Airline Ticketing: Impact of Changes in the Airline Ticket
Distribution Industry (31-JUL-03, GAO-03-749).
In 2002, when major U.S. airlines posted net operating losses of
almost $10 billion, they paid over $7 billion to distribute
tickets to consumers. Of these total distribution expenses,
airlines paid hundreds of millions of dollars in booking fees to
global distribution systems--the companies who package airline
flight schedule and fare information so that travel agents can
query it to "book" (i.e., reserve and purchase) flights for
consumers. Each time a consumer purchases an airline ticket
through a travel agent, the global distribution system used by
the travel agent charges the airline a set booking fee. Concerns
have been raised that the global distribution systems may
exercise market power over the airlines because most carriers are
still largely dependent on each of the global distribution
systems for distributing tickets to different travel agents and
consumers and therefore must subscribe and pay fees to each.
Market power would allow global distribution systems to charge
high, noncompetitive fees to airlines, costs that may be passed
on to consumers. GAO was asked to examine changes in the airline
ticket distribution industry since the late 1990s and the effects
on airlines, the impact of these changes on travel agents and
consumers, and what the relationship between global distribution
systems' booking fees and related costs suggest about the use of
market power.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-749
ACCNO: A07826
TITLE: Airline Ticketing: Impact of Changes in the Airline
Ticket Distribution Industry
DATE: 07/31/2003
SUBJECT: Air transportation operations
Airline industry
Cost analysis
Price regulation
Prices and pricing
Cost control
Travel agents
Travel costs
Fees
******************************************************************
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GAO-03-749
A
Through Orbitz, however, some airlines can generate significant cost
savings relative to traditional and on- line travel agent booking methods.
14 *Charter airlines* have negotiated special arrangements with Orbitz,
under
which they receive rebates on a portion of the booking fee. 15 According
to Orbitz officials, these rebates generally save charter airlines about
$3 of the approximate $16 paid in booking fees per ticket compared to
bookings made through traditional travel agencies. Airlines that are not
charter members of Orbitz pay the full Worldspan booking fee. These
arrangements contrast with the CRS rules requirement of price
nondiscrimination and mandatory participation, which have limited
carriers* ability to negotiate reduced booking fees with GDSs. Airlines
are allowed to negotiate special arrangements with Orbitz because DOT has
not defined Orbitz as a CRS, and thus did not extend the application of
the CRS rules to cover Orbitz.
Recently, Orbitz, with airline cooperation, has also developed technology
that enables it to book tickets by directly accessing each participating
airlines* internal reservation system, bypassing the GDS and its booking
fees. This technology, which (unlike the technology used to access an
airline*s internal reservation system) can query and get information from
multiple airlines, functions similarly to the technology used by GDSs.
According to Orbitz officials, its new technology, which is called
*Supplier Link,* could result in participating airlines saving about $12
of the typical
14 When airline flights are booked through Orbitz, airlines pay booking
fees to GDSs, commissions or transaction fees to Orbitz, and other
distribution costs. Airlines* costs can vary. For airlines that enter into
agreements with Orbitz (i. e., charter airlines), Orbitz rebates the net
booking fee by 60 percent of the total Orbitz rebate received from
Worldspan, or up to $3, and the transaction fee paid to Orbitz by the
charter airlines for each ticket is $5.34. (The transaction fee for
tickets that are more than $150.00 is $5.34, and $2.67 for tickets that
are less than $150.) In comparison, airlines that do not enter into
agreements with Orbitz do not receive the $3 rebate and pay a higher
commission of about $10 per ticket to Orbitz.
15 A charter airline, or Airline Charter Associate, is an airline that
enters into an agreement with Orbitz. Under the Charter Associate
Agreement, Orbitz provides discounted distribution costs in return for an
assurance that it would have access to airlines* publicly available fares,
including web fares. Charter airlines account for 93 percent of all
airlines that book through Orbitz. These airlines include all of the
largest U. S. airlines (excluding low fare carriers Southwest and JetBlue)
and most of the regional carriers. Other airlines that participate in
Orbitz but are not charter associates include AirTran and ATA.
$16 paid in booking fees per ticket. 16 Since its implementation in 2002,
11 major airlines have signed up to participate in Supplier Link. As of
July 2003, four airlines* America West, American, Continental, and
Northwest- have begun to use the technology. Currently, these airlines
process over 70 percent of their Orbitz bookings through Supplier Link.
These airlines* remaining Orbitz bookings need to go through the Worldspan
GDS because of their complexity. Complex bookings that cannot at this time
be handled by Supplier Link might include bookings with itineraries that
involve trips flown by interlining airlines (i. e., two or more airlines
that collectively transport a passenger from origin to destination) or
international destinations.
In light of its new Supplier Link technology, Orbitz may be the first
entity in the U. S. to perform functions similar to GDSs since
finalization of the CRS rules in 1984. Furthermore, some believe that
Orbitz represents a new entrant into the GDS market. 17 However, Orbitz is
a creation of the major airlines* as were the CRSs* and questions have
been raised about whether Orbitz charter member airlines could use Orbitz
to gain a competitive advantage over other airlines. DOT and DOJ have been
involved in examining this issue. In its June 27, 2002, report to
Congress, DOT found that Orbitz is not anticompetitive and more
specifically, has shown no evidence of biased presentation of airline
services. However, DOJ has not yet commented on the topic. As of July
2003, DOJ was
continuing its review of Orbitz. 16 All airlines that participate with
Supplier Link, which must be a charter associate, pay Orbitz the same
transaction fee as before ($ 5.34 or $2.67 depending on price of ticket)
and a Supplier Link fee ($ 4 per ticket), but do not pay booking fees.
However, there are start- up costs for airlines that choose to participate
with Supplier Link. Orbitz charged $200,000 for a *first in type* Supplier
Link connection. This fee covers the development costs for the
interface between Orbitz* system and an airline internal reservation
system. Subsequent implementations connecting other airlines that use the
same data processing company to *host* their internal reservation system
costs those airlines $75,000. According to Orbitz, its messaging costs are
inconsequential. But, the airline may be charged by its internal
reservation system owner for internal messaging costs both for bookings
and for the *polling* queries necessary to maintain Orbitz* availability
cache.
17 As noted earlier, other GDSs operate predominantly in foreign countries
and have not penetrated the U. S. domestic market to any significant
extent. These include Abacus, Amadeus, Axess, Infini, and Topas.
Internet- Based Travel Agencies Other participants in the airline ticket
distribution industry have also
That Use GDSs Also Book developed Internet sites that, like traditional
travel agencies, book tickets Tickets at a Lesser Cost to
through a GDS. Sabre entered the Internet market by creating Travelocity,
Airlines than Traditional Travel which is a web- based booking engine that
uses the Sabre GDS to query and Agents book tickets. In general,
Travelocity functions as an on- line travel agent: airlines make payments
to Travelocity as well as pay booking fees to Sabre. As with other travel
agencies, consumers pay it ticketing fees. For accounting purposes, Sabre
pays Travelocity incentive payments, but the payments stay within the
parent company. Independent on- line travel sites have also emerged to
sell airline tickets to
consumers. One notable example is Expedia. com. In general, the
relationships and flow of payments among Expedia. com, its GDS
(Worldspan), airlines, and consumers resemble those of traditional travel
agencies. Major independent on- line travel agencies continue to subscribe
to a GDS and pay a subscription fee if they do not meet the high volume
requirements for fee waivers. In turn, the GDS pays the on- line agency
incentive payments for bookings, while charging airlines booking fees. In
addition, some airlines make payments to these independent on- line travel
agencies. Consumers also typically pay a $5-$ 10 fee to the new on- line
sites for each ticket. In Expedia*s case, since it is Worldspan*s largest
subscriber, it does not pay GDS subscription fees. Furthermore, since it
books in such high volumes, it receives negotiated payments from its GDS
and certain airlines.
Other independent on- line travel agencies, sometimes referred to as
*opaque* travel distributors, have also entered the airline ticket
distribution industry, typically offering low- cost tickets to consumers
in exchange for less flexibility or choice. Opaque travel distributors
book through GDSs to sell what the industry refers to as *distressed
inventory.* Analogous to a deep discount store or an outlet store, opaque
distributors, such as Priceline. com, take bids from consumers for airline
tickets. However, the consumer will know neither the carrier nor the exact
departure times for his itinerary until after an airline accepts the
consumer*s bid, and the ticket is bought and paid for.
Despite the fact that airlines pay commissions and overrides as well as
GDS fees for these on- line travel agency bookings, these bookings cost
airlines less than bookings made through traditional travel agencies. This
is in part because on- line consumers generally must purchase the ticket
at the time of reservation, reducing *churn* that airlines claim is
costly, by not allowing repeated bookings, cancellations, and rebookings
prior to
purchase. A traditional travel agent has the capacity to make changes to a
consumer*s itinerary; however, for any changes to a reservation,
additional GDS processing is required. GDSs charge the airlines a small
amount for each cancellation and rebooking, so each such change adds to
total airline distribution costs.
