates that own or market a system). Since the parity clauses
are currently injuring some carriers, we are making a final decision
now on Alaska's rulemaking petition rather than waiting for the
completion of other pending CRS proceedings.
As explained in more detail below, parity clauses cause airlines
either to buy more CRS services than they wish to buy from some systems
or to stop buying services from other systems that they would like to
buy, which creates economic inefficiencies and injures airline
competition. In addition, the clauses eliminate competition between the
systems for higher levels of participation. Without the clauses, such
competition would exist, since the airlines' need to participate in
systems does not compel them to buy the higher levels of service from
each system. For these reasons the Department of Justice, several
smaller airlines, and the CRS that does not use a parity clause,
Galileo, support our proposal.
We have considered the arguments made by the parties opposing the
proposal, but we have determined that the rule would benefit
competition and airline efficiency. None of the opponents denies that
the parity clauses compel airlines to buy services that they do not
want and that the clauses provide no significant benefit to airlines.
We also conclude that our rule will not adversely affect travel
agencies. Each airline's interest in facilitating travel agency sales
of its services should ensure that no important airline will reduce its
participation in any system by enough to seriously interfere with the
efficiency of travel agency operations.
By adopting this rule we are following our long-standing policy of
promoting the ability of airlines to choose how they will distribute
information on their services and enable travel agencies to carry out
booking and ticketing transactions through electronic means. Parity
clauses unreasonably interfere with the ability of individual airlines
without CRS ties to choose the level of CRS service they will buy and
to choose how best to communicate with travel
[[Page 59785]]
agencies in distributing their services, and this harm is not offset by
any competitive benefits. Our prohibition of airline parity clauses,
moreover, is consistent with our existing rule prohibiting the use of
parity clauses in travel agency CRS contracts, 14 CFR 255.8(b). We
prohibited parity clauses in travel agency contracts in order to
eliminate unreasonable restrictions on the travel agencies' ability to
change systems and use more than one system.
We have concluded, however, that entirely banning the use of parity
clauses would be unreasonable, since an airline that owns or markets a
CRS may limit its participation in other systems in order to compel
travel agencies in areas where it is the dominant airline to subscribe
to its own system. The apparent use of such tactics by some U.S.
airlines caused us to adopt a rule requiring significant owners of a
CRS to participate at equivalent levels in competing systems, 14 CFR
255.7 (``the mandatory participation rule''), and some foreign airlines
have apparently reduced their participation in a U.S. system in order
to frustrate that system's marketing efforts in the foreign carriers'
homelands. Our rule will therefore allow systems to enforce parity
clauses against airlines that own or market a competing system.
Finally, several parties have proposed other changes in our
mandatory participation rule and other CRS rules. We will consider
their proposals in our next major CRS rulemaking, not here.
Background
The Systems' Role in Airline Distribution
As we explained in the notice of proposed rulemaking, each CRS is
able to dictate its terms for airline participation because virtually
all airlines must participate in each system due to the role of travel
agencies in airline distribution and the agencies' reliance on CRSs. 61
FR at 42198. Almost all airlines depend heavily on travel agencies for
the sale of their services, and travel agencies sell about seventy
percent of all airline tickets. Travel agents primarily rely upon CRSs
to determine what airline services and fares are available, to book
seats, and to issue tickets for their customers. Travel agents use CRSs
for these tasks because the systems are the most efficient method of
carrying out these tasks. Ibid.
Travel agencies typically use only one CRS for obtaining airline
information and making bookings. As a result, an airline that wants its
services sold by a travel agency must make its services available for
sale in the CRS used by that agency. If the airline does not
participate in that system, that system's subscribers are likely to
make significantly fewer bookings on the airline, which will
substantially undermine the airline's ability to compete with other
airlines that do participate in the system. Given the importance of
marginal revenues in the airline industry, an airline's loss of a few
passengers on each flight will substantially reduce, and perhaps
eliminate, the airline's ability to operate profitably. 61 FR at 42198.
Because most airlines are therefore compelled to participate in
each system, the systems do not compete for airline participation and
their prices and terms for participation are not disciplined by market
forces. 61 FR at 42198. In contrast, the systems do compete for travel
agency subscribers, and travel agencies do not pay supracompetitive
prices for CRS services (indeed many agencies receive CRS services and
equipment for free). Saber Reply at 1, n. 1; Justice Dept. Comments at
5.
Some airlines, particularly Southwest, compete successfully without
participating in all of the systems. Southwest, for example,
participates only in Saber. As explained below, most airlines could not
duplicate Southwest's ability to avoid full CARS participation, so
Southwest's experience does not invalidate our finding that each system
has market power over almost all airlines. See 61 FR at 42198. We note,
moreover, that some airlines like Western Pacific and ValuJet have
recently decided to participate in CRSs.
The Systems' Different Participation Levels and the Parity Clauses
Each system offers several levels of participation in its system
and various enhancements to the different levels of participation. When
an airline uses a higher level of service, it must pay higher fees.
When an airline participates at the ``full availability'' level in a
system, the travel agents subscribing to that system can obtain a
display of the airline's schedules and fares, learn whether seats are
available, book a seat, and issue a ticket. However, if the airline
participates at a higher level, the travel agent can obtain realtime
availability information and make a booking in the airline's internal
reservations system. If the airline chooses to purchase the
enhancements offered by a system, travel agents can also issue boarding
passes and select specific seats on the basis of seat maps. Southwest,
on the other hand, uses a level of service offered by Saber called
Basic Booking Request. Saber does not display Southwest's availability,
so the travel agent must send Southwest an electronic message to find
out whether seats are available. 61 FR at 42199.
While almost all airlines must participate in each system at the
full availability level, participation at the higher levels does not
appear to be essential for many airlines. Moreover, higher-level
participation increases an airline's CARS fees. Many airlines
accordingly choose not to participate at higher levels, and, but for
the parity clauses, many would consider participating at a higher level
in some systems but not in other systems. The parity clauses, however,
deny airlines the ability to participate at different levels in
different systems. Three CRSs--Saber, Worldspan, and System One--impose
parity clauses on their airline participants, while the fourth system--
Galileo--does not. 61 FR at 42199.
The History of CARS Regulation
Each of the four systems is owned by or affiliated with one or more
airlines. American Airlines' parent corporation, AMR, controls Saber,
the largest system. United Air Lines, US Airways, several European
airlines, and Air Canada own most of Galileo, the second-largest
system, which is sold under the name Apollo in North America. Galileo
and Saber also have public shareholders. Delta Air Lines, Northwest
Airlines, Trans World Airlines, and Abacus, a partnership of several
Asian airlines, own Worldspan. System One is owned by Amadeus, which is
owned by Lufthansa, Air France, Iberia, and Continental Air Lines. 61
FR at 42198.
Each of the airlines that owns a system has the incentive to use
its control of a system to prejudice the competitive position of other
airlines. We therefore regulate CARS operations in order to protect
competition in the airline industry and help ensure that consumers
obtain accurate and complete information on airline services. 61 FR at
42198. Our current rules, adopted in 1992, modified the rules
originally adopted by the Civil Aeronautics Board (``the Board''), the
agency that had been responsible for the economic regulation of
airlines. 49 FR 32540, August 15, 1984, afield, United Air Lines, 766
F.2d 1107 (7th Cir. 1985). Both we and the Board adopted the CARS rules
under our authority to prevent unfair methods of competition and unfair
and deceptive practices in the marketing of airline transportation. 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. Since our rules
by their terms will expire at the end of 1997, 14 CAR
[[Page 59786]]
255.12, we will begin a major reexamination of the rules in 1997.
Two features of our 1992 rulemaking are relevant here. First, we
revised the rules to give airlines and travel agencies a greater
ability to use alternative electronic methods for communicating
information and conducting transactions. In particular, we stated that
a system could not bar a travel agency from using CARS terminals to
access other systems and databases with airline information, unless the
system owned the terminals. We intended this rule to make possible
direct links between the airlines' internal reservations systems and
individual travel agencies. 57 FR at 43796-43800. We had hoped that
this rule would avoid the need for more intrusive regulation. 57 FR at
43781. In addition, we prohibited several types of restrictive contract
clauses imposed by systems on subscribers--minimum use clauses, roll-
over clauses, and parity clauses--that unreasonably limited the travel
agencies' ability to switch systems or use multiple systems. 57 FR at
43822-43826.
Secondly, we found that some U.S. airlines with an ownership
interest in a CARS appeared to be limiting their participation in
competing systems to prejudice competition in the CARS business. If an
owner airline limited its participation in competing systems, travel
agencies in areas where that airline was the major airline would be
compelled to subscribe to its system in order to obtain the best
information and transactional capabilities on the airline. 56 FR at
12608; 57 FR at 43800-43801. We therefore adopted the mandatory
participation rule, which requires each airline deemed a ``system
owner'' to participate in other systems at the same level in which it
participates in its own system as long as the terms for such
participation are commercially reasonable. 14 CFR 255.7. An airline is
a system owner if it and its affiliates hold five percent or more of a
system's equity interest. 14 CFR 255.3. Since we focused on the
domestic CARS market in adopting the mandatory participation rule, we
excluded carriers with a small CARS ownership interest from the rule's
coverage, since those airlines appeared unlikely to have an incentive
to distort CARS competition within the United States. 57 FR at 43795.
We have also addressed CARS issues in other contexts. First, we
found in several proceedings under the International Air Transportation
Fair Competitive Practices Act (``IATFCPA''), 49 U.S.C. 41310(c), that
a foreign airline was apparently refusing to participate in a U.S.
system at an adequate level (or at all) in order to give a marketing
advantage to the system owned by that airline or an affiliate in the
airline's homeland. Complaint of American Airlines against British
Airways, Order 88-7-11 (July 8, 1988); Complaint of United Air Lines v.
Japan Air Lines, Order 88-9-33 (September 15, 1988); Complaint of
American Airlines v. Iberia, Lineas Aereas de Espana, Order 90-6-21
(June 8, 1990). We concluded in those orders that a foreign airline
would be engaging in unreasonably discriminatory conduct if it refused
to participate in a U.S. system in order to frustrate that system's
ability to compete with the foreign airline's own system, since that
would interfere with the right of U.S. airlines to a fair and equal
opportunity to compete. See also Complaint of American Airlines v.
Iberia, Lineas Aereas de Espana et al., Order 93-2-37 (February 17,
1993).
In addition, we have completed two studies of the CARS business and
its impact on airlines. Airline Marketing Practices: Travel Agencies,
Frequent-Flyer Programs, and Computer Reservation Systems, prepared by
the Secretary's Task Force on Competition in the Domestic Airline
Industry (February 1990) (Airline Marketing Practices); and Study of
Airline Computer Reservation Systems (May 1988). We are currently
conducting another study, begun by Order 94-9-35 (September 26, 1994),
which will provide information for our review of the CARS rules.
History of This Proceeding
As we explained in detail in the notice of proposed rulemaking,
Alaska had been considering lowering its level of participation in
Saber while maintaining a higher level of participation in other
systems. When Saber learned of this, it told Alaska that any such
action would violate the parity clause in Alaska's CARS contract with
Saber. Saber also sued Alaska to enforce the parity clause. 61 FR at
42199-42200. After we issued our notice of proposed rulemaking, the
court dismissed Saber's suit on the ground that Saber's claims, all
based on state contract law, were preempted by federal law,
particularly in light of our tentative decision that parity clauses
should be prohibited as unfair methods of competition. American
Airlines v. Alaska Airlines, N.D. Tex. Civ. No. 4-94CV-595-Y (September
18, 1996 memorandum opinion).
In addition to defending itself in the litigation, Alaska
petitioned us for a rule prohibiting parity clauses. We published a
notice inviting comments on Alaska's petition. 59 FR 63736, December 9,
1994. American, Worldspan, and System One filed comments opposing
Alaska's petition, as did 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.
Galileo International Partnership submitted comments supporting
Alaska's petition.
While Alaska's rulemaking petition was pending, Saber told Alaska,
Midwest Express, and a number of other airlines that they were
participating in another system at a higher level than they were in
Saber, that each of them was therefore violating the parity clause in
its Saber contract, and that their continued participation in Saber
required each of them to either upgrade its participation in Saber or
downgrade its participation in the other systems. December 8, 1995,
Letter of Scott Alvis, included as Attachment D to Alaska's Reply. At
our request, Saber agreed to postpone enforcing this demand against
Alaska and Midwest Express for a short time to give us an opportunity
to rule on Alaska's petition. See 61 FR at 42201. We have not asked
System One or Worldspan to suspend enforcement of their clauses, which
to our knowledge have not recently generated as much controversy as
Sabre's clause.
We then issued a notice proposing to adopt the rule sought by
Alaska. 61 FR 42197, August 14, 1996. The basis for our proposal was
our tentative finding that parity clauses unreasonably interfered with
each airline's ability to choose the level of CRS services that it
would buy and injured competition in both the CRS and airline
industries. We recognized, however, that parity clauses could be a
legitimate tool against discriminatory conduct by airlines that own or
market a competing system. We therefore specifically requested comment
on whether we should include an exception in the prohibition so that a
system could enforce a parity clause against an airline that owned or
marketed a competing CRS. 61 FR at 42197, 42198, 42206.
