Domestic Aviation: Effects of Changes in How Airline Tickets Are Sold
(Letter Report, 07/28/1999, GAO/RCED-99-221).
Pursuant to a congressional request, GAO provided information on: (1)
how changes in the way airlines sell tickets affected travel agencies
and consumers; (2) airlines' policies and practices for the sale and use
of airline tickets sold by travel agencies compared with the sale and
use of tickets sold directly by airlines; (3) what airlines' policies
and practices are for making their airfares, particularly discount
fares, accessible to travel agencies and consumers; and (4) what
airlines' policies and practices are regarding the use of data on travel
agency sales.
GAO noted that: (1) changes in the way the airline industry sells
tickets have had mixed effects on travel agencies and consumers; (2)
since 1995, airlines have saved as much as $4.3 billion by reducing
commissions paid to travel agencies; (3) through the use of new
technology such as the Internet and electronic ticketing, airlines have
found new ways to lower the cost of selling their tickets; (4) doing so
has reduced airlines' reliance on travel agencies, and the number of
travel agencies is declining; (5) nevertheless, industry surveys
indicate that total travel agency revenues are rising, as the remaining
travel agencies diversify their products and services to other types of
travel-related sales; (6) about 40 percent of travel agencies have also
instituted service fees for ticket processing, ranging from $10 to $50,
to offset lower commissions; (7) the effect on consumers is difficult to
measure; (8) some portion of airlines' cost savings from reduced
commission rates has likely been passed on to consumers, especially
leisure travellers, through lower airfares, but the extent is unknown
because fares are also affected by many other factors; (9) airlines
generally apply the same ticketing policies to themselves and to travel
agencies; (10) airlines' policies are contained in rules that govern the
sale and use of all airline tickets; (11) the travel agency industry
alleges that airlines apply their rules more strictly to travel agencies
than to themselves, with the intention of luring customers away from
travel agencies; (12) while admitting some unintentional lapses in the
past, airlines argue that they have a strong financial incentive to
enforce their rules--if they did not do so, business passengers would
buy the lower-priced tickets intended for leisure travellers; (13) U.S.
and some foreign airlines offer special discount fares that are only
available through their Internet websites; (14) airlines obtain data on
travel agency sales from a variety of sources and combine them to
develop complete sales information, by agency, for each airline market;
(15) according to the airline industry, the data are needed to manage
their travel agency incentive programs to target agencies that exceed
sales targets; and (16) GAO and the Department of Transportation's
Inspector General have criticized override programs as anticompetitive
and harmful to consumers because they increase the likelihood that the
information provided to consumers will be biased.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-99-221
TITLE: Domestic Aviation: Effects of Changes in How Airline
Tickets Are Sold
DATE: 07/28/1999
SUBJECT: Commercial aviation
Comparative analysis
Cost control
Competition
Fare discounts
Consumer protection
Restrictive trade practices
Airline industry
Travel agents
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Cover
================================================================ COVER
Report to the Honorable
Michael P. Forbes,
House of Representatives
July 1999
DOMESTIC AVIATION - EFFECTS OF
CHANGES IN HOW AIRLINE TICKETS ARE
SOLD
GAO/RCED-99-221
Sale of Airline Tickets
(348141)
Abbreviations
=============================================================== ABBREV
ARC - Airlines Reporting Corporation
GAO - General Accounting Office
Letter
=============================================================== LETTER
B-281616
July 28, 1999
The Honorable Michael P. Forbes
House of Representatives
Dear Mr. Forbes:
The U.S. airline industry has gone from record losses during the
early part of the decade to record profits in more recent years.
Airline cost-cutting initiatives and sustained growth in traffic have
contributed to this dramatic turnaround. Travel agencies, the
primary channel for selling airline tickets, have not been immune
from airlines' cost-cutting efforts. Commissions paid to travel
agencies represent airlines' fourth largest expense, after labor,
fuel, and the cost of airplanes. To decrease their costs, airlines
have reduced these commissions and established Internet sites to sell
more tickets themselves. Such actions have led some travel agency
representatives and consumer groups to question whether airlines are
attempting to drive travel agencies out of business, thereby
depriving consumers of an important source of comparative price and
schedule information.