In 1999, on average, each ticket booked via a traditional travel agent
cost an airline a total of $45. 93, compared to $23. 40 and $25.12 for
airline Website and on- line travel agency sites, respectively. 18
Although costs associated with each of these distribution methods have
decreased, bookings made through traditional travel agencies continue to
cost much more than those
made on line. From 1999 through 2002, the average cost to an airline for a
booking made through a traditional travel agency decreased by 33 percent
to $30.66, while the average cost to an airline for a booking on its own
Website decreased by 50 percent to $11.75. Over the same period, the
average cost to airlines for bookings made through on- line travel
agencies
decreased 23 percent to $19.43. Figure 5 illustrates the change in average
airline distribution costs by the different distribution methods.
18 Throughout this report, we report the data in averages. We calculated
the averages by aggregating data provided by a number of entities, and
dividing that total by the number of entities providing data. See app. I
for additional information on the scope and methodology.
Figure 5: Average Airline Booking Costs Per Distribution Method, 1999-
2002
With Airline Encouragement, the Airlines have taken steps to encourage
travelers to book tickets through
Percentage of Airline Tickets less expensive, on- line distribution
methods. Some airlines have instituted
Booked through the Internet Has a fee for travelers who receive a paper
ticket through a traditional travel
Increased, as Has the Percentage agent. For example, Northwest charges a
$50 fee for a paper ticket as
of Bookings Processed without opposed to electronic tickets. Airlines may
also reward on- line bookers
GDSs with loyalty incentives (i. e., frequent flyer program bonuses). For
instance,
travelers booking on line with American may earn up to 1,000 AAdvantage(R)
Bonus miles. Airlines* both directly and through on- line travel agencies*
have also offered special *Webfares* and last minute Internet- only deals
to encourage consumers to book tickets on the Internet.
While airlines continue to sell a significant proportion of their tickets
through traditional travel agencies, the number of tickets sold through
on- line distribution methods, including airline Websites and on- line
travel
agencies, has increased rapidly since the late 1990s. Between 1999 and
2002, on average, the percentage of tickets that consumers booked through
traditional travel agents fell from 67 percent to 46 percent. By
comparison, the percentage of tickets booked on line (using both on- line
travel agencies and airlines* own Websites) increased from 7 percent to 30
percent from 1999 to 2002. Throughout that same time period, airlines sold
the remainder (roughly 25 percent) directly to consumers via their call
centers (1- 800 numbers). Figure 6 illustrates the change in distribution
methods between
1999 and 2002.
Figure 6: Average Airline Bookings Per Distribution Method, 1999- 2002
While business travelers generally continue to rely on traditional travel
agents, trends suggest that leisure travelers are adopting the Internet as
an alternative to traditional travel agents. The National Commission to
Ensure
Consumer Information and Choice in the Airline Industry (NCECIC) 19
reported in 2002 that business travel* usually the highest yield traffic
for airlines* is often contracted out to travel agencies to manage. As a
result, airlines report that traditional travel agencies (and therefore
GDSs) will continue to play a vital role in the distribution of airline
tickets. On the other hand, an increasing percentage of leisure travel is
now booked via the Internet.
Bookings continue to be predominantly processed by GDSs, but since the
late 1990s the percentage of on- line booking processed through airline
internal reservation systems and Orbitz Supplier Link technology has
increased. However, the sales through traditional travel agents continue
to account for the majority of airline revenue, in large part because
higherpriced business travel continues to be managed through traditional
travel agencies. Figure 7 illustrates how the number of major U. S.
airlines bookings processed through GDSs and GDS bypasses has changed from
1999 to 2002. 19 NCECIC was authorized by Section 228 of the Wendell H.
Ford Aviation Investment and
Reform Act for the 21st Century (P. L. 106- 18) on April 5, 2000.
Figure 7: Number of Airline Tickets Processed through and outside GDSs,
1999- 2002
Note: GDS bypasses include bookings made through Orbitz Supplier Link,
airline proprietary Websites, and airline call centers. GDS bookings
include those performed by traditional travel agents and on- line travel
sites that go through a GDS. Airlines Reduced Travel Travel agent
reimbursement patterns have shifted significantly since the Agent
Payments, While
late 1990s. Much of the shift was caused by the airlines, which by 1998
GDSs* Payments to Travel
reduced or ultimately ended the traditional practice of offering a flat
Agents Increased
published *base* commission (traditionally a percentage of each ticket
price, which later was a flat fee for each ticket) to all travel agents as
a means of reducing distribution costs. 20 Partly the CRS rules do not
govern
airlines* relationships with travel agencies, airlines were free to change
their payments to travel agents in a way they were not free to do with 20
Airlines continue to pay service fees, in essence ticket commissions, for
each booking made by certain on- line travel sites, and override
commissions to travel agents that reach an established sales goal.
Override commission policies vary from airline to airline. For instance,
Delta no longer offers a flat base commission to all travel agents in the
U. S. for its ticket sales, but instead negotiates private relationships
to provide financial incentives that reward key travel agencies for their
sales.
GDSs, and now use a system of privately negotiated commission arrangements
with individual travel agencies. Not all travel agencies are able to
negotiate such individual commission arrangements, and the terms of such
agreements vary among travel agencies and among airlines. From 1999 to
2002, average annual payments by airlines to travel agencies
decreased by 57 percent, from $370 million to $159 million, as airlines
provided override commissions predominantly to those travel agencies with
high ticket sales.
Figure 8 illustrates the decline in average commission payments by
airlines to travel agencies in relation to total distribution costs. From
1999 to 2002, on average, major airlines reduced their total distribution
costs by 25.8 percent, from $732.9 million to $543.6 million, or 43.6
percent on a per booking basis. Most of that reduction occurred in the
payments by airlines to travel agencies, which decreased by 57 percent,
from $370 million to $159 million. Despite a decrease of 8.5 percent in
passenger traffic between 2000 and 2002, remaining distribution costs--
which include rising GDS fees, as well as overhead, personnel,
advertising, and credit card fees-- were essentially unchanged over the
period.
Figure 8: Average Annual Airline Total Distribution Costs, 1999- 2002
Note: Amounts shown are in nominal dollars.
The largest travel agencies* those with total annual revenues in excess of
$50 million* represent less than 1 percent of travel agencies, but book
almost 60 percent of total travel agent sales. By definition, because of
their large volumes of sales, these large travel agencies are most likely
to receive the majority of the airlines* override commissions.
As airlines cut traditional travel agent ticket commissions, GDSs began
increasing incentive payments to travel agencies. 21 According to an
official of a domestic GDS, since airlines (and, subsequently, other
travel suppliers) reduced travel agent commissions, travel agencies sought
out replacement
21 We do not have access to specific agreements between GDSs and travel
agents, and are therefore limited in our ability to detail overall
financial flows between GDSs and travel agents.
sources of revenue, and GDSs responded with incentive payment increases.
Large travel agencies were able to use their position in the industry
between the GDSs and large segments of the traveling public to
convince the GDSs to provide some form of incentive payment. At the same
time, GDSs use incentive payments to compete for travel agent market share
and to incentivize travel agents to book on their particular GDS.
Generally, as with airlines* override commissions, a GDS pays incentives
to those travel agencies with high booking volumes, as each booking
results in the GDS receiving a fee from the airline. Between 1995 and
2002, on average, each GDS paid travel agencies an increasing amount of
incentive payments, from $22.3 million to $233.4 million (over 900
percent). Figure 9 illustrates the average change in each GDS*s payments
to U. S. travel agents since 1995.
Figure 9: Average Payments to U. S. Travel Agents by Each GDS, 1995- 2002
Note: Amounts shown are in nominal dollars.
Shifts in travel agent payments have also occurred between travel agents
and consumers. After airlines ended automatic base commissions, many
travel agencies began to charge consumers service fees for booking
tickets* previously included in the ticket price in the form of a
commission that was invisible to the consumer. Figure 10 illustrates the
current flow of
payments among the four participants in the airline ticket distribution
industry. Compared to figure 3, it illustrates some changes that have
taken place in the airline ticket distribution industry since the late
1990s* particularly the advent of various Internet booking methods,
airline- initiated sites that bypass GDSs, the new flow of payments to
travel
agencies, and new service fees imposed on consumers.
Figure 10: Summary of Payment and Fee Flows in the Current Distribution of
Airline Tickets
a Consumers pay services fees. b Airlines that subscribe to Orbitz
Supplier Link pay less fees (including the commission per transaction)
than GDS booking fee. c Airline commission and override payments vary and
are based on travel agencies meeting certain
sales goals.
Airlines Continue to Be While each change* increased use of the Internet
to process and sell
Dependent Upon the GDSs tickets and reductions in airline payments to
travel agencies* has
contributed to the lowering of overall airline distribution costs, neither
has reduced the effective requirement that nearly every major airline
participate in and pay booking fees to each GDS. As previously stated,
airlines continue to process over 60 percent of their tickets* mostly high
yield business traffic* through the GDSs. Furthermore, airlines continue
to need to subscribe to each GDS in order to reach all consumers. As DOJ
described it in comments submitted to DOT during a 1997 review of the
CRS rules, from an airline*s perspective, because each CRS provides access
to a large, discrete group of travel agencies, each CRS constitutes a
separate market. And unless the airline is willing to forego access to
those travel agencies and the consumers they serve, it must participate in
every CRS.