In proposing the ban on parity clauses, we summarized our reasoning
as follows, 61 FR at 42198:
[T]he 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.
[[Page 59787]]
Thus, despite our reluctance to regulate CRS contracts, we proposed
to ban parity clauses because they ``substantially--and unfairly--
restrict a non-vendor airline's ability to choose the level at which it
is willing to participate in a system.'' 61 FR at 42201.
We further noted that the parity clauses injured CRS competition:
``[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.'' 61 FR at 42202. Galileo in fact had alleged that four
airlines had already lowered their participation level in Galileo due
to Sabre's threat to enforce the parity clause and that Galileo
expected more airlines would take such action. 61 FR at 42201.
Furthermore, the parity clauses could drive up a non-vendor
airline's costs by forcing it to buy more services from some systems
than it would otherwise purchase, without the offsetting benefit of
precluding a CARS vendor from compromising CARS competition. Alaska and
Midwest Express, for example, stated that Saber's demands that they
upgrade their level of participation would increase their CARS costs by
more than ten percent. 61 FR at 42201.
We tentatively determined that we could adopt the proposed rule
under our power to prohibit unfair methods of competition in the
airline industry, a power which authorizes us to prohibit conduct which
violates the letter or the spirit of the antitrust laws. 61 FR at
42202. We based that determination on our finding that each CARS has
market power over the airlines. Each system had market power because
the economics of the airline and travel agency businesses forced
airlines (with few exceptions) to participate in each system, no matter
how onerous the terms of participation. Because the systems have market
power, the parity clauses appeared to be analogous to conduct
prohibited by the antitrust laws, such as tying arrangements. 61 FR at
42203.
While we concluded that parity clauses appeared to unreasonably
restrict competition as to airlines that did not own or market a CARS,
we recognized that an airline that owned or marketed a CARS could
choose to lower its participation in competing systems in order to give
its own system a competitive advantage. In the past several foreign
airlines had lowered their participation in Saber or another U.S.
system in order to cause travel agencies in the foreign airline's
homeland to subscribe to its system. Saber represented that it had
recently used the parity clause against some Latin American carriers in
order to ensure that they participated in Saber at the same level that
they participated in the CARS they were marketing. 61 FR at 42206. We
therefore asked for comments on whether we should modify the proposed
rule to prevent unfair competition by barring airline parity clauses
except when enforced against a carrier owning or marketing another
system. 61 FR at 42197, 42198, 42206.
The Comments and Reply Comments
The Department of Justice; Galileo; several smaller airlines--
Alaska, America West, Midwest Express, and Reno; an association
consisting of smaller airlines, the National Air Carrier Association;
the American Automobile Association; and the European Civil Aviation
Conference filed comments supporting the proposed rule. Saber,
American, Worldspan, Delta, Northwest, TWA, Continental and System One,
the American Society of Travel Agents (ASTA), the Association of Retail
Travel Agents, and the United States Travel Agent Registry opposed the
proposal. In addition, several hundred travel agencies filed letters
opposing the prohibition against parity clauses (most of these letters,
however, followed form letters prepared by Saber).
We will discuss the arguments made by the commenters in the
following explanation of our decision to adopt a rule generally
prohibiting parity clauses but allowing their enforcement against
airlines that own or market a competing CARS.
Introduction to Our Decision
We have determined to adopt the proposed rule barring parity
clauses, subject to an exception allowing a system to enforce such a
clause against an airline that owns or markets a competing CARS. We
agree with the Justice Department's findings that the clauses injure
airline competition by making airline distribution less efficient and
by eliminating the possibility of competition among the CRSs for
higher-level participation by airline participants. We further find
that, subject to the exception for airlines owning or marketing a
competing system, prohibiting parity clauses will promote rather than
injure CARS competition and will not significantly injure travel
agencies. We are relying on the facts, undisputed by any party in this
proceeding, that parity clauses force airlines to buy CARS services
that they do not want, that airline participants in CRSs are compelled
to accept parity clauses, and that airlines receive no benefit in
return for the burdens imposed on them by the clauses.
The parties opposing our proposal base their position in large part
on the claim that an airline choosing to buy more service from one
system than from another is improperly ``discriminating'' against the
latter system. This claim has no merit as to airlines that neither own
nor market the favored system. If an airline without such CARS ties
chooses to favor one system over another, the airline is only
``exercis[ing] 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,'' as we stated in our notice of proposed
rulemaking. 61 FR at 42204. In that case the airline has decided that
the higher level of service offered by the favored system is more
desirable in terms of price, quality, or value than the comparable
services offered by other systems. If another system wants that airline
to upgrade its participation level, it should do what firms in
competitive industries do to win customers--lower its price or
otherwise make its service more attractive.
Moreover, while Saber has legitimately complained about foreign
airlines that discriminated against it in order to promote the system
they own, Saber's position in this rulemaking--that any airline's
participation in one system at a higher level than in other systems is
unreasonable discrimination--is inconsistent with Saber's own conduct.
Saber has established a marketing arrangement with Southwest Airlines,
a major U.S. airline that has long refused to participate in any other
system. Since Southwest does not participate at all in other systems,
those systems' parity clauses cannot affect Southwest. Southwest's
participation in Saber (and the airline's refusal to participate in any
other system) surely handicaps the other systems' ability to market
themselves in areas where Southwest is a major airline. Yet in response
to the other systems' argument that we should expand the mandatory
participation rule to cover airlines that market a CARS, not just
airlines deemed ``system owners,'' Saber says, ``[If a carrier elects
not to participate in a system at all, it should be allowed to act as
it deems appropriate, including marketing another system.'' Saber Reply
at 25.
In this proceeding we are not taking any steps to expand the
coverage of the mandatory participation rule, as
[[Page 59788]]
explained below, or finding Southwest's conduct improper. Southwest,
after all, refused to participate in the other systems long before it
agreed to market Saber. However, in our view Saber has not reconciled
its position that any airline's decision to participate at a lower
level in one system rather than another is discrimination with its
position that it is entirely proper for an airline marketing one system
to refuse to participate at all in other systems.
Saber wrongly complains that the proposed rule amounts to ``micro
management'' of the CARS business and is inconsistent with the
Administration's goal of eliminating unnecessary regulation. Saber
Comments at 2. Our rule is necessary--market forces do not
significantly discipline the systems' treatment of participating
airlines, and the systems have used their market power to impose
contract terms that reduce competition in the CARS and airline
industries and make airline distribution less efficient. This rule is
consistent with other actions we have taken to restrict the business
choices of CASS and their airline owners when doing so is necessary to
keep them from using a dominant market position to frustrate
competition. See, e.g., Complaint of American Airlines v. Iberia, Lines
Aereas de Espana, Order 90-6-21 (June 8, 1990) at 9-10; Complaint of
United Air Lines v. Japan Air Lines, Order 88-9-33 (September 15, 1988)
at 11-12.
Before setting forth the basis for our rule in detail, we will
explain why we are acting now rather than delaying our decision until
the completion of other pending CRS matters.
The Need to Resolve the Parity Clause Issue
Given the harm caused by parity clauses, and the lack of any
justification for their continuation as to airlines without CRS ties,
our decision to adopt a final rule prohibiting the clauses now is
clearly reasonable. Nonetheless, several of the opponents argue that we
should delay a decision on the parity clause issue, either because the
issue allegedly cannot be rationally resolved until the completion of
our pending CRS study and our planned consideration of all CRS
regulatory issues in our reexamination of the CRS rules, or because the
rule proposed by us would have no significant practical consequences.
We cannot agree that any delay is warranted.
First, all of the parties have had an ample opportunity to address
the issues in this proceeding, both by filing comments on Alaska's
petition and by filing comments and reply comments on our notice of
proposed rulemaking. The record in this proceeding, coupled with our
earlier analyses of CRS issues (which parties were free to dispute in
their comments here), provides more than an adequate basis for
resolving the issues in this rulemaking. Thus there is no need for us
to delay our decision here until the completion of our pending CRS
study.
Worldspan and others argue that the requests by several commenters
for changes in other rules, primarily the mandatory participation rule,
necessarily mean that this rulemaking should be postponed until we can
consider all of the commenters' requests for rule changes. See, e.g.,
Worldspan Reply at 2-3. Despite these arguments, we conclude that we
can rationally and fairly decide the parity clause issue without
deciding other issues or changing other CRS rules.
Several parties have urged us to reexamine the mandatory
participation rule applicable to airlines with a significant CRS
ownership interest, either by limiting the rule or by broadening its
scope, and we recognize that the mandatory participation rule involves
competitive and economic efficiency issues like those presented by the
parity clause issue. Even so, the relationship between the two rules is
not close enough to require them to be decided together. No one, for
example, has claimed that our adoption of the proposed rule on parity
clauses will make compliance with the mandatory participation rule more
burdensome for the airlines subject to that rule.
We disagree with ASTA's position that it would be unfair to travel
agencies for us to act on Alaska's petition without addressing the
travel agencies' contention that their CRS contracts will not allow
them to switch to a different system if the quality of a system's
service declines during the contract term because some airlines reduce
their participation levels in that system as a result of our rule.
Assertedly the travel agencies entered into contracts with systems in
the expectation that no airline participant could lower its level of
participation in one system while maintaining a higher level in other
systems. ASTA Comments at 2-3. However, travel agencies have never had
any implied guarantee that a system will not become less useful during
the term of the subscriber contract. For example, Galileo, Worldspan,
and System One changed their rules on non-participant airlines with the
result that their subscribers could no longer ticket Southwest through
the CRS. That change immediately made those systems less attractive for
agencies in areas where Southwest was an important airline. Similarly,
after a travel agency chooses a system because its owner is the major
airline in the agency's area, that airline may decide to drastically
reduce its operations in the area. See, e.g., Marketing Practices
Report at 24, n. 50. Moreover, travel agencies have more bargaining
leverage with the systems than the airlines do. That travel agencies
benefit from the systems' competition for their subscriptions is shown
by the systems' reliance on the suppliers of travel services for almost
all of their revenues; subscribers, in contrast, contribute only about
ten percent of CRS revenues. Justice Dept. Comments at 2, 5.
Deferring this proceeding until the completion of the major
rulemaking could also lead to a significant delay in remedying the
competitive harm addressed by this rule. While the reexamination of all
of the CRS rules is scheduled to be completed by the end of 1997, that
will probably not happen. Our last major reexamination of the CRS rules
took much longer than expected. We did not publish our revised rules
until September 1992, almost two years after the original deadline of
December 1990.
Furthermore, delaying the completion of this rulemaking would
postpone the beginning of potential competition among the systems for
airline purchasers of higher levels of CRS service. Equally
importantly, it could create substantial risks for Alaska and Midwest
Express, since Sabre has told them that it considered them in violation
of the parity clause and that they would be excluded from Sabre if they
did not upgrade their level of participation in Sabre (or reduce their
level of participation in other systems). Sabre agreed not to enforce
the parity clause against them only for a short period, not
indefinitely. 61 FR at 42201; Alaska Reply at 5.
Sabre has argued that the parity clause issue is too insignificant
to warrant prompt action. Sabre bases this argument in part on its
contention that its clause only applies when the fees and quality of
service offered by Sabre are comparable to those offered by the system
in which the airline is participating at a higher level. Sabre Comments
at 3-4. Sabre's contention, however, does not accurately characterize
the contract clause, as explained below. But even if the
characterization were accurate, the clause should still be prohibited
due to the competitive harm it causes.
Sabre asserts that the parity clauses cannot have any significant
impact, since the airlines operating the great
[[Page 59789]]
majority of domestic service are subject to the mandatory participation
clause and since the amount of revenue obtained by Sabre as a result of
the parity clause is so small that a prohibition of parity clauses
would have no significant impact on U.S. airlines. Sabre Reply at 2-3.
We disagree. Even though this rulemaking will not change the
applicability of our mandatory participation rule to airlines with CRS
ownership interests, Alaska and Midwest Express have estimated that
Sabre's most recent threat to enforce the clause against them would
have increased their CRS expenses by more than ten percent. 61 FR at
42201. Galileo has stated that at least four airlines reduced their
participation levels in Galileo as a result of Saber's recent threats
to enforce the parity clause and that other airlines are likely to do
so if we do not issue a final rule in this proceeding. Galileo Comments
at 2-3. And, as shown by the Justice Department's comments, the
systems' recent enforcement of the parity clauses has thwarted efforts
by Reno Air and at least one other airline to improve the efficiency of
the distribution of their services. Justice Dept. Comments at 6-7, 8-9.
While the increased CRS expenses imposed on an airline by the parity
clause may be small, even small expenses are important because of the
thin margins in the airline business. 57 FR at 43783. In addition,
airlines like Alaska must lower their expenses since they increasingly
face competition from Southwest and other low-fare carriers that have
lower distribution costs. See 61 FR at 42199; United Comments at 6-7.
