[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]


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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.

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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