Changes in the Airline Large travel agencies and consumers who use the
Internet appear to have benefited most from recent changes in the airline
ticket distribution
Ticket Distribution industry. 22 Small travel agencies and the consumers
who patronize them
Industry Appear to appear to have benefited least, if not been
disadvantaged. Since the late
Have Benefited Very 1990s, the number of very large travel agencies (i.
e., those with total annual
sales in excess of $50 million) has stayed approximately the same, but
their Large Travel Agencies
total annual air travel sales have almost doubled. 23 Because the largest
and Consumers Who
travel agencies sell more air travel than any other category of travel
agency, Use the Internet
by definition they would likely qualify for both GDS incentive payments
and airline override commissions. During this same period, the number of
small travel agencies has steadily declined, as have their total annual
air sales. Figure 11 illustrates changes in the number of different sized
travel agencies and their sales of air travel over time.
22 For additional information, see U. S. General Accounting Office,
Domestic Aviation: Effects of Changes in How Airline Tickets Are Sold,
GAO/ RCED- 99- 221 (Washington, D. C.; July 28, 1999).
23 For the purposes of categorization, very large travel agencies generate
more than $50 million annual revenue. Midsize travel agents generate
between $2 million and $50 million annual revenue. Very small travel
agencies generate less than $2 million annual revenue.
Figure 11: The Number of Travel Agencies, by Amount of Annual Revenue and
Volume of Air Travel Sales
Note: Amounts shown are in nominal dollars.
The increase in on- line bookings appears to have had a more negative
effect on smaller travel agencies than on large travel agencies because of
general differences in the nature of their clientele. Leisure travelers
increasingly book on line* usually well in advance with simple
itineraries. According to the DOJ, leisure travelers with relatively
simple itineraries are best suited to using the Internet. On- line travel
agencies sell most tickets to price- sensitive leisure passengers. 24 In
contrast, business consumers, who often use large travel agencies, are not
likely to book on line because of restrictive corporate policies and
complex business itineraries that are
often subject to short notice changes. Those travel agencies also may 24
Reply Comments of the Department of Justice to DOT on the Notice of
Proposed Rulemaking Computer Reservation System Regulations, June 9, 2003,
p. 16.
provide reporting and record keeping services for large business
customers.
According to officials from the NCECIC and the American Society of Travel
Agents, small travel agencies are confronting financial pressure from both
airlines and GDSs. First, small travel agencies may have difficulty
securing airline override commissions or GDS incentive payments because of
sales
volume requirements. In addition, small travel agencies often must pay for
GDS service and equipment, while these fees are frequently waived for
agencies with high sales volumes. To survive, many smaller travel agencies
have become focused on niche travel markets* for example, regional travel,
hiking/ biking travel, and cruise line travel* and charge service fees to
clients. The availability of Internet distribution methods appears to have
positively affected Internet users. These methods provide fare and
schedule information to consumers, and provide consumers with a number of
Websites on which they can compare fare and schedule options. Moreover,
consumers who use the Internet have access to less expensive webfares
offered by the airlines. Airlines use such fares to encourage consumers to
use Internet travel sites, as they are less expensive to the airlines. For
instance, the results of a 2001 Forrester Research 25 survey of Internet
users, which the NCECIC included in their 2002 report to Congress and the
President, found that people who booked on line preferred doing so because
they can readily compare various on- line travel sites, as well as access
more diverse fares (i. e., webfares) than they can through a traditional
travel agent. Furthermore, on- line customers may also avoid the higher
ticketing fee that some travel agencies now charge (up to $50), although
many on- line travel agencies may charge their own smaller ticketing fees
($ 5-$ 10). Finally, the public perceives that booking on line is less
expensive than booking through a traditional travel agent. Conversely,
consumers purchasing tickets on airline Websites may not have complete and
unbiased information when booking flights, which is important in a
competitive industry. For example, Orbitz. com does not include schedule
and fare information for certain low fare airlines, such as Southwest and
JetBlue because these airlines have chosen not to participate.
25 Forrester Research is a firm that identifies and analyzes trends in
technology and their impact on business.
Travelers who choose not to buy airline tickets on line, or who do not
have Internet access, may be at a relative price disadvantage. Travelers
using a traditional travel agent may pay a service charge of up to $50. In
addition,
travelers who do not choose to use the now standard *electronic ticket*
may be charged an extra fee by the airline for a paper ticket. 26 And as
noted before, a travel agent may not have access to special webfares. 27
But travelers who do use traditional travel agents may benefit from the
added flexibility of being able to change their reservation. An on- line
travel
agency booking is often difficult to change, especially if it is a low
fare that is nonrefundable or subject to other restrictions. On the other
hand, with the power to change a booking through the GDS, travel agents
say they act as the consumer*s advocate with an airline, with consumers
benefiting from the detailed knowledge and personal interaction that a
travel agent can
provide. Business travelers are continuing to use traditional travel
agencies to manage their travel because of corporate travel policies,
including negotiated *private fares.* 28 According to the National
Business Travel Association, less than 10 percent of corporate travel is
booked through the
Internet and many corporations forbid their employees from booking travel
on the Internet, even if employees find a lower fare through that
distribution method. Corporate travel policies can limit the employees*
ability to use the Internet in booking travel because they often require
employees to use a contracted travel agency, through which they are booked
on corporate contract carriers. 29 26 Travel agency customers who accept
electronic tickets would not pay a fee for paper
tickets, but would still pay a service fee to the travel agent. 27 Some
airlines are offering traditional travel agents access to their
*webfares.* Through American Airlines* EveryFare(R) program, a travel
agent can access full fares in exchange for the travel agent picking up
some of the GDS booking fee. In addition, GDSs have created similar
programs in an effort to provide travel agents with greater access to
airlines* special fares. For instance, Sabre has created its *Direct
Connect Availability 3 year Option,* which rolls back approximately 12.5
percent off 2003 booking fee rates and freezes those rates for 3 years in
exchange for full content of the participating airlines* fares.
28 See app. II for more discussion of the effect of private fares on GDS
costs. 29 On- line business travel management services, such as Sabre*s
GetThere. com, are emerging. These services manage company travel,
including compliance with travel policies.
Sufficient Data Were Because we lacked access to proprietary company data
on costs and
Not Available to revenues, we could not develop the sort of evidence that
would allow us to determine whether GDSs exert market power in the airline
ticket Determine the
distribution industry. 30 Booking fees charged by GDSs to airlines have
risen Relationship between
over the past several years. From 1996 to 2001, the typical booking fee
paid Booking Fees and by a major airline has increased by 30. 9 percent,
from $3.27 in 1996 to $4.28 in 2001, a change greater than the overall
inflation rate (as measured by the
Costs and the Presence Gross Domestic Product chain- type price index) of
9.4 percent during this
and Use of Market same time period. According to GDS officials, during
this time period, the
services and products offered by GDSs were enhanced and deliver Power
substantial benefits to airlines (e. g., e- ticketing). Furthermore, one
GDS official estimates that about 40 percent of its self- reported
software development costs are meeting supplier (e. g., airlines) needs.
Because much financial information is proprietary, 31 we were therefore
unable to obtain a full breakdown of GDSs* costs in order to isolate the
specific costs directly associated with the booking function (*
transaction costs*). However, two GDS- reported costs associated with the
booking function for which we were able to get data both rose between 1996
and 2002: GDS computing costs (i. e., total data center operating costs)
and travel agent incentive payments.
Computing costs have increased but because of inconsistent data reported
by the GDSs, we were unable to determine the precise increase. However,
the GDS computing cost increase is in contrast to general industry
computing cost trends, which decreased by over 60
percent since the mid- 1990s. According to officials with the GDSs, their
computing costs per booking rose relative to commercial sector
30 The link between the price of a product and the cost of producing it is
an important element in determining the level of competition or exercise
of market power. Generally speaking, in competitive industries, revenues
are closely related to costs (including a reasonable profit margin).