The Systems' Market Power
Airlines must accept parity clauses as part of the price for
obtaining any services from three of the systems. The systems can
compel airlines to accept the clauses because each system has market
power over airline participants, as we have found in our past
rulemakings and CRS studies. 56 FR at 12591-12600; 57 FR at 43783-
43784; Airline Marketing Practices at 44, 76-77, 83-84, and 91-93. The
Justice Department thus states, Justice Dept. Comments at 2-3 (footnote
omitted):
Each CRS provides access to a large, discrete group of travel
agents, and unless a carrier is willing to forego access to those
travel agents, it must participate in every CRS. Thus, from an
airline's perspective, each CRS constitutes a separate market and
each system possesses market power over any carrier that wants
travel agents subscribing to that CRS to sell its airline tickets.
See also Midwest Express Comments at 4; Alaska Reply at 16.
Our conclusion that each system has market power is consistent with
the Supreme Court's analysis in Eastman Kodak Co. v. Image Technical
Services, 504 U.S. 451 (1992). There the Court explained that market
power is the power ``to force a purchaser to do something that he would
not do in a competitive market,'' 504 U.S. at 464, quoting Jefferson
Parish Hospital v. Hyde, 466 U.S. 2, 14 (1984), and ``the ability of a
single seller to raise price and restrict output.'' 504 U.S. at 464,
quoting Fortner Enterprises, Inc. v. United States Steel Corp., 394
U.S. 495, 503 (1969).
The Court's definition of market power fits the systems' imposition
of parity clauses, since there is no evidence that an airline would
accept an obligation like the parity clause in a competitive market. We
noted in the notice of proposed rulemaking that no one had given us an
example of any comparable practice by a seller in a competitive
industry (while Sabre cites the most favored nations clauses imposed by
buyers in some markets, those clauses are different from the parity
clauses imposed on buyers by the systems, as discussed below). 61 FR at
42202.
In addition, the clauses demonstrate the systems' ability to raise
prices or restrict output by forcing airlines to choose between paying
higher CRS fees for unwanted services or reducing their purchase of
services from a competing system.
In Eastman Kodak the Court also noted that market power is usually
inferred from the seller's possession of ``a predominant share of the
market.'' 504 U.S. at 464. Insofar as electronic access to travel
agency subscribers is concerned, each system effectively holds a
monopoly market share. Justice Dept. Comments at 2-3. See also 57 FR at
43783-43784, quoting the Department of Justice's analysis in the last
comprehensive CRS rulemaking.
Sabre nonetheless contends that no system has market power. Sabre,
however, does not argue that any airline has an alternative means for
electronically giving travel agencies the ability to obtain information
on its services and conduct booking and ticketing transactions. Sabre
similarly offers no analysis showing that market forces limit in any
way a system's ability to raise the fees charged participating
airlines. While Sabre submitted an affidavit from Dr. Gary Dorman, an
economist, in an attempt to refute our findings of market power, his
affidavit is unpersuasive. He claims that the relationships between
airlines and CRSs ``closely resemble those found between suppliers and
distributors throughout the economy.'' Dorman Affidavit at 1. He
provides no support for this assertion. He suggests that the Justice
Department's rationale--that each system has a monopoly over electronic
access to its subscribers--would be irrational if applied to grocery
stores. Id. at 2-3. We agree--the grocery store business is quite
competitive. The Justice Department, however, based its rationale on
its analysis of the airline and CRS businesses, and Dr. Dorman
submitted no analysis of his own. While he asserts that the Justice
Department has failed to show that the CRS fees charged participating
airlines are at supracompetitive levels, id. at 3, he has presented no
analysis indicating that Sabre's booking fees do not exceed the
system's costs. The Justice Department's conclusion, on the other hand,
is consistent with our past findings on the systems' ability to charge
airlines fees that are unrelated to their costs. 57 FR at 43785.
While Sabre additionally argues that the systems cannot have market
power since Southwest has prospered while participating only in Sabre,
Sabre Comments at 23, we think Southwest's experience does not disprove
the systems' possession of market power over airline participants.
Southwest itself has chosen to participate in Sabre, the system with
the largest market share in the United States. More importantly,
Southwest's operations are substantially different from those of other
airlines. Southwest operates as a low-fare carrier relying heavily on
direct sales to consumers, not on travel agency sales. For these and
other reasons, few other airlines can copy Southwest's experience and
thereby avoid depending on CRSs for the distribution of their services.
Alaska Reply at 16; Midwest Express Comments at 7. As the Justice
Department points out, while some new entrant airlines have tried to
bypass CRSs by creating alternative methods for bookings, ``the vast
majority of tickets are still booked through travel agents using a
traditional CRS, and airlines that desire access to consumers who
purchase through such channels must participate in each CRS.'' Justice
Dept. Comments at 3, n. 2.
While Sabre claims that airlines can avoid depending on CRSs due to
the growth in use of the Internet for airline bookings, Sabre Comments
at 23, the Internet cannot enable airlines to avoid CRS participation,
at least not in the near future. ASTA Comments at 3-4. The great
majority of airline tickets are
[[Page 59790]]
still sold by travel agents, not through direct purchases by consumers.
Thus, despite the existence of some alternative means of
distribution, most airlines depend on travel agencies for distribution,
so the systems have market power over those airlines. The systems have
used that power to impose parity clauses on airline participants which
reduce competition in the airline and CRS businesses and make airline
operations more inefficient, as explained next.
The Inefficiency and Reduced Competition Caused by the Parity
Clauses
Because of the parity clauses, the systems need not compete on
price and service quality to obtain higher-level participation by
airlines. Such competition might well exist otherwise (although
somewhat limited for airlines subject to our mandatory participation
rule). While virtually all airlines must participate in each system at
the full availability level, the competitive demands of the airline
business do not compel them to participate in the highest levels of CRS
service. Alaska and Midwest Express, for example, have chosen not to
purchase some of the enhancements offered by Sabre, a decision that led
to Sabre's threats to exclude them entirely from the system. Alaska
Reply at 5.
In a competitive market, each system would compete to obtain higher
levels of participation by airlines, in order to make the system more
attractive to the travel agencies doing business in regions where those
airlines have a significant market share. See, e.g., Justice Dept.
Comments at 2. Systems would also compete for higher levels of
participation in order to increase revenues, since airlines pay higher
fees for higher levels of participation.
The parity clause, however, reduces or eliminates the systems'
competition for higher level participation by airlines, as the Justice
Department has explained, Justice Dept. Comments at 5:
Without the parity provision, each CRS would likely have to
respond competitively to a large booking fee decrease offered by one
of its competitors to airlines. With the parity provision, however,
each CRS knows that a participating carrier cannot be induced by
price to upgrade its service level in a competing CRS without also
upgrading in its own. Thus, there is little reason for any CRS to
lower booking fees to induce participating carriers to upgrade their
service levels. [footnote omitted]
In addition, the Justice Department states that the parity clauses
have kept the systems from working with airlines to create levels of
service that will meet their needs. The Justice Department cites Reno
Air's experience as an example. When Reno Air, which participates in
all four systems, wanted a system to develop a level of service that
would meet its distribution needs, none of the systems would work with
it. In contrast, when Southwest wanted Sabre to develop a participation
level that suited Southwest's needs, Sabre was willing to create such a
product. Southwest, unlike Reno, is not bound by the parity clauses
since it participates in only one system, Sabre. Justice Dept. Comments
at 6-7.
Furthermore, as shown by the Justice Department, the parity clauses
reduce the systems' incentive to provide satisfactory service to
participating airlines. Because each airline must participate in each
CRS, the airline's only credible response to poor service would be a
threat to lower its participation level. The parity clause, however,
prevents an airline from taking such action, unless it simultaneously
lowers its participation level in the other systems. Justice Dept.
Comments at 7-8.
Finally, of course, parity clauses create inefficiency by
compelling non-vendor airlines, which have no incentive to skew CRS
competition, to buy a higher level of service from the systems than
they would otherwise choose. Without the clauses an airline might well
decide that participation at a higher level in some systems but not
others would be the most efficient method for distributing its
services. Justice Dept. Comments at 8-9; Midwest Express Comments at 3-
5; Alaska Reply at 19-20; America West Reply at 2-4.
The parties opposing our proposal argue that the parity clauses do
not injure airlines and, even if airlines were injured, the clauses
provide competitive benefits that outweigh any possible injury. We find
these arguments unpersuasive.
According to Sabre, parity clauses do not give it the power to
increase airline fees due to the impact of our rules. One rule, 14 CFR
255.6(a), requires fees to be nondiscriminatory, while the mandatory
participation rule requires system owners to participate in competing
systems only if the terms for participation are commercially
reasonable. Sabre contends that these two rules in combination
``severely'' restrict a system's ability to raise prices. Sabre
Comments at 16-18. Sabre's contention is contradicted by the systems'
ability to impose fees on airlines for CRS services that are unrelated
to the costs of providing CRS services. 57 FR at 43785. We doubt that
the systems' fees would be so high if our rules had the effect
suggested by Sabre. Moreover, airlines have increasingly complained
about the continuing series of fee increases imposed by the systems in
recent years. See, e.g., Justice Dept. Comments at 5.
Sabre further contends that a rule allowing airlines to
``discriminate'' against one or more systems will lead to higher levels
of concentration in the U.S. CRS market. Assertedly the United States
CRS market is one of the most competitive in the world ``largely
because airline discrimination against CRSs is rare,'' whereas in
foreign markets discrimination is much more likely. Sabre Reply at 17.
We think that the U.S. market is more competitive than foreign markets
primarily because the United States had five large airlines (American,
United, TWA, Eastern, and Delta) that each had the resources to create
a CRS when the CRS business was developing. However, even if Sabre's
analysis were correct, our mandatory participation rule already
prevents any of the largest airlines in the United States from
selectively lowering its participation in competing systems because
each of those airlines holds a significant CRS ownership interest and
is covered by that rule.
Sabre argues that parity clauses are essential for ensuring
competition in the CRS market, since otherwise carriers could
discriminate against one or more systems, as shown by past experience.
Sabre Comments at 9-10, 19-20. As discussed below at greater length,
however, the anticompetitive discrimination that has occurred has
involved decisions to reduce or end participation in competing systems
by an airline that either itself or through an affiliate owned or
marketed a system. Those kind of abuses should be prevented by our
mandatory participation rule and the exception included in this rule
that allows a system to enforce a parity clause against an airline that
directly or indirectly owns or markets a competing system.
Sabre also repeats the argument made by others earlier in this
proceeding that eliminating the parity clauses will make it more
difficult for the smaller CRSs to survive. Sabre Comments at 14. We
concluded that this claim was unpersuasive--a smaller system can obtain
higher-level participation by airlines if it offers attractive prices
and service. 61 FR at 42205. Moreover, System One, previously the
smallest U.S. system, is now part of Amadeus, one of the largest
systems in the world. In addition, as we explained earlier, the smaller
systems' past conduct indicates that they do not view the ability to
offer competitive functionality on all
[[Page 59791]]
significant airlines as crucial to their ability to survive in the U.S.
market, since they changed their policies on the treatment of non-
participating airlines and thereby ended their subscribers' ability to
issue tickets on Southwest through the CRS. 61 FR at 42205. Although
Southwest had never been willing to pay for CRS services in those
systems--Worldspan and System One--or in Galileo, each of those systems
nonetheless had displayed some information on Southwest's flights and
allowed travel agents to write Southwest tickets using the system until
1994. Because of Southwest's continuing refusal to pay for CRS
services, each of those systems then decided to change its policies on
the treatment of non-participating airlines and thus to remove
Southwest flight information from its displays and to bar the system's
use for writing Southwest tickets. These steps greatly reduced the
efficiency of travel agencies subscribing to one of those systems when
they were located in regions where Southwest is an important airline.
61 FR at 42198. We recognize the claims that each system's action was a
rational response to Southwest's continuing refusal to pay CRS fees,
Worldspan Comments at 9-10, but their action still undermines Sabre's
argument that a system must provide functionality on all important
airlines that is comparable to the functionality available from
competing systems.
Sabre additionally disputes our competitive analysis by arguing
that the elimination of parity clauses could cause the systems to limit
the number of different levels of service offered participating
airlines because the systems ``might find it necessary'' to phase out
the lower levels of service or to reduce the price differentials
between the various levels of service in order to limit the airline
participants' ability to discriminate against the system. Sabre
Comments at 16-17; Sabre Reply, Dorman Affidavit at 4. Sabre does not
explain why the systems would reduce the number of options available to
airline participants when airlines have a greater ability to choose the
level of service they wish to purchase. Sabre also does not explain why
eliminating the lower levels of service would solve its alleged
discrimination problems. If Sabre eliminates the less costly levels of
service, it might also discourage smaller airlines from participating
at all in Sabre. If Sabre's arguments were accurate, that could hamper
the system's ability to obtain subscribers. But if Sabre in fact
reacted to our decision by reducing the levels of service available to
participating airlines, that would seem to confirm that it believes
that it has the power to control the distribution choices of the
airlines that used the eliminated service levels.