Conversely, in industries that are less competitive, prices tend to
be higher than costs (including a reasonable profit) and output tends to
be less than in competitive industries. As demonstrated by their
Horizontal Merger Guidelines (United States Department of Justice and
Federal Trade Commission Revision to the Horizontal Merger Guidelines,
Apr. 8, 1997), the Department of Justice and others who analyze
competition and market power would also examine the structure of the
market, including the number of competitors, the ease with which new
competitors could enter the market, and other contributing or mitigating
factors in forming a conclusion about competition or market power. 31 See
app. I for more information on limitations associated with obtaining
proprietary data.
computing costs because (1) bookings have become more complex, requiring
more processing to complete and (2) the volume of transactions shopping
for low fares that do not result in a booking has
risen, especially for on- line travel agencies used by consumers. They
stated that the additional processing required offset any general decrease
in computing costs. 32 For example, airlines have offered more types of
fares to consumers (e. g., *private fares* available to large corporate
clients, government fares, and conference specials). Many of these fares
are stated as a percentage of the full coach fare, which airlines can
change several times daily. GDSs must quickly match the correct fare with
each customer for each specific flight. Moreover, GDS officials also
stated that airlines are keeping more detailed Passenger Name Records with
all reservations. The amounts of data that the GDSs track with these
records have also increased over time, as airlines have made efforts to
better serve passengers (e. g., frequent flyer accounts
and seating preferences). It is unclear how much of this increasing GDS
functionality, the costs of which are presumably passed on to the airlines
through increases in booking fees, adds value for the airlines. Some
airlines have complained that they do not need certain elements of the
increased functionality (e. g., seat maps) and are paying for something
they do not want at a time when they are struggling financially.
As discussed above, GDSs* incentive payments to travel agencies have
increased. GDSs provide incentive payments to travel agencies to reward
them for using their system. The largest travel agencies were able to use
their position in the industry between the GDSs and large
segments of the traveling public to convince the GDSs to provide increased
incentive payments. On average, incentive payments from GDSs to travel
agencies increased by over 500 percent from 1996 to
2002, rising from $34.9 million to $233.4 million. Computing costs and
travel agent incentive payments do not encompass all airline ticket
booking- related costs, and we were unable to get financial data on other
costs (e. g., booking- related hardware costs) related to GDSs* airline
ticket booking function, which might have allowed us to determine a
relationship between booking fees and related costs and to consider what
32 See app. II for further discussion of how GDS computing costs compare
to commercial sector computing costs.
the relationship indicated about the presence and possible exercise of
market power by the GDSs.
To identify other information about the possible existence and use of
market power, we reviewed the comments submitted to DOT since its November
2002 Notice of Proposed Rulemaking of the CRS rules. GDSs stated that they
do not have market power. However, some airlines contend that they do
operate under GDS market power. For example, America West
contends that each CRS exercises monopoly power over it. In its June 9,
2003, comments to DOT, DOJ concluded based on its market structure
analysis that despite the recent growth of Internet distribution, GDSs
continue to have market power over airlines. 33 DOJ found no evidence that
existing regulations designed to erode that power had succeeded in the
past or are likely to improve the situation in the future. Rather, they
concluded that many of the existing regulations have been ineffective in
reducing GDS market power, which derives from the inability of most
airlines to withdraw from any GDS. DOJ noted that while the CRS rules
have been effective in eliminating discriminatory pricing (charging
different fees to target specific airline competitors), it has not
prevented GDSs from charging fees above competitive levels. Nevertheless,
DOJ concluded that recent changes in the industry have eliminated the need
or
utility for most of the CRS rules and that anticompetitive practices be
enforced through case- by- case antitrust investigations. Concluding
A competitive airline ticket distribution industry, which includes the
Observations
airline, GDSs, and travel agent industries, continues to be important
because noncompetitive practices may adversely affect airlines and
consumers. Originally, the CRS rules were focused on reducing the market
power of airline- owned CRSs to prevent owner airlines from using the CRSs
to gain a competitive advantage over nonowner airlines. With the GDSs now
independent from the airlines, questions have been raised regarding the
GDSs* exercise of market power over all airlines. Among
other things, because GDSs do not compete with each other for airline
business, airlines and consumers may be subject to prices that are higher
than in more competitive markets. While our limited ability to get
complete booking cost and fee data from the GDSs did not allow us to
independently evaluate whether GDSs currently exercise market power, the
market
33 Reply Comments of the Department of Justice to DOT on the Notice of
Proposed Rulemaking Computer Reservation System Regulations, June 9, 2003,
p. 2.
position of large travel agencies or the overall performance of the
industry, evidence that we developed in this review provides suggestions
of both a functioning market and competitive flaws. On the one hand, our
review provides some indications of a market that is functioning and
adaptive. For example, the use of the Internet has grown significantly,
and overall prices for airlines for each form of distribution have fallen.
In addition, the development and evolution of Orbitz and expansion of
direct airline Internet booking reflects that at least some lower- cost
substitutes for GDSs have emerged. Airlines and other participants in the
ticket distribution system have developed an ability to use Internet
innovations to limit distribution expenses. Similarly, the Internet*s
ability to provide consumers with access to a wide variety of, often low
cost fares (i. e., transparency) has arguably benefited them.
On the other hand, our review also highlights issues that suggest the
continued possibility of GDS market power as well as the growing power of
large travel agencies. The structure of the industry, in which airlines
are dependent upon the GDSs to obtain ultimate access to large portions of
travel agents and potential passengers (especially high yield business
traffic), perpetuates the potential for the existence and exercise of
market power by GDSs. Although Orbitz may offer a technological substitute
that mitigates the market power of GDSs for some airlines, Orbitz*
relationship with major airlines has raised different concerns about the
potential for owner airlines once again using their ownership position to
distort airline competition. Our review also indicates that the largest
travel agencies, upon whom both airlines and GDSs depend to reach a large
percentage of the higher- paying business travelers, currently have
considerable leverage in the industry. This leverage is reflected by their
ability to obtain rising incentive payments from GDSs as well as
commission and override payments from airlines.
The innovation that has occurred in the airline ticket distribution
industry- particularly the growth of the Internet* is noteworthy. These
innovations occurred under the framework of federal regulations, which DOT
is currently reviewing. DOJ stated that some of these rules have failed to
accomplish their goals and therefore need to be removed. At the same time,
DOJ*s antitrust review of Orbitz continues. Thus, the federal interaction
with the industry continues on both an industry- wide and case- by- case
basis. At the same time, it will be important to continue monitoring how
developments in the industry affect competition and consumers.
Agency Comments We provided a draft of this report to DOT for review and
comment. DOT provided us with technical comments, which we incorporated
where
applicable. We also provided relevant sections of this report to DOJ, the
three major U. S. GDSs, Orbitz, and most major U. S. airlines for review.
These organizations provided technical corrections, which we incorporated
as appropriate.
We will send copies of this report to the Honorable Norman Mineta,
Secretary, Department of Transportation. We will make copies available to
others on request. In addition, the report will be available at no charge
on
our Website at www. gao. gov. If you or your staff have any questions
about this report, please call me at (202) 512- 2834. I can also be
reached at HeckerJ@ gao. gov, or Steve Martin at MartinS@ gao. gov.
Appendix III lists key contacts and key contributors to this report.
JayEtta Z. Hecker Director, Physical Infrastructure Issues
Appendi Appendi xes x I
Objectives, Scope, and Methodology This report examines three questions:
What have been major changes in the airline ticket distribution industry
since the late 1990s, and how did these changes affect airlines? How
have these changes in the airline ticket distribution industry
affected travel agents and consumers? What does the relationship between
global distribution system*s booking fees and booking- related costs
suggest about the presence and
use of market power? We limited the scope of this review to the three
global distribution systems (GDS) that handle over 90 percent of U. S.
airline bookings. These three GDSs are Galileo, Sabre, and Worldspan. We
excluded other GDSs that operate predominantly in other countries. Those
excluded from this review include Abacus, Amadeus, Axess, Infini, and
Topas. In addition, we did not have access to the individual contracts
between the various industry entities; and therefore, the descriptions of
the relationships are generalizations.
To determine how the airline ticket distribution industry has changed and
the effects on airlines since the late 1990s, we analyzed industry booking
trend and cost data (e. g., airline and GDS payments, annual airline
expenditures per distribution method). These data are proprietary, so we
agreed to aggregate them so that no private company materials or
information would be publicly disclosed in an identifiable form.
Consequently, all data are reported in averages. Furthermore, since these
data are proprietary, we were unable to independently verify them because
we have no authority to require access to the underlying data. However, we
applied logical tests to the data and found no obvious errors of
completion or accuracy. Along with our use of corroborating evidence, we
believe that the data were sufficiently reliable for our use. In addition,
we examined
documents from the Department of Transportation (DOT). We interviewed DOT
officials, Department of Justice (DOJ) officials, industry experts, the
three domestically based GDSs, seven major airlines, and four travel
agencies (e. g., a small traditional travel agency, and the three leading
on- line travel sites* Travelocity, Expedia, and Orbitz). We attempted to
interview all of the major travel agencies, but the top three would not
agree to meet with us. In addition, we were unable to obtain any airline
or GDS cost data related specifically to those travel agencies.
To describe how changes in the airline ticket distribution industry have
affected travel agents and consumers, we analyzed travel agent data (e.
g., sales and revenues). We obtained these data from the National
Commission to Ensure Consumer Information and Choice (NCECIC), a
commission authorized under Section 228 of the Wendell H. Ford Aviation
Investment
and Reform Act for the 21 st Century (P. L. 106- 181, AIR- 21) to study
two distinct issues* first, the current state of the travel industry, and
the impact of changes in the industry on consumers; and second, the
potential for impediments to distribution of information to cause injury
to agencies and consumers. We contacted the Airline Reporting Corporation
(ARC), the source of the NCECIC travel agent data, to clarify the nature
of the data and thus we decided the data were reliable for our purposes.