The Broad Applicability of the Parity Clauses
In concluding that the parity clauses unreasonably deny airlines
the ability to choose how much CRS service they wish to purchase, we
read the clauses as requiring an airline to upgrade its participation
in a system if it is already participating at a higher level in another
system, even if the system requiring the upgraded participation offers
inferior service or charges higher prices than the system whose higher-
level service is already being used by the airline. 61 FR at 42201-
44202.
Sabre and Worldspan now contend that we mischaracterized their
parity clauses. Sabre claims that its parity clause requires upgraded
participation only when Sabre offers the higher-level service at a
price and on terms comparable to those offered by the system in which
the airline is already participating at the higher level. Sabre Comment
at 18. Worldspan similarly contends that it enforces its parity clause
only when Worldspan's service is comparable in price and quality to the
higher-level service purchased by the airline participant from a
competing system. Worldspan Reply at 5-7. The record does not support
these claims.
Sabre's clause states, ``[A]ny improvements, enhancements, or
additional functions to Participating Carrier's reservations services
offered to end users of any [CRS] will be offered by Participating
Carrier to SABRE Subscribers on the same terms and conditions as are
agreed to with such [CRS].'' Alaska Reply at 22. Alaska contends that
the clause appears to impose an obligation on the participating
airline, not on Sabre, to use the same terms and conditions; the clause
does not imply that the airline is excused from the higher level of
Sabre participation if Sabre's terms and conditions are different. In
addition, Alaska points out that Sabre's current interpretation is very
new: Sabre did not interpret the clause as requiring a higher level of
participation only when Sabre offered comparable price and terms until
after we issued our notice of proposed rulemaking. Neither Sabre's
comments on Alaska's rulemaking petition nor its pleadings in its suit
against Alaska stated that Sabre's price and terms for higher-level
participation had to be comparable to those offered by the system in
which the airline was already participating at a higher level. Alaska
Reply at 22-23. See also Galileo Reply at 4-5.
We also note that Sabre's reading of its clause would make the
clause difficult to implement, since different systems use different
pricing methods and do not offer the same levels of service.
Sabre, for example, makes much less use of transaction pricing than
the other systems. As Alaska notes, Sabre has had to read the word
``same'' in its contract clause as ``comparable'' in order to make its
interpretation plausible, but the resulting interpretation is
inconsistent with the contract's literal language. Alaska Reply at 22,
n. 7.
Worldspan, unlike Sabre, does not contend that the language of its
clause requires an airline to increase its participation in Worldspan
only when Worldspan's prices and services are comparable to the higher-
level service already being purchased by the airline from another
system. Worldspan instead claims only that it does not enforce its
clause against airlines unless Worldspan's price and quality are
comparable. However, Worldspan's parity clause in no way limits
Worldspan's ability to enforce the clause, whether or not its price and
quality are comparable. Worldspan's clause, included as an attachment
to Alaska's rulemaking petition, reads as follows, ``Participating
Carrier will provide Worldspan users with any improvements,
enhancements, or functions related to Participating Carrier's
reservations services as offered to users of any other CRS.'' The
clause would not block Worldspan from changing its enforcement policy
in the future.
As a result, we conclude that our notice of proposed rulemaking
correctly interpreted the scope of the parity clauses. Moreover, even
if the interpretation now offered by Sabre and Worldspan were correct,
airline participants would have little protection, since Sabre or
Worldspan would decide whether the price and quality of the competing
system's service were comparable to the service offered by itself.
Midwest Express Reply at 5.
More importantly, even if the parity clauses were limited as
claimed by Sabre and Worldspan, allowing systems to enforce them
against airlines with no CRS ownership or marketing interest would
still be contrary to the public interest. Parity clauses eliminate
price and service competition among the systems for higher levels of
CRS service and make airline distribution less efficient. If the
clauses were limited as proposed by Sabre and Worldspan, the
[[Page 59792]]
systems would still have no need to improve their prices and services
relative to their competitors. For example, parity clauses of the type
proposed by Sabre and Worldspan would still eliminate any need by a
system to respond to Reno Air's request for a new level of service that
would match Reno's distribution needs. And airlines would still be
forced to either buy more CRS services than they wanted or reduce their
purchase of services from some systems in order to avoid violation of
the parity clauses imposed by other systems. Midwest Express Reply at
4-5.
For these reasons, we also find unacceptable Sabre's proposal that
we modify our rule to allow a system to enforce a parity clause against
an airline as long as the system's price and other terms for
participation are comparable to those offered by the system in which
the airline already participates at a higher level.
The Systems' Claims of Discrimination by Airline Participants
In arguing that parity clauses are essential for fair CRS
competition, Sabre characterizes an airline's decision to participate
at a higher level in one system than in another as ``discrimination.''
We cannot agree with Sabre's view with respect to airlines that do not
own or market a system. An airline is not engaging in
``discrimination'' when it decides to participate at a higher level in
one system than in other systems. 61 FR at 42204. When a firm in a
competitive industry chooses to buy more service from one supplier than
another, no one characterizes that choice as ``discrimination.''
In arguing the contrary with respect to airline choices on their
levels of CRS participation, Sabre complains that an airline's decision
to participate at a lower level in one system than in other systems
will handicap the former system's ability to compete in regions where
the airline is a major carrier. For example, Sabre alleges that it
might be forced to withdraw from the Pacific Northwest and State of
Alaska CRS markets if Alaska Airlines downgraded its participation in
Sabre. Sabre contends that Alaska's choice of a lower participation
level would make using Sabre less efficient for travel agencies in
those regions, where Alaska is a principal airline, and thus end
Sabre's ability to obtain subscribers in those regions. Sabre Comments
at 7-8.
If Sabre's claims were true, however, Southwest's participation in
Sabre and refusal to participate at all in other systems should have
eliminated those systems from regions like California where Southwest
is a major airline. We have no evidence that Sabre has driven Galileo,
Worldspan, and System One from those regions. And the continuing policy
of those systems not to allow their subscribers to use the CRS to issue
tickets on Southwest further suggests that a system's failure to
provide as much information and booking capability on a significant
airline as do other systems is not a fatal competitive handicap. 61 FR
at 42205.
In any event, if Alaska participates in Sabre at at least the full
availability level, as is its stated intent, Alaska Comments at 4,
Sabre agencies could obtain schedule, fare, and availability
information on Alaska's services, make bookings on Alaska, and issue
Alaska tickets through Sabre. We doubt that Alaska's choice of a lower
participation level in Sabre than in other systems would drastically
reduce Sabre's competitiveness in Alaska and the Pacific Northwest.
Even if Sabre were correct in claiming that a regionally-important
airline's decision to participate at a lower level in one system than
in other systems is a substantial competitive handicap, the proper
remedy would not be the system's use of market power to compel the
airline to buy a higher level of service than it wanted, when the
airline neither owns nor markets a competing system. The system instead
should make its price and service more attractive so that the airline
will determine that the system's higher level of service is
economically worthwhile. Midwest Express Reply at 3.
We note, moreover, that Galileo believes that it can obtain an
adequate number of airline users of its higher-level services by
offering better service. Galileo, whose contracts contain no parity
clause, asserts that airlines are willing to participate in its higher-
level features because of their superiority. Galileo Comments at 2.
Sabre suggests that an airline that neither holds a CRS ownership
stake nor has a contract compensating it for marketing another system
may still choose to lower its participation level in a system in order
to distort competition in the CRS business. Sabre Comments at 10-11.
Sabre has provided no evidence of such conduct, and we consider such a
scenario unlikely. Given the importance of CRS participation to an
airline's ability to distribute its services efficiently and the
significant differences in fees between different levels of CRS
participation, we see no reason why an airline that neither owns nor
markets a competing system would base its decision on extraneous
factors instead of an assessment of its distribution needs and costs.
Even if such an airline might choose a lower level of participation in
one system for illegitimate reasons, the slight possibility of such an
occurrence cannot justify the systems' elimination of the ability of
all other non-owner airlines to choose their level of participation in
each system. We will, however, add an exception to the rule so that a
system can enforce a parity clause against airlines that own or market
another system.
Finally, in an effort to bolster its discrimination claims, Sabre
asserts that Alaska's motive for lowering its participation level in
Sabre was Alaska's interest in obtaining payments from Galileo under an
arrangement between Alaska and Galileo for switching travel agencies
from Sabre to Galileo. Sabre Comments at 11. Alaska, Galileo, and
Galileo's marketing affiliate, Apollo Travel Services, have each denied
that any such arrangement ever existed or was considered.
Alaska Reply at 12-13; Galileo Reply at 4; Apollo Travel Services
Reply. Sabre's charge seems implausible--Sabre only made the charge at
a late stage in this proceeding, and the affidavits submitted by Sabre
largely rely on speculation and hearsay. But if Sabre's charge were
true, our rule would allow Sabre to enforce the parity clause against
Alaska--or any other participating airline--that had a marketing
arrangement with another system.
Impact on Travel Agencies
In proposing the rule prohibiting parity clauses, we tentatively
determined that such a rule would not significantly harm travel
agencies. We noted that airlines like Alaska rely on travel agencies
for their distribution and so would not likely take steps that would
deny travel agencies the ability to obtain information and make
bookings electronically. 61 FR at 42205-42206. In addition, travel
agencies using any system other than Sabre were already handicapped,
since they could not use their system to issue tickets on Southwest, a
major airline in many domestic markets, since 1994. 61 FR at 42206.
We find unpersuasive the arguments by Sabre, ASTA, and several
other parties that the rule will harm U.S. travel agencies, although we
recognize that most travel agencies use only one system and thus
largely depend on that system to electronically obtain airline
information and conduct booking and ticketing transactions.
[[Page 59793]]
First, the largest airlines are CRS owners and thus subject to the
mandatory participation rule. Secondly, the claims that U.S. travel
agencies will be injured essentially assume that one or more important
airlines without CRS ownership or marketing ties will reduce their
participation in some systems below the full availability level, with
the result that travel agents using that system could neither obtain
availability information nor make bookings and issue tickets on those
airlines through the CRS. No one has shown that airlines are likely to
use the rule to do that. Airlines participate in the systems, after
all, to make their services readily saleable by the agents using each
system, and no airline (other than Southwest and some other low-fare
airlines) is likely to reduce its participation level in any system to
an extent that would keep the airline from being booked through the
system. See, e.g., Alaska Comments at 5-6.
We assume that airlines without CRS ownership or marketing ties
would use the rule to avoid buying higher levels of participation from
one or more systems--in other words, those airlines will participate at
the full availability level but may choose not to participate in direct
access or all of the enhancements offered by a system. While an
airline's non-participation in these features may cause some
inconvenience to the travel agents using that system, the amount of
inconvenience should not cause substantial inefficiencies. Furthermore,
if the systems could maintain parity clauses, airlines could respond by
lowering their participation in systems that they would otherwise
participate in at a higher level. Galileo thus states that some
airlines have lowered their participation in its system as a result of
Sabre's threats to enforce its parity clause. Galileo Comments at 2-3.
The Justice Department states that Reno Air reduced its participation
level in the systems as a result of the systems' enforcement of the
parity clause. Justice Dept. Comments at 7. And the American Automobile
Association believes that our rule will lead to a greater degree of
airline participation in CRSs, not less participation.
In addition, while each airline must participate in every system,
most travel agencies can choose between systems. The systems compete
for travel agency subscribers--indeed, according to Sabre, some
agencies receive cash bonuses in exchange for agreeing to use a system.
Sabre Reply at 1, n. 1. Thus travel agencies should have some ability
to influence systems to make higher levels of functionality attractive
to non-owner airlines.
Furthermore, our CRS rules include several provisions that give
travel agencies the ability to use two or more systems. In 1992, for
example, we prohibited parity clauses and minimum use clauses in travel
agency contracts, gave travel agencies the right to use their own
equipment, stated that equipment owned by a travel agency could be used
to access any database, CRS, or internal reservations system of any
airline, and required systems to offer travel agencies three-year
contracts. 57 FR at 43822-43826. Thus, a travel agency should have some
ability to protect itself if one system offers unsatisfactory
information and booking capability on an airline important to the
agency.
ASTA further contends that our proposed rule is unfair, since
travel agencies will have no protection if their chosen system becomes
less efficient due to an important airline's reduction in its
participation level. As noted, we doubt that airlines will use the rule
to drastically downgrade their participation in any system. Travel
agencies, moreover, have never had a guarantee that all important
airlines not covered by the mandatory participation rule will
participate in each system. Indeed, as shown, Southwest has only
participated in Sabre, so agencies using one of the other three systems
have never been able to obtain availability information on Southwest's
flights or to book Southwest through their CRS. Nonetheless, many
travel agencies were willing to subscribe to one of those systems.
We have also received a large number of letters from travel
agencies opposing our proposal. We recognize, as shown by these
letters, that travel agencies would prefer to obtain the best possible
information and functionality on all airlines from each of the systems.
However, that result would require us to allow the systems to continue
using their market power to force some participating airlines to buy a
higher level of service than they wish, a result that would be
inconsistent with our policy of enabling airlines (and travel agencies)
to benefit from CRS competition.
In addition, a large portion of the travel agency letters are form
letters solicited by Sabre, according to Alaska's reply comments.
Alaska Reply at 8-9. Moreover, the letters using Sabre's suggested form
predict that airlines will lower their participation in a system in
order to injure travel agencies. Given the airlines' reliance on the
agencies for distribution, we do not believe that an airline will be
taking steps just to injure travel agencies; an airline will only
change its level of participation if it decides that doing so is cost-
effective. We also note, as explained by Alaska, that the material used
by Sabre to obtain the letters did not accurately describe the CRS
business. Alaska Reply at 8-9.
Worldspan contends that the rule would hurt travel agencies by
reducing the systems' ability to compete for subscribers in areas where
an important airline lowered its participation level in some systems
but not others. Worldspan Comments at 7. As discussed, a system can
compete for higher-level participation by airlines. And Worldspan's
prediction, even if correct, could not justify the continuation of a
regime where the systems use their market power to force airlines to
buy more services than they want. Furthermore, our ban on airline
parity clauses essentially duplicates our ban on parity clauses in
subscriber contracts. 57 FR at 43826.
Legal Authority for Adopting the Proposed Rule
The adoption of the rule prohibiting parity clauses is clearly
within our statutory authority. As we explained in our notice of
proposed rulemaking, 61 FR at 42202-42203, 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. 49 U.S.C. 41712, formerly section 411 of the Federal
Aviation Act (and codified then as 49 U.S.C. 1381). Our authority,
modelled on section 5 of the Federal Trade Commission Act, 15 U.S.C.
45, allows us to define and prohibit as unfair methods of competition
practices that do not violate the antitrust laws. See, e.g., United Air
Lines, 766 F.2d 1107, 1114 (7th Cir. 1985). We may not prohibit a
practice as an unfair method of competition, however, if the practice
does not violate the letter or the spirit of the antitrust laws. See,
e.g., E.I. Du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir.
1984).
In the notice of proposed rulemaking, we tentatively concluded that
the parity clauses were comparable to antitrust violations on several
grounds, based on our finding that each of the systems had market power
over airline participants. We reasoned that the parity clauses were
analogous 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. 61
FR at 42203.
Sabre's parity clause--and the similar clauses used by Worldspan
and System
[[Page 59794]]
One--violate antitrust principles because they deny an airline the
ability to choose for itself the level of service it will buy from each
system. As the Supreme Court has stated, ``A restraint that has the
effect of reducing the importance of consumer preference in setting
price and output is not consistent with [the] fundamental goal of
antitrust law'' that price and output should respond to consumer
preference. NCAA v. Board of Regents, 468 U.S. 85, 107 (1984). NCAA
also undermines Sabre's contention that the parity clause merely allows
Sabre to compete on an equal footing with other systems, for the Court
rejected a similar defense by the NCAA. The NCAA had argued that its
restraints were necessary since its preferred product--tickets for
college football games--would not attract enough consumers without
limits on televised games. The Court reasoned this justification was
inconsistent with the basic policy of the Sherman Act. 468 U.S. at 116-
117.
Only Sabre objected to our tentative conclusion that our legal
authority enables us to adopt a rule prohibiting parity clauses, and
Sabre has not shown that our analysis was invalid.
Significantly, Sabre has not challenged several key points in our
reasoning. We stated our doubt that firms in any competitive industry
could unilaterally impose a requirement like the parity clauses on
their customers. We noted that purchasers typically obtained offsetting
benefits, such as a guaranteed supply or a lower price, when they
agreed with suppliers in competitive industries to requirements
contracts or contracts requiring purchases in large quantities or over
long periods of time. Cf. Barry Wright Corp. v. ITT Grinnell Corp., 724
F.2d 227, 237 (1st Cir. 1983) (Breyer, J.). As we pointed out, no one
in this proceeding had claimed that participating airlines obtained any
benefit from the clauses or obtained other benefits in exchange for
accepting the clauses. 61 FR at 42202. Neither Sabre nor any other
party argues the contrary, nor has Sabre or any other party cited
comparable business practices in competitive industries (while Sabre
contends that the most favored nation clauses used by some health
insurers are comparable, we find that they are not, as explained
below).
In arguing that we have no legal authority to prohibit parity
clauses, Sabre disputes our finding that each system has market power
over airline participants, but, as discussed above, after reviewing the
comments, we have determined that the systems do have market power.
Sabre further contends that we may not prohibit parity clauses,
because the clauses allegedly have no impact on airline competition and
our authority to prohibit unfair methods of competition runs only to
practices that reduce airline competition. Sabre is mistaken in arguing
that the clauses have no impact on airline competition. The clauses
force airlines with no CRS ownership interest to buy a higher level of
service than they would buy if they had the freedom to choose what
level of service to buy from each system. The clauses thereby increase
the costs of the airlines competing with the system owners and injure
those airlines' ability to compete effectively. See, e.g., Midwest
Express Comments at 6; National Air Carrier Ass'n Comments at 2-3. See
also Justice Dept. Comments at 6-7, 8-9.
Sabre in any event errs in contending that our authority is limited
to practices that interfere with airline competition. The statute
expressly authorizes us to prohibit ``an unfair method of competition
in * * * the sale of air transportation.'' 49 U.S.C. 41712. Parity
clauses clearly affect ``the sale of air transportation'' and affect
competition among the systems in distributing airline information and
booking capabilities. The clauses thus are within our authority over
unfair methods of competition. By requiring airlines to purchase
services they do not want (or to avoid the purchase of services they do
want), the clauses drive up airline costs and thus increase airfares.
Judicial Rulings on Most Favored Nation Clauses
Sabre's principal challenge to our legal analysis is its argument
that the courts have approved practices that allegedly resemble the
parity clauses--most favored nation clauses imposed by buyers--as pro-
competitive. Sabre cites such cases as Ocean State Physicians Health
Plan v. Blue Cross, 883 F.2d 1101 (1st Cir. 1989), cert. denied, 494
U.S. 1027; and 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). Sabre analogizes the most favored nation clauses imposed by
buyers with its clause, which protects a seller against a buyer's
decision to buy more service from another supplier. As a result, Sabre
argues, we cannot conclude that the clauses are an unfair method of
competition.
Sabre made this same argument in its response to Alaska's
rulemaking petition, and we found it unpersuasive. As we explained, in
the cases cited by Sabre, the courts upheld a buyer's insistence on a
most favored nation clause which assured the buyer that its supplier
would not give any other customer a lower price. The courts reasoned
that a most favored nation clause imposed by a buyer represented the
buyer's insistence on obtaining the lowest price and thus was a
practice which tended to promote competition on the merits. Such a
clause benefited consumers by giving them lower prices. 61 FR at 42204.
We concluded that the most favored nation clause cases did not
support Sabre's position. Unlike the most favored nation clauses
imposed by buyers, the parity clauses imposed by the CRSs on their
airline customers do not promote efficiency, do not lead to lower
prices for airline participants, and cause consumers to pay higher
prices, as we explained in our notice of proposed rulemaking. 61 FR at
42204. And we pointed out that the Justice Department believed that
most favored nation clauses imposed by buyers could violate the
antitrust laws. Ibid., 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 FR 5210, January 26, 1995, and 59
FR 47349, September 15, 1994.
Sabre has not shown that our earlier analysis of the most favored
nation clause cases was incorrect. Sabre again cites the court cases
that held that a health insurer's insistence on ``most favored nation''
clauses did not violate the antitrust laws, e.g., Ocean State
Physicians Health Plan and Blue Cross & Blue Shield, and additionally
cites E.I. Du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir.
1984). In Du Pont the Second Circuit reversed an FTC order that held
unlawful several practices used by the major suppliers of lead
additives for gasoline, one of which was a ``most favored nation''
clause given purchasers. Sabre Comments at 21-22.
Sabre has again failed to show that the health insurer clauses
upheld by the courts are equivalent to the parity clauses imposed by
the systems on their airline customers. In particular, Sabre has not
shown that the parity clauses provide consumer benefits like the ``most
favored nation'' clauses used by health insurers. In Ocean State
Physicians the First Circuit held 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 (``the antitrust laws seek to
encourage'' a buyer's efforts to minimize its costs). Unlike the health
insurer clauses, the parity clauses do not enable any consumers to
receive lower prices. The clauses instead force airlines to buy
[[Page 59795]]
services they neither need nor want, and the resulting increase in
airline costs can cause consumers to pay higher fares or receive less
service. Furthermore, one court has indicated that most favored nation
clauses may injure competition. Willamette Dental Group P.C. v. Oregon
Dental Service Corp., 882 P.2d 637, 642-643 (Or. App. 1994).
Sabre does not attempt to show that parity clauses result in lower
costs for airline participants or their customers, the travelling
public. Instead, Sabre initially claims that a most favored nation
clause has the same effect whether imposed by a seller or a buyer.
Sabre Comments at 21. But a seller's insistence on most favored nation
treatment, unlike a buyer's demand for such treatment, is unlikely to
result in lower prices. Sellers, after all, are typically interested in
obtaining higher revenues, which typically does not result in lower
prices.
Equally unavailing is Sabre's theory that its parity clause is
comparable to the health insurer clauses, because the parity clause
ensures that Sabre receives the same information as competing CRSs.
Sabre Comments at 22. This theory again ignores Sabre's position as a
seller of the service, not a buyer. Significantly, Sabre has made no
showing that its airline participants benefit as a result. Sabre's
parity clause operates as a means of saving Sabre the trouble of
competing to entice airlines to purchase a higher level of CRS
service--the clause enables Sabre to compel such participation if an
airline participating in Sabre chooses to participate at the higher
level in another system without regard for the price and quality of
Sabre's service or the airline's need for the increased functionality
in Sabre.
Sabre argues that we may not rely on the Justice Department's
position, reflected in the consent decrees cited in our notice of
proposed rulemaking, that the ``most favored nation'' clauses
unreasonably restrain competition. Allegedly we cannot prefer the
Justice Department's position to the holdings of the courts. Sabre
Comments at 22-23. This argument misconstrues the scope of our
authority to prohibit unfair methods of competition. We may outlaw
conduct that the courts would find permissible under the antitrust
laws. United Air Lines, 766 F.2d at 1114. And Sabre wrongly implies
that the courts necessarily disagree with the Justice Department's
position. The Seventh Circuit, for example, amended its opinion in Blue
Cross & Blue Shield to state that it had not rejected the Justice
Department's view that ``most favored nation'' clauses may be anti-
competitive in some cases--the court noted instead that there was no
evidence of an anti-competitive effect in the case before it. 65 F.3d
at 1415. And one district court recently refused to dismiss a Justice
Department suit against a most favored nation clause imposed by a
health insurer. United States v. Delta Dental of Rhode Island, 943
F.Supp. 172 (D.C. R.I. 1996).
The Du Pont case cited by Sabre is also consistent with our
analysis. That case involved an FTC decision that invalidated several
pricing practices used by manufacturers of lead additives for gasoline;
one of the practices was a most favored nation clause protecting the
manufacturer's customers against other customers obtaining lower
prices. In reversing the FTC's decision, the Second Circuit found that
the competitive conditions in the gasoline additive industry, which
were far different from those in the CRS business, did not support the
FTC's conclusion. Although the gasoline additive industry was an
oligopoly, its participants did not have monopoly power and competed
with each other: ``Notwithstanding the highly concentrated structure of
the industry, there was substantial price and non-price competition
during the 1974-1979 period that is the subject of the [FTC's]
complaint.'' 729 F.2d at 132. In the CRS business, on the other hand,
there has been no price or non-price competition on providing services
to airlines. Furthermore, the Court held that the FTC could invalidate
a business practice as unfair on ``proof of a violation of the
antitrust laws or evidence of collusive, coercive, predatory, or
exclusionary conduct * * *.'' 729 F.2d at 140. The Court reversed the
FTC in part because there was no evidence of coercive conduct. Ibid.
Here, in contrast, there is such evidence--the system refuses to
provide any CRS services to an airline unless the airline agrees to buy
at least as high a level of service from the system as the airline buys
from any other system.
We therefore conclude that the most favored nation clause cases
cited by Sabre do not support its argument that we may not prohibit
parity clauses. We will instead make final our tentative conclusion
that we may define the parity clauses as unfair methods of competition,
since a parity clause is equivalent to an unlawful tying agreement, a
denial of access to an essential facility on reasonable terms, and an
attempt to maintain monopoly control over electronic access to each
system's subscribers. We will begin with our conclusion that the parity
clauses are equivalent to a tying arrangement prohibited by the Sherman
Act.