Lastly, we interviewed travel agents, industry group representatives, and
officials from the NCECIC.
To determine the relationship between GDSs booking fees and bookingrelated
costs and what it may suggest about the presence and use of market power,
we analyzed GDS booking fee and cost data (e. g., computing costs and
travel agent incentives). We obtained these data from the three U. S.
GDSs. Since these data are proprietary, we agreed to aggregate them so
that no private company materials or information would be publicly
disclosed by us in an identifiable form. Consequently, all data are
reported in averages. Furthermore, since these data are proprietary, we
were unable to independently verify them because we have no authority to
require access to the data. However, we applied logical tests to the data
and found no obvious errors of completion or accuracy. We believe that the
data are sufficiently reliable for our use. We analyzed specific booking
fee- related
costs that were available to us* computing costs and travel agent
incentive payments. Computing costs are based on data center operations
costs, including hardware, software, leases, and personnel costs. We
compared trends in these computing costs with industry computing cost
trends using mainframe data center costs from the Gartner Group, a well-
known
research and advisory firm that helps its clients understand technology
and drive business growth.
We were limited in our review because we did not have full access to
proprietary data. One of the GDSs (Worldspan) is privately held and does
not file financial data with the U. S. Securities and Exchange Commission
(SEC). Although Sabre and Galileo are publicly held and file financial
data
with the SEC, they are not required to disaggregate cost data. Moreover,
it is difficult to compare even the data that Sabre and Galileo did
provide, since they may report their costs differently, as the Generally
Accepted
Accounting Principles allow companies to allocate costs in various ways.
Therefore, we were not able to obtain complete and detailed data from the
GDSs on all costs directly related to booking transactions. However, we
did review the comments that were submitted to DOT regarding its review of
the CRS rules. Prominent among those were the June 9, 2003, DOJ
comments, which were based on DOJ*s expert, market structure analysis. We
also discussed with DOJ the comments they submitted. In addition, we
sought cost and booking data that dated from 1978 to the present. However,
no airline was able to provide data for a time earlier than 1996.
Consequently, we limited our review to the 4 years covering the period
1999 to 2002. We conducted our review between September 2002 and July 2003
in accordance with generally accepted government auditing standards.
Computing Cost Trends at Global Distribution
Appendi x II
Systems According to the Gartner Group, 1 overall mainframe data center
costs continued to decrease every year from 1994 through 1998. 2 The
Gartner Group found that on a per- millions- of- instructions- per- second
(MIPS) basis (a common measure of usage), data center costs have decreased
during the same time period. Our analysis of the global distribution
systems (GDS) per
MIPS computing cost (cost per MIPS) suggests that GDS per MIPS costs also
decreased from 1995 through 2002. Thus, on a per MIPS basis, the general
trend of computing costs incurred by the GDSs seem to be consistent with
the industry trend reported by Gartner Group for the years 1994 through
1998.
For technology- based companies like GDSs, an important cost measure is
the computing cost per booking. This measure is significant because GDSs
generate revenue largely based on the volume of booking transactions
processed. On an annual basis, we found that the computing cost per
booking increased slightly over the years 1996 and 2001, the years for
which we had relevant data from most of the GDSs. According to the GDSs,
the per- booking computing cost has risen because each booking has become
more complex over time, requiring more processing* more MIPS* to complete
a booking, thereby more than offsetting any decrease in per MIPS computing
costs. One way to explain the increasing complexity of bookings is through
the number of messages that are required to complete a booking. A message
is typically a single command typed by a travel agent in a GDS reservation
system. A message is sent every time a travel agent types a command and
hits the Enter key on the keyboard. For example, for one GDS, the number
of instructions needed to process each message increased by 58 percent
from 1999 to 2002. For that GDS, the average number of messages required
for each booking increased by 118.6
percent from 1993 to 2002. In addition, a message can be very simple (e.
g., what gate is flight 442 scheduled to arrive at in Dallas today) or
very complex (e. g., what is the cheapest itinerary available to fly
roundtrip between Los Angeles International Airport and any of New York
City*s three major airports, departing next Tuesday morning).
1 The Gartner Group is a well- known research and advisory firm that helps
its clients understand technology and drive business growth. 2 For the
years 1994 through 1998, the Gartner Group analyzed the costs of operating
a typical mainframe data center using a budget model that included seven
key areas:
hardware, software, business resumption, occupancy, operations, technical
services, and finance and administration.
Appendi x III
GAO Contacts and Staff Acknowledgments GAO Contacts JayEtta Z. Hecker
(202) 512- 2834 Steven C. Martin (202) 512- 2834 Acknowledgments In
addition to those individuals named above, Naba Barkakati, Triana Bash,
Carmen Donohue, Brandon Haller, David Hooper, Joseph Kile, Sara
Moessbauer, and Alwynne Wilbur made key contributions to this report.
(544055)
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Report to Congressional Requesters
July 2003 AIRLINE TICKETING Impact of Changes in the Airline Ticket
Distribution Industry
GAO- 03- 749
Contents Letter 1
Results in Brief 3 Background 5 Major Changes Occurred in the Use of the
Internet and Travel Agent
Compensation in the Airline Ticket Distribution Industry 14 Changes in the
Airline Ticket Distribution Industry Appear to Have
Benefited Very Large Travel Agencies and Consumers Who Use the Internet 28
Sufficient Data Were Not Available to Determine the Relationship
between Booking Fees and Costs and the Presence and Use of Market Power 32
Concluding Observations 34 Agency Comments 36
Appendixes
Appendix I: Objectives, Scope, and Methodology 37
Appendix II: Computing Cost Trends at Global Distribution Systems 40
Appendix III: GAO Contacts and Staff Acknowledgments 41 GAO Contacts 41
Acknowledgments 41
Figures Figure 1: Summary of Historic Airline Ticket Distribution
Relationships Prior to the CRS Rules 8
Figure 2: CRS Relationships with Travel Agencies and Airlines 10 Figure 3:
Summary of Historic Airline Ticket Distribution
Relationships under the CRS Rules 12 Figure 4: U. S. Domestic Booking
Share of Global Distribution Systems Bookings, 2002 13
Figure 5: Average Airline Booking Costs Per Distribution Method, 1999-
2002 20 Figure 6: Average Airline Bookings Per Distribution Method,
1999- 2002 21 Figure 7: Number of Airline Tickets Processed through and
outside
GDSs, 1999- 2002 23 Figure 8: Average Annual Airline Total Distribution
Costs,
1999- 2002 25 Figure 9: Average Payments to U. S. Travel Agents by Each
GDS,
1995- 2002 26
Figure 10: Summary of Payment and Fee Flows in the Current Distribution of
Airline Tickets 27 Figure 11: The Number of Travel Agencies, by Amount of
Annual
Revenue and Volume of Air Travel Sales 29
Abbreviations
CRS Computer Reservation System DOJ Department of Justice DOT Department
of Transportation GAO General Accounting Office GDS Global Distribution
System NCECIC National Commission to Ensure Consumer Information and
Choice in the Airline Industry
This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
Letter
July 31, 2003 The Honorable Mike DeWine Chairman, Subcommittee on
Antitrust, Competition Policy and Consumer Rights Committee on the
Judiciary United States Senate The Honorable Herbert Kohl Ranking Minority
Member, Subcommittee on Antitrust, Competition Policy and Consumer Rights
Committee on the Judiciary United States Senate In 2002, when major U. S.
airlines posted net operating losses of almost $10 billion, they paid
approximately $7.3 billion to distribute tickets to consumers. Of these
total distribution expenses, airlines paid hundreds of millions of dollars
in booking fees to global distribution systems (GDS)* the companies whose
computer systems display airline flight schedule and fare information so
that travel agents can query it to *book* (i. e., reserve and purchase)
flights for consumers. Although distribution costs represent relatively
small amounts of an airline*s total costs (labor and fuel represent nearly
half an airline*s expenses), ensuring a competitive distribution system is
important to the industry because it represents the link between airlines
and the traveling public. In the United States, three domestic global
distribution systems dominate the industry. Traditionally, each time a
consumer purchases an airline ticket through a travel agent, the global
distribution system used by the travel agent charges the airline a set
booking fee. Concerns have been raised that the global distribution
systems may exercise market power over the airlines because most major
carriers are still largely dependent on each of the global distribution
systems for distributing tickets to different travel agencies and
consumers. Market power, which can arise where competition is lacking, may
result in high, noncompetitive fees charged for services or goods. In this
case, market power may be indicated by booking fees that bear little
relation to
booking costs. The precursors to global distribution systems, called
computer reservation systems (CRS), were owned by the airlines. Since
1984, rules enforced by the Department of Transportation (DOT) have
regulated the conduct of these systems to prevent airline owners of
computer reservation systems from using their influence to benefit
themselves by reducing competition
from other airlines, which could ultimately harm consumers. DOT
regulations, commonly referred to as the *CRS rules,* were developed to
prevent airlines that owned a computer reservation system from biasing the
information on flights and fares that consumers received in order to
impede competition. Effectively, the rules, which apply to computer
reservation systems and global distribution systems, ended bias in the
computer screen display of information that was used by travel agents to
book tickets and now require major U. S. airlines to "participate" equally
in each global distribution system. They also require computer reservation
systems to charge airlines similar booking fees for similar levels of
service,
which limited airlines* ability to negotiate over booking fees. As of July
2003, when most airlines have sold off their shares in global distribution
systems and the global distribution systems have become independent
entities, DOT was reviewing the CRS Rules to determine if and how they
should be revised. Many parties provided comments with differing opinions
to DOT. Department of Justice officials stated that the global
distribution systems have had and continue to have market power over the
airlines. In light of the airlines* dependence on the global distribution
systems
during this time of unprecedented financial losses, and in the context of
the ongoing debate on the CRS rules, you asked us to examine issues
related to the airline ticket distribution industry. As agreed with your
office, this
report focuses on the following questions: What have been major changes
in the airline ticket distribution industry
since the late 1990s, and how did these changes affect airlines? How
have these changes in the airline ticket distribution industry
affected travel agents and consumers? What does the relationship between
global distribution systems*
booking fees and booking- related costs suggest about the presence and use
of market power?