Tying Arrangements
We viewed parity clauses as analogous to the tying arrangements
prohibited by the antitrust laws, since the parity clauses 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 service. 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. Eastman Kodak Co.,
supra, 504 U.S. at 461-462 (1992). 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 the Court has explained, ``The essential
characteristic of an invalid tying arrangement lies in the seller's
exploitation of its control over the tying product to force the buyer
into the purchase of a tied product that the buyer either did not want
at all, or might have preferred to purchase elsewhere on different
terms.'' When a seller imposes a tying arrangement on a buyer,
``competition on the merits in the market for the tied item is
restrained * * *.'' Jefferson Parish Hospital, 466 U.S. at 12. A
tying arrangement can well cause consumers to pay higher prices, a
result that violates the goals of the antitrust laws. Eastman Kodak
Co., 504 U.S. at 478.
A parity clause is like a tying arrangement, because the clause
represents the system's use of its market power to force each airline
participant to buy at least as much service from the system as it buys
from any other system. Like the tying arrangements proscribed by the
Sherman Act, the CRS clauses restrict competition on the merits for the
tied service--the higher levels of service offered by each system--and
cause the systems' airline participants to pay higher prices. Since
each system offers several different levels of participation, as well
as various enhancements, the parity clause is akin to a tie, since the
system will not sell an airline any service unless the airline buys a
specified level of services.
Sabre does not challenge our reasoning that the parity clauses have
the effect of a tying arrangement. Instead, Sabre objects that there is
no tie, since each level of service is
[[Page 59796]]
mutually exclusive and thus each level of service is being sold
separately rather than in combination. Sabre Comments at 24.
Sabre's position is obviously flawed--even if each level of service
is mutually exclusive, Sabre's parity clause operates in practice like
a prohibited tying arrangement. An airline can not obtain the services
included within the lower level of service if it buys a higher level of
service from any other system, even though Sabre otherwise offers the
lower level of service as a separate product to airline participants.
As explained above, the parity clause has the same effects as an
unlawful tying arrangement--the parity clause restrains competition in
the tied product, the higher levels of service, and the clause causes
airlines to pay higher fees.
In addition, while Sabre sells different levels of service as
separate items, Sabre also sells enhancements as additions to the
various levels of service. Alaska Comments at 2, n. 1. Enhancements
also operate as tied products. Indeed the pending dispute between
Sabre, on the one hand, and Alaska and Midwest Express, on the other
hand, involved the two airlines' failure to buy enhancements. Midwest
Express Comments at 11.
The Essential Facility Doctrine Secondly, we tentatively determined
that the parity clauses are comparable to a violation of the essential
facility doctrine. That doctrine requires a firm that controls a
facility essential for competition to give its competitors access to
the facility on reasonable terms. The firm will violate section 2 of
the Sherman Act if it denies access (or imposes unreasonable conditions
on access). 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. 61 FR 42203, citing Aspen
Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985); and
Delaware & Hudson Ry. v. Consolidated Rail Corp., 902 F.2d 174 (2d Cir.
1990), cert. denied, 111 S. Ct. 2041.
In our last major rulemaking we determined that each of the systems
is comparable to an essential facility and must therefore offer
airlines access to its services on reasonable terms. 57 FR at 43790. We
tentatively concluded in this proceeding 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. 61 FR 42203.
Sabre objects on several grounds to our reliance on the essential
facility doctrine. According to Sabre, we may not consider a CRS to be
an essential facility because the Ninth Circuit held in a private
antitrust case, Alaska Airlines v. United Air Lines, 948 F.2d 536 (9th
Cir. 1991), that CRSs were not essential facilities. As we explained in
both the notice of proposed rulemaking in this proceeding and in our
last major CRS rulemaking, the Ninth Circuit's decision does not
preclude us from basing our CRS rules on an analogy with the essential
facility doctrine. 57 FR at 43791; 61 FR at 42203.
Sabre further claims that, if anything is ``essential'', it is the
information provided by important airlines, since otherwise the CRS
cannot provide adequate information to travel agents and so cannot
obtain subscribers. Sabre Comments at 25. But the relationship between
the systems and airline participants indicates that an airline's
control over its information does not give it any power over the
systems. Participating airlines have had little or no ability to
bargain over a system's terms for participation. The systems instead
have been able to impose terms on airlines that are not disciplined by
market forces.
Sabre's primary defense is its argument that the essential facility
doctrine allows the owners of essential facilities to impose reasonable
non-discriminatory conditions on access to the facility and that the
parity clause is such a reasonable non-discriminatory condition. Sabre
Reply at 21-22. We disagree--the clause is not a reasonable condition.
The clause forces airlines to either buy more service than they want
from some systems or less service than they would like from other
systems. The airlines, moreover, obtain no benefits in return.
In arguing that the clause is a reasonable condition for access,
Sabre alleges that the clause carries out the same goal as our
mandatory participation rule, which requires system owners to
participate in competing systems at the same level that they
participate in their own system. Sabre Reply at 21. However, as shown,
the parity clauses, unlike our rule, do not require that the service be
offered on commercially reasonable terms. More importantly, we adopted
the mandatory participation rule to keep system owners from distorting
CRS competition by unreasonably limiting their participation in
competing systems. Airlines like Alaska have no incentive to distort
CRS competition, since they have nothing to gain from doing so if they
neither own nor market a system.
Monopolization
Finally, since, as shown, most travel agencies subscribe to only
one CRS, the system used by those agencies will essentially hold a
monopoly over the electronic provision of information to the agencies
and the agencies' ability to carry out booking and ticketing
transactions electronically. If an airline established a direct link
between its internal reservations system and a travel agency, the
agency could obtain some information and conduct some transactions
without using the CRS. A parity clause, however, requires an airline to
participate in a system at a higher level than it prefers (and to pay
higher fees than it would otherwise pay for CRS services). The parity
clause thereby reduces the travel agencies' incentive to accept and use
an alternative channel and the airline's ability to fund an alternative
channel. Establishing direct links is costly, and an airline will have
little incentive to incur that cost if it must still participate in
every system at a high level (and pay the higher CRS fees). Alaska
Reply at 27-28; Midwest Express Reply at 5-6.
By discouraging the creation and use of alternative methods of
electronically providing travel agencies with information and booking
capabilities, the parity clause helps to maintain the system's existing
monopoly over electronic access to its subscribers. We found that the
clause is comparable to conduct designed to maintain or create a
monopoly, which would be unlawful under section 2 of the Sherman Act.
61 FR at 42203.
Sabre asserts that the parity clauses cannot be comparable to
unlawful monopolization since the systems have a legitimate business
reason for adopting the clauses--preventing exclusionary tactics by
other systems. Sabre Comments at 26. The clauses, however, apply to all
airline participants, not just those with ties to a CRS, and thus are
not legitimate insofar as they restrict the choices of non-owner
airlines.
Sabre and Worldspan also attack our analysis of an airline's
incentives for creating a direct link with travel agencies. They claim
that an airline will have a greater incentive to find alternatives for
CRSs if its costs go up, so the systems' enforcement of the parity
clauses will give airlines the incentive to find alternatives such as
direct links, since the clauses increase their CRS costs. See, e.g.,
Sabre Comments at 26; Worldspan Comments at 6. We disagree--while
airlines always
[[Page 59797]]
have an incentive to avoid higher CRS fees, the parity clause in
practice seems likely to discourage airlines from creating such links,
given the cost of doing so and the agencies' reduced incentive for
using them.
The Exception for Owners and Sellers of Other Systems
While we have determined that parity clauses are an unfair method
of competition when imposed on airlines that have no CRS affiliation,
we agree with the Justice Department, Sabre, Worldspan, Delta, TWA, and
System One/Continental that parity clauses can provide an effective
means of countering some forms of discriminatory conduct by airlines
that own or market a competing CRS. As suggested in our notice of
proposed rulemaking, we will therefore create an exception in our rule
allowing a system to enforce a parity clause against an airline that
owns or promotes a competing system. We are not adopting the much
broader exception sought by Sabre, which would apply to any airline
with ties of any kind with a CRS-owning airline, such as a code-sharing
relationship. Sabre has not shown that that exception is necessary, and
it would virtually destroy the prohibition against parity clauses.
Discriminatory Conduct by Airlines with CRS Affiliations
As we stated in our notice of proposed rulemaking, 61 FR at 42206,
in the past we have considered cases where a foreign airline apparently
reduced (or ended) its participation in a U.S. system in order to
frustrate the U.S. system's ability to market itself in the foreign
carrier's homeland. See, e.g., Complaint of American Airlines against
British Airways, Order 88-7-11 (July 8, 1988). We have been prepared to
take countermeasures against foreign airlines that deny U.S. systems a
fair chance to compete in the foreign airline's homeland, thereby
interfering with the right of the U.S. airlines affiliated with those
systems to a fair and equal opportunity to compete. Furthermore, in our
last major CRS rulemaking we concluded that there was evidence that
U.S. airlines had limited their participation in competing CRSs in
order to promote the system that they owned, a conclusion which caused
us to adopt the mandatory participation rule. 56 FR at 12608; 57 FR at
43800. That rule requires each airline with a significant ownership
interest in a CRS operating in the United States to participate in
other systems at at least as high a level as it participates in its own
system, assuming the terms for participation are commercially
reasonable. 14 CFR 255.7.
Sabre, moreover, has stated that it created its parity clause to
keep other airlines from engaging in unfair competition by
participating at a high level in their affiliated system while
participating at a low level in competing systems like Sabre, and that
it has successfully used the parity clause in recent years to stop
foreign airlines from discriminating against Sabre and in favor of a
system affiliated with the foreign carrier. 61 FR at 42206.
In recognition of the apparent value of the parity clauses in
preventing discrimination by airlines affiliated with a competing CRS,
we specifically requested parties to comment on whether a rule
prohibiting parity clauses should include an exception allowing a
system to enforce a parity clause against an airline that owned or
marketed a competing CRS. 61 FR at 42197, 42198, 42206.
The Parties' Comments
In response to our request for comments, the Justice Department,
Sabre, Worldspan, Delta, TWA, and Continental/System One stated that
they supported an exception that would allow a system to use a parity
clause against airlines owning or marketing a competing system. Galileo
opposes any such exception, while Midwest Express does not object to
the enforcement of parity clauses against foreign airlines that own or
market a system. Alaska opposes any exception allowing enforcement of a
parity clause against an airline without an ownership interest in a
system, even if the airline markets a system.
The Need for the Exception
We have determined to allow systems to enforce parity clauses
against airlines that own or market a competing system. As shown by our
own experience with both U.S. and foreign airlines, an airline that
owns a CRS may well decide to limit its participation in other systems
in order to encourage travel agencies in areas where it is a major
airline to use the system that it owns. While our past experience has
involved airlines that either owned or were affiliated with an owner of
a system, the same incentive to downgrade participation in competing
systems could well exist in an airline that is marketing a system.
Sabre has cited cases where some South American airlines reduced their
participation in Sabre in order to create a marketing advantage for a
system that they marketed but did not own. See 61 FR at 42206.
Galileo claims that discrimination is unlikely, as shown by the
decisions of some of Galileo's airline owners and marketers to
participate in other systems at a higher level than they participate in
Galileo. Galileo Comments at 5-6. While this indicates that many
airlines with CRS ties do not discriminate, it does not show that
discrimination never occurs or is so unlikely that we should deny a
system a useful tool for ending such discrimination. Indeed, Worldspan
and its owners complain that Egyptair, which markets Galileo, is
discriminating against Worldspan in order to promote Galileo. Worldspan
Comments at 8-9; TWA Comments at 3. Continental and System One
similarly complain that the TACA carriers in Central America, which are
associated with American, are discouraging Central American agencies
from using System One. System One/Continental Comments at 4-5.
Galileo and Alaska argue that any potential discrimination problem
does not warrant creating an exception from the ban on parity clauses,
because there are other means available for preventing discriminatory
conduct by a foreign airline, in particular, the complaint procedures
established by the International Air Transportation Fair Competitive
Practices Act (``IATFCPA''), codified as 49 U.S.C. 41310(c). Sabre and
Worldspan, however, point out that the statutory remedy has a number of
restrictions that limit its effectiveness, including the requirement
that the complaint be filed by a U.S. airline rather than a system. In
addition, a system's use of the private contractual remedy has other
advantages, including the avoidance of a dispute between the United
States and the foreign government. Sabre Reply at 8-10; Worldspan Reply
at 8-9. See also 57 FR at 43819.
The Scope of the Exception
Despite our willingness to create an exception in the rule that
will protect the legitimate interests of U.S. systems, we do not wish
to create an exception that will swallow the rule. We are therefore
unwilling to accept Sabre's argument that a system should be entitled
to enforce a parity clause against any airline whose reduced
participation would arguably harm the system's ability to obtain
subscribers. Sabre Comments at 32-33. In addition, as discussed below,
Sabre has not shown that a broader exception is essential.
Sabre argues that a system could pay a regionally-important airline
without any CRS ownership interest to lower its participation in
competing systems and that the airline's discriminatory
[[Page 59798]]
lowering of its participation level would prejudice the marketing
efforts of the competing systems. According to Sabre, a system owned by
the dominant airline in a country has many ways to induce smaller
airlines in that country to create a marketing advantage for itself.
The system and its owner could secretly compensate a non-owner airline
for lowering its participation level by giving it better pro-rates for
interline travel, discount ground-handling services, lower prices for
reservations services, and slots or space at crowded airports. Sabre
Reply at 10-11.
We appreciate Sabre's concerns, but the broad exception urged by
Sabre would destroy the ban on parity clauses. We note, for example,
that Alaska has a code-sharing relationship with Northwest, one of
Worldspan's owners; thus, if we created the broad exception sought by
Sabre, we would deny Alaska the benefit of the general prohibition
against parity clauses. Similarly, Alaska and Midwest Express are
hosted in Sabre, so an exception allowing systems to enforce parity
clauses against airlines hosted in another system would deny those two
airlines the ability to lower their participation level in any system
but Sabre.
At the same time, the expansive exception sought by Sabre seems to
be unnecessary, for every case of discrimination cited by Sabre or
otherwise known to us has involved either an airline that owned a
system (British Airways, Iberia, and Japan Air Lines), an airline that
was affiliated with an owner of a system (Air Inter and Iberia's
domestic affiliates), or an airline that was marketing a system
(Egyptair, the South American airlines cited by Sabre, and the TACA
carriers cited by Continental and System One). We are unaware of any
case where an airline without any affiliation with the owner or
marketer of a system reduced its participation in another system in
order to prejudice that system's ability to market itself to travel
agencies.
Sabre claims that a number of small airlines hosted in Amadeus have
been unwilling voluntarily to participate in Sabre at the same level
that they participate in Amadeus. Sabre Reply at 11. However, Sabre has
neither named the airlines nor explained how their levels of
participation varied or why a small airline's presence in Sabre would
significantly affect Sabre's ability to market itself in foreign
countries. Our rule will allow Sabre to enforce the parity clause
against all airlines that own or market a competing system, such as
Amadeus, a category that should include the critical mass of airlines
in the countries where Sabre is being marketed. In addition, even if we
allowed Sabre to enforce the parity clause against airlines hosted in a
system but not otherwise affiliated with that CRS, those airlines,
unlike U.S. airlines, might well decide to withdraw entirely from
Sabre, which would put them out of reach of the parity clause.
We are at this time also skeptical of Sabre's assertion that a
system and its owner airlines could secretly pay an unaffiliated
airline to lower its participation level in Sabre. Furthermore, given
the importance of CRS use to airlines, it seems doubtful that an
airline would change its level of participation in a system in exchange
for unrelated benefits. And Sabre would presumably become aware of any
efforts by the unaffiliated airline to market the system itself.
However, we are willing to reconsider the issue in our next major
CRS rulemaking, if Sabre can show that unaffiliated airlines will
change their participation level in order to distort CRS competition
and can suggest a rule modification that would alleviate that problem
without making the overall prohibition of parity clauses ineffective.
In the meantime, we have the ability to address specific issues or
problems with our foreign counterparts.
Having determined that systems should be allowed to enforce parity
clauses against airlines promoting a different CRS, we must craft a
rule that will allow systems to counteract discrimination by airlines
owning or marketing a competing system without allowing them to coerce
the participation level choices of airlines with no CRS interests.
Midwest Express and Alaska have suggested we should give the systems
the ability to enforce a parity clause against foreign airlines but not
U.S. airlines. Alaska Reply at 11; Midwest Express Comments at 10-11.
Because of the United States' international agreements, we may not
discriminate against foreign airlines. If we adopted such an exception
allowing the enforcement of parity clauses only against foreign
airlines, we would be violating our obligation to treat U.S. and
foreign airlines the same. See also Continental/System One Reply at 2,
n. 3; Galileo Comments at 7, n. 4. Although Midwest Express has noted
the CRS market in the United States differs in important respects from
the CRS market in many foreign countries, Midwest Express Reply at 13-
15, we doubt that those differences would justify a rule allowing
systems to enforce parity clauses against all foreign airlines but no
U.S. airlines.
The Justice Department has proposed that we allow enforcement of a
parity clause against airlines that themselves or through affiliates
own or market a system and that we define ``market'' as ``to cause,
encourage, or persuade a person or entity to subscribe to a particular
foreign or domestic system in return for some material benefit that is
conditioned upon the number of subscriptions received.'' Justice Dept.
Comments at 11. Two commenters would accept the Justice Department's
proposal if the phrase ``that is conditioned upon the number of
subscriptions received'' is struck, for they believe that a system
could easily compensate an airline for marketing on some basis other
than the number of subscriptions received. TWA Reply; System One/
Continental Reply at 6.
We have decided not to adopt the Justice Department's proposed
definition of ``to market'' or otherwise attempt to define that term in
the rules. We are concerned that a system seeking to enforce a parity
clause may have difficulty proving that an airline received a
``material benefit'' for marketing a competing system. We do not,
however, intend to give the systems broad authority to assert that an
airline participant is marketing a competing system. For example,
neither a code-sharing relationship between a non-owner airline and an
owner airline nor a hosting agreement between a non-owner airline and a
system can cause the non-owner airline to be deemed a marketer of a
system, unless the non-owner airline is specifically engaged in
promoting the system to travel agencies. We appreciate the concern
raised by Alaska that any exception for airlines marketing a system
phrased in general language will give the systems too much discretion.
Alaska Reply at 10-11. See also Midwest Express Reply at 13-15. But,
given past and current problems with discrimination by airlines that
market a CRS, some exception to our general ban on parity clauses seems
necessary. However, we will reexamine the language of our rule if the
systems attempt to use the exception to enforce a parity clause against
airlines uninvolved in marketing another system.
Furthermore, we will impose a fourteen days notice requirement on
the enforcement of a parity clause. A system may not enforce a parity
clause against an airline without first giving us and that airline
fourteen days written notice of its intent to take that action. The
notice requirement would give the airline time to complain if it
considered the system's action unauthorized by our rule and give us
time to intervene if necessary. We included a similar requirement in
our rule excusing a
[[Page 59799]]
system from complying with our rules if a foreign airline owns or is
affiliated with a system that discriminates against U.S. airlines.
Section 255.11; see 57 FR at 43829, 56 FR at 12637.
As provided by the Justice Department's proposed language, the
exception in the rule will allow enforcement of a parity clause against
an airline that markets a CRS in foreign countries, even if that CRS
does not do business in the United States.
Inclusion of Enhancements
We will modify the rule's language to clarify its applicability to
enhancements, as requested by Alaska. The language proposed by us would
prohibit a system from requiring any airline to maintain ``any
particular level of participation in its system'' on the basis of the
airline's level of participation in another system. Alaska and Midwest
Express ask us to revise the language to make it clear that a system
also cannot use a parity clause to force an airline to purchase
enhancements from it on the ground that the airline is purchasing those
enhancements from another system. Alaska Comments at 4-5; Midwest
Express Comments at 11-12. Galileo supports this proposal, Galileo
Reply at 5-6, but Worldspan claims that it was not included in the
notice of proposed rulemaking, Worldspan Reply at 4.
Both logic and policy support our inclusion of enhancements within
the scope of the prohibition of parity clauses. First, the systems have
used parity clauses to require airlines to purchase enhancements, not
just to require them to upgrade their level of participation. Indeed,
when Sabre at the beginning of 1996 threatened to use the parity clause
against Alaska and Midwest Express, Sabre was demanding that the two
airlines buy some enhancements from Sabre because their level of
participation in one or more other systems allegedly included those
enhancements. Alaska Comments at 3; Midwest Express Comments at 11. In
addition, according to Alaska, Sabre's lawsuit against Alaska also
argued that the parity clause applied to enhancements. March 8, 1995
Alaska Reply at 3-4. And we noted in the notice that Alaska's current
interest in the parity clause issue involved its wish to avoid
purchasing some enhancements from Sabre that it bought from other
airlines. 61 FR at 42207.
Furthermore, the reasons for our findings that parity clauses
reduce CRS and airline competition and make airline distribution less
efficient are fully applicable to the systems' use of parity clauses to
force airlines to buy enhancements. Whether a system is forcing an
airline to buy an enhancement or to upgrade its overall level of
participation, the system is using its market power to force an airline
to buy unwanted services (or to cancel its purchase of services from
another system that it did want to buy).
Thus, when we proposed to prohibit parity clauses, we intended to
prohibit any use of the clauses, whether the system wanted to force an
airline to upgrade to a higher level of participation or to buy
enhancements that the airline preferred not to buy. As noted by Alaska,
however, the proposed rule did not expressly refer to enhancements. We
will therefore modify it to make that clear.
Worldspan opposes Alaska's proposal. It argues that including
enhancements in the rule would substantially change the proposal, since
enhancements allegedly had not been included in the proposal, and could
not be included without a new notice of proposed rulemaking. Worldspan
Reply at 4. Worldspan, however, has not explained why a prohibition
against the use of parity clauses for enhancements would involve any
new or different issues. The analysis of the benefits and harm caused
by the clauses is the same in either case. Moreover, this proceeding
resulted in large part from Sabre's use of its parity clause to make
Alaska and Midwest Express buy enhancements, so the use of parity
clauses to require airlines to buy enhancements was inherently at issue
when we issued our proposal. Every party in the proceeding should have
understood that the use of the clauses as to participation in
enhancements would be an issue. We note in that regard that no one else
has supported Worldspan's position on enhancements.
The Parties' Proposals for Other Rule Changes
Our request for comments on our proposal to prohibit parity clauses
generated a number of requests for changes to other provisions in our
CRS rules, especially the mandatory participation rule.
Galileo, Worldspan, Delta, Northwest, TWA, and System One/
Continental urge us to amend the mandatory participation rule, 14 CFR
255.7, so that it requires airlines that market a system, not just
airlines with a significant CRS ownership interest, to participate in
other systems. Such an amendment would require Southwest to participate
in Galileo, Worldspan, and System One, if it continues to promote
Sabre. Southwest opposes this suggestion, as does Sabre.
United argues that we should eliminate the mandatory participation
rule, since CRS owner airlines should be able to choose the level of
CRS participation needed for distributing their services. Delta also
favors the elimination of the mandatory participation rule if it is not
extended to cover airlines marketing a system. TWA, on the other hand,
supports extending the mandatory participation rule to airlines that
market a system, but asserts that the rule should require only
participation at the full availability level, not at higher levels.
Delta suggests that we should bar systems from contractually tying
non-travel agency services to participation in agency services. Under
Delta's proposal, an airline could choose whether to participate in the
information and booking functions provided by a system to Internet
sites.
Worldspan asks us to amend the rule authorizing a system to take
countermeasures against foreign airlines affiliated with a CRS, 14 CFR
255.11, so that a system would have broader authority to react to
discriminatory treatment.
Finally, ASTA and USTAR contend that, if we adopt the parity clause
prohibition, we should allow travel agencies to cancel their CRS
contracts if the quality of a system's service is greatly reduced by a
carrier's decision to lower its participation in that system.
We have decided not to proceed on any of these suggested changes
before the next major rulemaking, which is scheduled for this year. We
could not in any event adopt any of these proposals without a new
notice of proposed rulemaking, since none of them were proposed in our
notice of proposed rulemaking. We have issued an advanced notice of
proposed rulemaking on the CRS rules, since, as discussed above, those
rules will expire at the end of 1997 unless extended. 62 FR 47606,
September 10, 1997. The suggestions for additional rule changes made by
the parties can be considered in the coming rulemaking.
Procedural Issues
We have considered Alaska's request for a rule barring parity
clauses through informal rulemaking procedures. Those procedures, which
included the opportunity to file comments and reply comments on our
notice of proposed rulemaking, have enabled every party to fully
present its position on the legal and factual issues.
Our use of informal rulemaking procedures here follows our
consistent past practice. When we reexamined and readopted the Board's
rules, we used
[[Page 59800]]
informal rulemaking procedures. No one asserted that those procedures
were improper or unfair, 57 FR at 43792, although American had
initially argued that a formal hearing should be held to resolve
factual disputes. See 56 FR 12586, 12603, March 26, 1991. In an earlier
proceeding we used informal rulemaking procedures to amend the CRS
rules as part of a package of rules designed to reduce airline delay
problems. 52 FR 34056, September 9, 1987.
Most importantly, when the Board adopted the original CRS rules, it
did so in an informal rulemaking proceeding over United's objections,
and the Seventh Circuit affirmed the Board's procedural decision in
United Air Lines v. CAB.
Sabre nonetheless argues that we may not adopt the proposed ban on
parity clauses without holding a formal hearing. Sabre Reply at 18-20.
Sabre's objection has no merit.
Sabre recognizes that the Seventh Circuit held that the Board could
adopt comprehensive CRS rules without a formal hearing. Sabre Reply at
19. Sabre, however, suggests that the Court decided the United Air
Lines case incorrectly, because the language of the statute authorizing
us to define and prohibit unfair methods of competition and unfair and
deceptive practices, 49 U.S.C. 41712, allegedly requires the holding of
a formal hearing. Sabre Reply at 19, n. 20. We disagree. As the Seventh
Circuit explained in rejecting the same contention made by United, the
statute clearly authorizes the use of informal rulemaking procedures
for prohibiting unfair methods of competition and unfair and deceptive
practices. United Air Lines, 766 F.2d at 1111-1112.