To determine how the airline ticket distribution industry has changed and
the effects on airlines since the late 1990s, we analyzed aggregated
proprietary industry booking trend and cost data; examined DOT documents;
and interviewed officials with the global distribution systems,
several major airlines, and other industry experts. To describe how
changes in the airline ticket distribution industry have affected travel
agents and consumers, we analyzed travel agent and consumer ticketing fee
data; reviewed major airline and various travel agency consumer fee
policies;
and interviewed travel agents, industry group representatives, and DOT
officials. To determine what the relationship between global distribution
systems* booking fees and related costs indicated about the presence and
use of market power, we analyzed and compared data on global distribution
system operating cost data, certain booking- related costs, and booking
fees. To protect the confidential proprietary nature of individual global
distribution system and airline information, we reported all costs and
fees in terms of averages calculated from the companies that provided
data. We limited the scope of this review to the three major U. S. global
distribution systems-- Galileo, Sabre, and Worldspan. These three systems
handle 92 percent of the U. S. bookings. We were limited in our review
because we did not have full access to proprietary airline, global
distribution system, and travel agent data. However, we reviewed the
comments submitted to DOT as part of its CRS rulemaking, including those
of the Department of Justice*s (DOJ) Antitrust Division -- government
antitrust experts who conducted a market structure analysis of the ticket
distribution system. We also discussed those comments with officials from
the Antitrust Division. Because of a lack of historical data, we limited
our review to the 4 years covering the period 1999 through 2002. Appendix
I contains additional information on the objectives, scope, and
methodology of this review.
Results in Brief Two major changes have occurred in the airline ticket
distribution industry as airlines began to sell their shares in the global
distribution systems in the
mid- 1990s, and these changes have helped airlines to cut distribution
costs. First, airlines have created and provided incentives to expand
the use of
various types of Internet- based applications that can bypass global
distribution systems and their associated booking fees. These include
airline Websites (e. g., www. continental. com), which bypass global
distribution systems by using the airlines* own internal reservation
systems, and Orbitz, a travel technology company developed by a consortium
of large U. S. airlines that has recently developed technology that allows
it to book tickets without using a global distribution system. Other
Internet- based travel agencies (e. g., Expedia, Priceline, or
Travelocity* a subsidiary of one of the global distribution systems) use
global distribution systems to book tickets but nevertheless cost airlines
less than traditional travel agencies. Through various incentives,
airlines have encouraged some passengers to book a growing portion of
tickets on less costly Internet- based booking sites.
Second, in another effort to cut distribution costs, airlines cut their
sales commissions to travel agents. In response to overtures by the large
travel agencies, on whom global distribution systems depend to reach large
numbers of consumers, global distribution systems subsequently increased
sales incentive payments to travel agencies. At the same time, both large
and small travel agencies began charging consumers ticketing fees.
Airlines, however, continue to provide commission payments,
particularly to the largest travel agencies* both traditional and
Internetbased. These changes have helped major airlines to reduce their
total distribution costs by 25.8 percent, from 1999 to 2002, from an
average of $732.9 million to $543.6 million, or 43.6 percent on a per
booking basis. However, airlines continue to depend on global distribution
systems to reach consumers, because over 60 percent of bookings (including
the majority of all traditional travel agency bookings and some Internet-
based bookings), and
nearly all the relatively high yield business traffic, continue to be
processed by global distribution systems. Furthermore, airlines continue
to need to subscribe to each of the global distribution systems, and no
new entry has occurred since the enactment of the rules in the 1980s to
reduce the market power of each global distribution system.
These changes in the airline ticket distribution industry* the growing
significance of the Internet and shifts in the payments to travel agents-
appear to have benefited very large travel agencies (those with more than
$50 million in annual air travel sales revenue) and consumers who use the
Internet. Very large travel agencies* whose total annual sales have almost
doubled since 1995-- appear to have benefited from a combination of
increasing global distribution system incentive payments, some continued
airline sales commission payments, and customer service fees. In contrast,
total annual sales at small travel agencies (those with less than $2
million in annual air travel sales revenue) decreased by 32 percent since
1995, driven in large part by a shift toward on- line bookings by leisure
consumers. Consumers who use the Internet may benefit from being able to
independently access and compare airline ticket pricing and scheduling
information, as well as from being able to access special low fares
available only on the Internet. Consumers who do not use the Internet may
be at a disadvantage in not having access to Internet- only fares and in
having to pay relatively higher travel agent service fees. But they may
have more flexibility regarding schedule changes, and they may benefit
from travel
agents* industry expertise.
Because we lacked access to proprietary company information, we could not
determine whether the relationship between global distribution system
booking fees and related costs suggest that global distribution systems
exert market power in the airline ticket distribution industry. In
response to your request, we found that global distribution system booking
fees rose by nearly 31 percent between 1996 and 2001. Of total global
distribution system costs, two costs available to us that relate
specifically to the
booking function* computing costs (i. e., total data center operating
costs) and travel agency incentive payments* have increased during the
same time period. The precise rate of increase for computing costs is
difficult to determine because global distribution systems do not report
the data in the
same way, but the incentive payments to travel agencies by global
distribution systems is measurable and it has increased by an average of
over 500 percent. However, we could not obtain data on all expenses
related to the booking function (e. g., software development costs), and
thus could not accurately compare total booking costs to booking fees.
Consequently, we are not able to independently assess whether the booking
fees are indicative of the existence and use of market power by global
distribution systems over airlines. On June 9, 2003, the Department of
Justice, based on its antitrust analysis of the industry, offered
conclusions to DOT about the existence of market power in the industry as
part of its ongoing review of the CRS rules. Justice concluded that
despite recent growth of Internet ticket distribution, the GDSs continue
to have market power over the airlines and the CRS rules do not prevent
them from charging airlines fees above competitive levels. DOT and DOJ
provided us with technical comments, which we incorporated as appropriate.
Background An airline *booking* occurs when a passenger reserves and
purchases a seat for a trip. In 2002 in the United States, an estimated
255 million
passengers flew more than 611 million flight segments (e. g., a traveler
who flew between Baltimore, Maryland, and Portland, Oregon, who connected
over Chicago both outbound and inbound represents a single passenger that
flew four flight segments). Information included in the booking consists
of the traveler*s name; an address; price and billing information; the
full itinerary origins, destinations, and possible connecting airport with
flight numbers and times; and perhaps other information as well, such as
loyalty program (i. e., frequent flyer) information, including program
status or seat and meal preferences. When a booking is entered in a
computer system by a traditional travel agent, it is created in a GDS. The
GDSgenerated booking is then sent to the airline*s internal reservation
system.