Sabre wrongly contends that this rulemaking is so different from
the rules upheld in United Air Lines that the Seventh Circuit's
decision is inapplicable here. Sabre argues that we cannot use informal
rulemaking procedures since our decision necessarily involves a
determination on the ``nature and validity of past conduct.'' Sabre
Reply at 19. Most rulemaking decisions made by regulatory agencies,
however, involve findings about the reasonableness of the private
parties' past conduct, as did the Board's original CRS rulemaking. Cf.
United Air Lines, 766 F.2d at 1107. Moreover, like the Board's CRS
rules, this rule imposes no sanctions on anyone for past conduct.
Sabre similarly errs in arguing that a formal hearing is needed
here because the allegations made by the parties are unsupported and
``under cross-examination would be exposed as seriously flawed.'' Sabre
Reply at 19. Most rulemaking decisions require the resolution of
disputed issues of material fact, but that does not force the agency to
hold a formal hearing. The Administrative Procedure Act, after all,
expressly authorizes agencies to adopt rules without such a hearing.
Indeed we may decide adjudicatory cases without holding a formal
hearing, even when there are material factual issues in dispute. See,
e.g., City of St. Louis v. DOT, 936 F.2d 1528, 1534, n. 1 (8th Cir.
1991). We are satisfied, moreover, the record here amply supports our
findings in this rule.
According to Sabre, however, this proceeding is also different from
the Board's original rulemaking because our proposed rule ``may also
retroactively alter some expectations,'' since the rule would allegedly
``disrupt'' the expectations of the systems and their subscribers.
Sabre Reply at 19-20. The Board's rules in fact were much more
disruptive. See Republic Airlines versus United Air Lines, 796 F.2d 526
(D.C. Cir. 1986), where the Court held that a system could require an
airline to pay higher fees for CRS participation, since the Board's
rules invalidated the contract allowing the airline to pay lower fees.
We are not interferring here with any party's reasonable contract
expectations. But, even if we were disrupting existing contracts, we
could still act by rulemaking. As the Court stated in Republic, 796
F.2d at 528, ``There is of course no question that the CAB had the
power, as a matter of federal law, to render the violative CRS
contracts entered into by the airlines unenforceable from the effective
date of the rule.''
Finally, Sabre alleges that a hearing is necessary since we cannot
adopt rules prohibiting unfair methods of competition without first
finding that antitrust violations have occurred, a step which would
require a formal hearing, according to Sabre. Sabre Reply at 19, n. 20.
Sabre's allegation is plainly wrong, for we need not find that anyone
has violated the antitrust laws as a condition for prohibiting a
practice as an unfair method of competition. 49 FR at 32545. Cf. United
Air Lines, 766 F.2d at 1119-1120.
Worldspan asserts that we cannot fairly rely on our past analyses
of the CRS business and its impact on airlines, both because those
findings are now several years old and because we allegedly did not
specifically identify which of the past findings are relevant to our
proposed rule. Worldspan Comments at 4. Our use here of our earlier
rulemakings and studies is neither unfair nor irrational. We relied on
our past findings on the basic structure and operation of the CRS and
airline businesses, and their structure and operation have not changed
significantly since our last rulemaking. The past findings on which we
relied were identified in the notice of proposed rulemaking. If
Worldspan believed that our past findings were outdated or inaccurate,
it had the chance in its comments to argue that those findings were no
longer valid, as we specifically said in our notice. 61 FR at 42206.
Cf. 57 FR at 43793.
The other procedural issues concern the motions by the Department
of Justice and America West for leave to file pleadings after the due
date for comments or reply comments and the late submission of letters
from a number of travel agencies and from the European Civil Aviation
Conference (ECAC). The Justice Department filed its comments soon
enough to give other parties the ability to address its arguments in
their reply comments. While America West filed its reply comments long
after the applicable deadline, its reply responds to the points in the
initial round of comments and contains no new factual or legal
arguments. The late travel agency letters, which were largely generated
by Sabre, primarily used Sabre's form response and thus duplicated the
views stated in the timely letters. ECAC's comment states its position
but does not present new arguments and evidence. Thus the acceptance of
the late comments and letters will not prejudice anyone. We will
therefore accept the Justice Department's comments, America West's
reply comments, ECAC's comments, and the late letters from travel
agencies.
Finally, we note that Sabre has tried to persuade the Departments
of State and Commerce, the United States Trade Representative, and the
Office of Management and Budget to keep us from adopting a rule
prohibiting parity clauses. Our ex parte docket contains OMB's outline
of Sabre's meeting with OMB officials.
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
[[Page 59801]]
procedures of the Department of Transportation, 44 FR 11034.
Our notice of proposed rulemaking stated our tentative conclusions
that the rule would benefit competition and innovation and give non-
owner participating airlines a greater ability to choose the
distribution methods that best meet their needs. We further stated that
we did not think the rule would significantly injure travel agencies or
affect the systems' operations. Among other things, no airline appeared
likely to use the rule to lower its level of participation in any
system below the full availability level. We found that the costs and
benefits of the proposed rule appeared to be unquantifiable, but we
asked interested persons to provide information on the costs and
benefits. 61 FR at 42207.
After reviewing the comments and reply comments submitted in
response to our notice of proposed rulemaking, we have determined that
the rule should provide significantly more benefits than costs. We do
not have data, however, that would enable us to accurately quantify the
benefits of the rule for airlines and airline passengers and the costs
of the rule for systems and travel agencies, although we had asked for
such data. We are therefore providing a qualitative assessment of the
rule's costs and benefits.
The rule will benefit airlines that do not own or market a CRS
because it will allow them to choose the level of service purchased
from each system. The rule will thereby enable each such airline to
choose the most efficient method for distributing its services.
Airlines can also avoid purchasing services they do not need, which may
save them significant amounts of money. Alaska and Midwest Express, for
example, had estimated that Sabre's most recent threat to enforce the
parity clause against them would raise their booking fee expenses by
more than ten percent. 61 FR at 42201.
The rule should also cause the systems to compete for airline
purchasers of higher-level services. Although virtually all airlines
must participate in each system at the full availability level, many
non-owner airlines do not need to purchase higher levels of service
from each system (our mandatory participation rule generally requires
airlines with significant CRS ownership interests to buy an equivalent
level of service from each system). Since a system's services will be
more attractive to travel agencies if more airlines participate at
higher levels, and since higher-level participation by more airlines
will produce more revenue for a system, the systems should compete for
higher-level participation by offering better service and perhaps lower
fees.
In addition, if airlines can operate more efficiently, they can
reduce their costs, which should lead to lower fares for airline
travellers. However, while CRS costs are relatively large in relation
to airline profit margins, they are relatively small in relation to
total operating costs, so lower CRS costs are unlikely to result in
large fare decreases.
We do not expect the rule to impose a substantial burden on the
systems. The rule will not require the systems to change their method
of operations. If the systems compete for higher-level airline
participation, they are likely to incur additional marketing and
developmental expenses, but nothing in the record indicates that those
expenses would be significant. The systems may also have to lower their
fees for higher-level participation. However, since the fees charged
airlines do not currently appear to be disciplined by market forces,
any marketplace discipline on the systems' fees would be economically
beneficial.
The rule should not significantly affect travel agencies. We doubt
that any significant airline that currently participates in CRSs will
reduce its level of participation in any system below the full
availability level, so travel agents using any system should continue
to have the ability electronically to obtain information on the
airline's schedules, fares, and availability, to make bookings, and to
issue tickets. While some airlines are likely to reduce their level of
participation in some systems, the operations of the travel agents
using those systems should not become significantly less efficient,
since the higher-level participation does not appear to greatly affect
the efficiency of agency operations. Furthermore, if the systems could
continue to enforce the parity clauses, airlines that would otherwise
prefer to buy a higher level of service from one or a few systems would
have the option of reducing their level of participation in those
systems rather than upgrading their level of participation in the other
systems. Thus the rule should not cause a significant reduction in the
efficiency of travel agency operations.
Barring the systems from enforcing a parity clause against airlines
that own or market a competing system would reduce CRS competition,
since some airlines with CRS ties might well choose to discriminate
against competing systems in order to create a marketing advantage for
the system that they own or promote. Since our rule will allow systems
to continue enforcing a parity clause against airlines that own or
market a system, our rule should not cause any distortions in CRS
competition.
The Department does not believe that there are any alternatives to
the 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 Sec. 255.7(a)) the ability to choose
its level of participation in each system.
Some parties have suggested that we should adopt a rule allowing a
system to enforce parity clauses when the price and quality of its
higher level of participation are comparable to those of the systems
from which the airline is already purchasing the higher level of
service. That proposal, however, would neither promote price and
service competition among the systems for higher-level participation
nor give participating airlines the ability to choose what service
levels were most efficient for them.
This rule does not impose unfunded mandates or requirements that
will have any impact on the quality of the human environment.
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 airlines and
travel agencies. The notice of proposed rulemaking contained our
initial regulatory flexibility analysis. This rule and our notice of
proposed rulemaking set forth the reasons for our adoption of Alaska's
rule proposal and the objectives and legal basis for the rule.
A number of the commenters submitted their views on our proposal's
impact on small entities. We considered their comments in deciding
whether to make final our proposed ban on parity clauses final.
The rule will primarily affect two types of small entities, smaller
airlines and travel agencies. To the extent that airlines can operate
more efficiently and reduce their costs, the rule will also affect all
small entities that purchase airline tickets, since airline fares may
be somewhat lower than they would otherwise be, although the amount may
not be large.
[[Page 59802]]
The rule, as explained above, will give smaller non-owner airlines
the ability to choose the level of service they will buy from each
system by barring the use of airline parity clauses. Smaller non-owner
airlines will be able to choose how they will distribute their services
and thus be better able to operate more efficiently.
The rule will not directly affect travel agencies but may 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 or as efficiently as some of
the agencies' competitors. 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 and
if the reduction in the level of participation made it substantially
more difficult for an agent to book the airline's services. We doubt
that any significant airline currently participating in the systems
will drastically reduce its level of participation in any system, so
changes in participation levels are not likely to significantly
interfere with the efficiency of travel agency operations. Furthermore,
the parity clauses give airlines the option of either reducing their
level of participation in the favored system or upgrading their level
of participation in other systems. Since a participating airline may
well choose to reduce its participation level in the favored system,
parity clauses do not ensure that every airline will participate at a
high level in all systems. For these reasons, we conclude that the rule
will not significantly harm travel agencies.
In addition, the 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.
The only alternative rule suggested by the commenters was Sabre's
proposal that we allow each system to enforce a parity clause as long
as that system's terms for the higher level of participation or
enhancement were comparable to the terms offered by the competing
system in which the airline was already participating at a higher
level. As discussed above, we decided against adopting this proposal,
since it would not promote competition in the CRS and airline
industries and would force airlines without any CRS affiliation to buy
more services than they considered desirable.
Our rule contains no direct reporting, recordkeeping, or other
compliance requirements that would affect small entities. There are no
other federal rules that duplicate, overlap, or conflict with our
proposed rules.
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 rule contains no collection-of-information requirements
subject to the Paperwork Reduction Act, Public Law 96-511, 44 U.S.C.
Chapter 35.
Federalism Implications
The rule we are adopting 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 rule does not have sufficient
federalism implications to warrant preparation of a Federalism
Assessment.
This rule does not impose unfunded mandates or requirements that
will have any impact on the quality of the human environment.
List of Subjects for 14 CFR Part 255
Air carriers, Antitrust, Reporting and recordkeeping requirements.
Accordingly, the Department of Transportation amends 14 CFR Part
255, Carrier-owned Computer Reservations Systems, as follows:
PART 255--[AMENDED]
1. The authority citation for part 255 is revised to read as
follows:
Authority: 49 U.S.C. 40101, 40102, 40105, 40113, 41712,
recodifying 49 U.S.C. 1301, 1302, 1324, 1381, 1502 (1992 ed.).
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 (other than a carrier that owns
or markets, or is an affiliate of a person that owns or markets, a
foreign or domestic computerized reservations system) to maintain any
particular level of participation or buy any enhancements in its system
on the basis of participation levels or enhancements selected by that
carrier in any other foreign or domestic computerized reservations
system. A system may not compel a carrier that owns or markets, or is
an affiliate of a person that owns or markets, a foreign or domestic
computerized reservations system, to maintain a particular level of
participation or buy an enhancements in its system on the basis of
participation levels or enhancements selected by that carrier in
another foreign or domestic computerized reservations system, until 14
days after it has given the Department and such carrier written notice
of its intent to take such action.
Issued in Washington, D.C. on October 28, 1997.
Rodney E. Slater,
Secretary of Transportation.
[FR Doc. 97-29295 Filed 11-4-97; 8:45 am]
BILLING CODE 4910-62-P