The GDS charges an airline a *booking fee* based on the total number of
flight segments in the traveler*s itinerary. 1 For example, if a booking
fee is $4 per segment and a passenger reserves and purchases an itinerary
that consists of four flight segments (an outbound flight that connects
over an airline*s hub to the ultimate destination and two similar return
flights), the
airline will be charged approximately $16 in booking fees. Changes made to
the booking may cost extra for the airline. For example, if a passenger
changes the day of his return flight, the airline may be refunded all but
a fraction of its booking fees for those segments, and charged again for
the booking of the new segments. 2
Sometimes, a passenger may book an itinerary with an airline through a
traditional travel agent, but may choose not to pay for the ticket pending
a final decision on the trip. Such cases are called *speculative* or
*passive bookings.* In an effort to maintain the booking as a service to
the potential
customer, a travel agent may continue to cancel and re- book the
itinerary. 3 Each cancellation and re- booking costs the airline
(sometimes cancellations and re- bookings result in *churn*). The final
cost to the airline is called a *net booking fee.* 4
The precursors to GDSs, CRSs, first automated the selling of airline seats
and the tracking of flight and schedule information for use by airline
employees in the late 1960s. Beginning in the mid- 1970s, these systems
were offered to travel agencies. These CRSs were owned by (i. e.,
vertically integrated with) the airlines. American Airlines and IBM
jointly developed a system called Sabre (Semi- Automatic Business Research
Environment) to automate American*s bookings. United Airlines and TWA
followed with
1 Travel agents and consumers shop using a GDS without charge. Much data
processing occurs to support this shopping process, which may or may not
result in a booking. 2 Airlines may be refunded for a cancelled segment by
all but 40 cents of the booking fee. Using the above example (four flight
segments for $16), a change to the passenger*s return
date (i. e., a change to two segments) would finally cost the airline
$16.80. 3 The inventory has already been deducted from the carrier host
system, so the travel agent enters the flight segment data into the CRS
using transaction codes that may not generate a message to the carrier
advising of the sale. The travel agent must then notify the carrier either
by phone or by sending a GDS message that they now have control of the
booking. 4 Airlines can avoid churn by requiring payment at the time of
the original booking, but some
airlines make a business decision to allow passive bookings with
traditional travel agents in order to potentially secure the passenger*s
business.
Apollo and PARS, respectively. 5 Delta and Eastern followed with DATAS II
and System One, respectively. These CRSs replaced manual booking systems,
and thus allowed the airlines to quickly and reliably process a large
number of transactions. By extending use of the systems to travel
agencies, airlines were able to reduce expensive telephone calls from
travel agencies to airline reservation offices and were able to offer real
time access to fares and inventory to its agency partners, improving the
marketability of their services. Under airline ownership, certain CRS
practices created competitive disadvantages for some carriers and often
did not expose consumers to all available carrier options and prices.
Before the industry was deregulated in 1978, interline travel-* a practice
in which passengers fly on more than one airline to reach a destination--
was common. 6 To serve passenger needs, travel agencies also needed CRSs
to provide information and booking capabilities on all airlines. However,
CRSs did not treat every airline
equally. An airline with its own CRS (* owner airline*) did not pay fees
for
booking passengers through that CRS, and it displayed schedule information
in a way that favored its own flights at the expense of these other
airlines* even if other airlines offered more direct service between two
cities at less cost to the traveler. Typically, an owner airline would
market its CRS to travel agencies in cities where it flew a significant
number of flights.
In the early 1980s, to expand CRS- travel agent market share in cities
where they provided limited air service, owner- airlines developed
*cohost* programs with other airlines that had a significant presence in
targeted cities. In exchange for discounts on fees for bookings made on
5 By 1988, five CRSs were in use by travel agents: Sabre, owned by
American Airlines; Apollo, principally owned by United with a consortium
of other airlines; PARS, owned by TWA and Northwest; System One, owned by
Texas Air Corp., which acquired Eastern Airlines and its system; and DATAS
II, owned by Delta Air Lines. Apollo since became Galileo. PARS and DATAS
II since became Worldspan. System One was acquired by Amadeus, the largest
foreign- based GDS. Since the mid- 1990s, all major airlines have fully
sold their interest in the GDSs.
6 Interline agreements between airlines provide for the mutual acceptance
by the participating airlines of passenger tickets, baggage checks, and
cargo waybills, as well as establish uniform procedures in these areas.
These agreements are common, but not universal, among the major U. S.
airlines. Interline agreements typically do not include reciprocal
frequent flyer and airport lounge rights.
that CRS and for more prominent display of its flight information on the
CRS computer screen, the co- host airline would market the owner airline*s
CRS to its local travel agencies.
Other airlines that were not co- hosts (* subscriber airlines*) would
pay higher fees for any booking made on that CRS and continued to be
disadvantaged by a bias in the display of their available flights.
In essence, airline owners of CRSs used them to gain an unfair advantage
in the marketplace, and struck deals with certain airlines giving them
competitive advantages over other airlines. Figure 1 illustrates the
typical
financial transactions that took place among airlines, CRSs, travel
agencies, and consumers prior to the enactment of the CRS rules.
Figure 1: Summary of Historic Airline Ticket Distribution Relationships
Prior to the CRS Rules Owner airlines had an incentive to service as many
travel agencies as
possible in order to gain greater booking share. This, in part, is because
CRSs benefit from economies of scale: CRS profits increase as passenger
traffic and bookings increase, and both of those depend on access to more
travel agents. While CRS market positions tend to be strongest in specific
geographic areas consistent with their airline owners* markets (and any
markets they were able to negotiate from nonowner, or co- host, airlines),
each U. S. GDS has developed a national, and subsequently, global
footprint. In addition, owner airlines also recognized that travel agents*
familiarity and comfort with their CRSs produced something of a halo
effect that gave owner airlines a greater share of bookings. While
airlines paid commissions to travel agencies based on the value of the
purchased tickets, carriers also encouraged travel agents to make
additional passenger bookings by paying commission *overrides* to travel
agencies for surpassing set sales goals. 7 Though three domestic CRSs
existed, an individual travel agent office
typically relied on only one system. This was due in part to the
multiyear, often exclusive, contracts under which they historically
operated with CRSs. Using more than one system was also inefficient from
the standpoint of most travel agents. These structural relationships
produced two major effects: Because airlines* dependent on the systems*
paid the booking fees,
rather than the other users of the systems (travel agents and, ultimately,
consumers), there was no competitive pressure constraining CRS booking
costs. Airlines had little choice except to participate in each CRS, and
CRSs
did not have to compete for airline participants. As DOJ stated in
comments submitted to DOT in 1989, each CRS constituted a separate market
for air carriers because of the near- exclusive relationship with separate
groups of travel agencies, and each is a monopolist with market power over
carriers that want to sell tickets in areas where the CRS has a
significant number of travel agencies. Thus, unless an airline was willing
to forego access to those travel agencies and the consumers
they served, it needed to participate in every CRS. To illustrate,
consider Sabre*s relationship with American Airlines, and Galileo*s
relationship with United Airlines. Because American has significant
operations in the Dallas/ Ft. Worth area, many travel agencies in Texas
historically subscribed to Sabre, while United has similarly significant
operations in Chicago and many travel agencies there likely were Galileo
users. However, because American wanted to be available to travel agencies
located in United*s traditional territory that subscribe to
7 An override commission is a payment made based on the travel agency
meeting a set goal of sales.
Galileo, it had to use Galileo as a CRS, as with other GDSs. Similarly,
United wanted to be available to travel agencies in what was historically
dominated by American in Texas and therefore had to be available on Sabre.
Figure 2 illustrates the exclusive relationships that CRSs had with
travel agencies, and the airlines* dependence on each CRS to reach the
most number of travel agencies.
Figure 2: CRS Relationships with Travel Agencies and Airlines
Prior to the enactment of the CRS rules, consumers only paid airfare,
regardless of the complexity of the itinerary. Presumably, those airfares
reflected the airlines* total costs, including overhead expenses
associated with ticket distribution.
In 1984, the Civil Aeronautics Board (CAB), in one of its last official
acts, adopted CRS rules to protect consumers and help ensure fair
competition among airlines. The goal of these rules was to dissipate or
constrain the
power of the airlines and their CRSs to manipulate the competition for
passenger traffic. DOT inherited the CAB*s duties, and in 1992 found that
the rules were still necessary. DOT concluded that without them, CRS
owners could use their control of the systems to prejudice airline
competition, and the systems could bias their displays of airline
services. 8 Three main requirements in the CRS rules attempt to ensure
that each owner airline and its CRS would treat other airlines equitably:
Screens displaying flight information are not to favor one airline over
another (* unbiased screens*); For the same level of service, prices for
bookings must be the same for
all airlines, including owner airlines, eliminating differences such as
cohost or subscriber airlines (* price nondiscrimination*); and
The *mandatory participation* rule requires airlines with a 5 percent
ownership interest or more in a CRS (* owner airlines*) to participate in
competing systems at the same level at which it participates in its own
system. 9 Figure 3 illustrates how the airline ticket distribution
industry changed after the implementation of the CRS rules.
8 57 Fed. Reg. 43780, September 22, 1992. 9 The mandatory participation
rule does not preclude nonowner airlines from participating in CRSs to
varying extents. Fees paid per booking depend on an airline*s
participation level. For instance, according to information from Sabre,
its simplest participation level** Basic Booking Request** costs an
airline $2.12 per segment. Sabre*s highest level of participation** Direct
Connect Availability** costs an airline $4.39 per segment.
Figure 3: Summary of Historic Airline Ticket Distribution Relationships
under the CRS Rules DOT*s 1992 revisions to the CRS rules included a
sunset date of December
31, 1997, which DOT subsequently extended to January 2004. DOT is
currently reviewing additional possible revisions to the CRS rules.
As CRSs evolved as corporate entities, they added other lines of business
to the original airline ticket booking function. They currently book not
only airline reservations, but also hotel, rental car, train, tour, and
cruise reservations. CRSs also sell other professional services to
airlines, such as software and Information Technology services for
personnel and aircraft scheduling, and for baggage handling. CRSs provide
outsourced internal reservation systems for airlines, as well. In the
expansion of their activities they became known as GDSs, reflective of the
increasingly international and diverse nature of travel they encompassed.
Since the mid- 1990s, U. S. airline owners have sold their shares in their
GDS
businesses. Three domestic GDSs have evolved to dominate the U. S. travel
agent market: Sabre, Galileo, and Worldspan. Sabre became a separate legal
entity of AMR Corp. (American Airlines* parent company) in July of 1996,
followed by an initial public offering of Sabre in October 1996; it has
since been fully divested by AMR Corp. In 1997, Galileo International
became a publicly traded company, and in 2001 became a subsidiary of
Cendant Corp. Worldspan was sold in June 2003 to private investors. These
changes ended the vertical integration of these airlines and GDSs. Figure
4 illustrates the GDS shares for all U. S. domestic bookings that relied
on a GDS in 2002. 10 Figure 4: U. S. Domestic Booking Share of Global
Distribution Systems Bookings,
2002
Note: All figures are approximations. a *Other* refers to all
internationally based GDSs, such as Amadeus, Abacus, Axess, Infini, and
Topas.
Amadeus* booking share is about 8 percent, while the remaining
international GDSs comprise less than 1 percent of total U. S. bookings.
10 The scope of this report is focused on domestic global distribution
companies and we therefore do not include foreign companies, such as
Europe- based Amadeus, in our review. For more information on the scope of
our review, see app. I.
Major Changes Since the airlines began selling their shares in the GDSs in
the mid- 1990s,
Occurred in the Use of the ticket distribution system has undergone two
major changes. These
changes have helped airlines, faced with generally high operating
expenses, the Internet and Travel
cut distribution costs. First, airlines and others have increasingly sold
and Agent Compensation in
processed tickets through Internet- based applications (e. g., airline the
Airline Ticket
Websites, on- line travel sites), some of which bypass GDSs. These
distribution methods are less expensive to the airlines than traditional
Distribution Industry travel agencies. Second, airlines have reduced
commission payments to
travel agents. At the same time, in response to overtures by large travel
agencies, GDSs partially offset that reduction in airline commission
payments by significantly increasing incentive payments to travel agents,
on whom they depend to reach a large number of consumers. 11 In part,
these changes have enabled major airlines to reduce their total
distribution costs by 25.8 percent from an average $732.9 million in 1999
to $543.6 million in 2002, or 43.6 percent on a per booking basis. 12
However, these changes have not eliminated the airlines* dependence on the
GDSs for the selling of air tickets. Airlines continue to need to
subscribe to each GDS to reach the universe of travel agents and potential
consumers. Internet Sites That Cost
Airlines have developed new Internet- based ticket booking processes that
Airlines Less Are
bypass GDSs and their associated booking fees. Others have developed
Increasingly Used to Book Internet- based travel agencies that use GDSs to
book tickets but whose
Tickets, Some without the bookings still cost airlines less than tickets
booked through traditional
travel agents. An increasing percentage of tickets are booked through the
Use of Global Distribution
Internet, and an increasing percentage of bookings are made without the
Systems
use of GDSs. Airlines are Using New
The airlines have used the Internet to change the way bookings are
Processes to Bypass the GDSs
processed by creating ways to work around the GDSs and their booking and
their Fees fees. Airlines have developed two basic ways to use the
Internet to avoid the cost burden associated with standard GDS booking
fees.
First, airlines have developed their own Websites (e. g., www.
continental. com) that allow consumers to reserve and book seats 11 We do
not have access to the individual contracts between various travel agents
and airlines. Therefore, these descriptions are general and may not be the
case for all airlines. 12 Examples of other airline cost- cutting efforts
include a reduction of labor costs.
A
directly with airlines. Bookings made through these sites do not use a GDS
booking function, and therefore do not incur booking fees. Rather,
airlines maintain pricing, flight, and seat availability in their own
internal reservation systems. For example, a booking made through
Continental*s Website is processed by a data vendor that is not a GDS.
Bookings made when a consumer telephones an airline*s *call center* (e.
g., via a toll- free
number such as Continental*s 1- 800- 523- FARE) are also routed through
that same vendor. 13 But, unlike call centers that rely on personnel to
process bookings, airline proprietary on- line site bookings are processed
electronically and therefore incur lower labor costs.
Second, five major U. S. airlines collectively underwrote the development
of a travel technology company called Orbitz. Because consumers can go to
the Orbitz Website (www. orbitz. com) to query fare and schedule
information for most major airlines as well as to book and purchase
tickets, it performs similar functions as a travel agent. Orbitz now has
two methods by which it books tickets, one of which uses a GDS and one of
which bypasses GDSs and their associated booking fees.
Originally, and in many cases still, Orbitz uses the Worldspan GDS to
obtain airline availability data and to place the booking, and airlines
pay booking fees to Worldspan for tickets booked in this manner. Orbitz
receives volume- based rebates from Worldspan, flat transaction fees
(approximately $5. 34 charter associate fee or $10 per ticket from
noncharter associates) from airlines, and it charges fees to consumers ($
6
per ticket). 13 Some airlines* internal reservation systems are *hosted*
by various GDS* data processing systems. Reservations and other
transactions initiated by the hosted airline*s employees and the airline*s
branded Websites (e. g., AA. com) are covered by a separate technology
services agreement different from the agreement that covers the
distribution of the airline*s inventory to the GDS agency subscribers (i.
e., Participating Carrier Agreement). The compensation to the GDS for such
technology services is separate from the booking fees described earlier
and may take several forms, including a fee per transaction, a fee per
computer message and a fee per information technology capacity unit
utilized and also include separate charges for software development
services.
a
GAO United States General Accounting Office
Since the mid- 1990s, two major changes occurred in the airline ticket
distribution industry, and these have produced cost savings for some major
U. S. airlines. First, airlines developed less expensive Internet
ticketing sites that bypass global distribution systems and their fees and
encouraged passengers to book via Internet sites. Between 1999 and 2002,
on average, the percentage of tickets booked on- line, including airline-
owned Websites and on- line travel agencies, grew from 7 percent to 30
percent. Second, in a related effort to trim costs, airlines cut the
commissions they traditionally paid to travel agencies. However, these
changes have not eliminated airline dependence on global distribution
systems.
Less expensive Internet- based airline bookings have increased over time
These changes have had mixed effects on travel agents and consumers. Very
large travel agencies (those with more than $50 million in annual air
travel sales revenue) appear to have benefited from volume- based
incentive payments from airlines and global distribution systems, while
smaller travel agencies have closed or lost business, especially to on-
line travel Websites.
Consumers who use the Internet have benefited from lower internet- only
fares. Travelers who do not buy airline tickets on line may be at a
disadvantage in not having access to these fares. Because we lacked access
to proprietary company information, we could not
determine the precise relationship between global distribution system
booking fees and related costs, and thus could reach no conclusions about
potential exercise of market power by global distribution systems in the
airline ticket distribution industry. Since 1996, booking fees and some
costs related to the booking function* computing costs and travel agent
incentive payments* both increased. However, we could not obtain data on
all expenses related to the booking function, and thus could not
accurately compare these costs to booking fees. DOT provided us with
technical comments, which we incorporated as appropriate. In 2002, when
major U. S. airlines
posted net operating losses of almost $10 billion, they paid over $7
billion to distribute tickets to consumers. Of these total distribution
expenses, airlines paid hundreds of millions of dollars in
booking fees to global distribution systems* the companies who package
airline flight schedule and fare information so that travel agents can
query it to *book* (i. e., reserve and purchase) flights for consumers.
Each time a consumer purchases an airline ticket through a travel agent,
the global distribution system used by the
travel agent charges the airline a set booking fee. Concerns have been
raised that the global distribution systems may exercise market power over
the airlines
because most carriers are still largely dependent on each of the global
distribution systems for distributing tickets to different
travel agents and consumers and therefore must subscribe and pay fees to
each. Market power would
allow global distribution systems to charge high, noncompetitive fees to
airlines, costs that may be passed on to consumers.
GAO was asked to examine changes in the airline ticket distribution
industry since the late
1990s and the effects on airlines, the impact of these changes on travel
agents and consumers, and what the relationship between global
distribution systems* booking fees and related costs
suggest about the use of market power.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 749. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact JayEtta Z. Hecker, 202- 512- 2834, HeckerJ@ gao. gov.
Highlights of GAO- 03- 749, a report to
congressional requesters
July 2003
AIRLINE TICKETING
Impact of Changes in the Airline Ticket Distribution Industry
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Contents
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Appendix I
Appendix I Objectives, Scope, and Methodology
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Appendix I Objectives, Scope, and Methodology
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Appendix II
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Appendix III
United States General Accounting Office Washington, D. C. 20548- 0001
Official Business Penalty for Private Use $300 Address Service Requested
Presorted Standard Postage & Fees Paid
GAO Permit No. GI00
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