To examine these issues, you asked us to determine the following:
(1) How have changes in the way airlines sell tickets affected travel
agencies and consumers? (2) What are airlines' policies and
practices for the sale and use of airline tickets sold by travel
agencies compared with the sale and use of tickets sold directly by
airlines? (3) What are airlines' policies and practices for making
their airfares, particularly discount fares, accessible to travel
agencies and consumers? and (4) What are airlines' policies and
practices regarding the use of data on travel agency sales?
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Changes in the way the airline industry sells tickets have had mixed
effects on travel agencies and consumers. Since 1995, airlines have
saved as much as $4.3 billion by reducing commissions paid to travel
agencies. Through the use of new technology such as the Internet and
electronic ticketing, airlines have found new ways to lower the cost
of selling their tickets. Doing so has reduced airlines' reliance on
travel agencies, and the number of travel agencies is declining.
Nevertheless, industry surveys indicate that total travel agency
revenues are rising, as the remaining travel agencies diversify their
products and services to other types of travel-related sales. About
40 percent of travel agencies have also instituted service fees for
ticket processing, ranging from $10 to $50, to offset lower
commissions. The effect on consumers is difficult to measure. Some
portion of airlines' cost savings from reduced commission rates has
likely been passed on to consumers, especially leisure travelers,
through lower airfares, but the extent is unknown because fares are
also affected by many other factors, such as lower airline fuel
prices. Furthermore, any fare savings may be offset by travel
agencies' service fees. Direct ticket sales, especially via the
Internet, appeal to some consumers, though travel agencies continue
to play an important role in providing comparative information for
consumers who are less interested in or adept at getting this
information on their own.
Airlines generally apply the same ticketing policies to themselves
and to travel agencies. Airlines' policies are contained in rules
that govern the sale and use of all airline tickets�rules, for
example, that require a Saturday night stayover to obtain a
discounted fare. The travel agency industry alleges that airlines
apply their rules more strictly to travel agencies than to
themselves, with the intention of luring customers away from travel
agencies. While admitting some unintentional lapses in the past,
airlines argue that they have a strong financial incentive to enforce
their rules--if they did not do so, business passengers would buy the
lower-priced tickets intended for leisure travelers. Furthermore,
airline representatives say, even if they did not have this financial
incentive, they are not precluded from imposing different rules on
travel agencies.
U.S. and some foreign airlines offer special discount fares that are
only available through their Internet websites. Airlines have
developed these websites to lower the cost of selling their tickets,
increase sales, and better manage their inventory of airline seats.
While the travel agency industry and consumer groups assert that
airlines should make all their fares available through all sales
channels, including travel agencies, airlines are not required to do
so.
Airlines obtain data on travel agency sales from a variety of sources
and combine them to develop complete sales information, by agency,
for each airline market. According to the airline industry, the data
are needed to manage their travel agency incentive programs,
including the payment of additional commissions�called overrides�to
travel agencies that exceed sales targets. GAO and the Department of
Transportation's Inspector General have criticized override programs
as anticompetitive and harmful to consumers because they increase the
likelihood that the information provided to consumers will be biased.
The travel agency industry contends that the sales data used to
calculate overrides are proprietary. While presently under review,
current Department of Transportation regulations require that the
providers of computer reservation systems used by travel agencies
make their ticket sales data available to all interested airlines.
The Department of Justice and an independent mediation panel examined
this issue in 1984 and 1991, respectively, and did not find airlines'
access to travel agencies' sales data to be unlawful.
BACKGROUND
------------------------------------------------------------ Letter :2
Consumers have many ways to buy airline tickets. Travel agencies
sold about 75 percent of all airline tickets in 1996, down from 85
percent in 1993, according to Air Transport Association estimates.
Airlines pay the travel agencies a standard commission based on a
percentage of the value of each ticket. Airlines sell the other 25
percent of tickets directly by telephone, at airline counters, and,
increasingly, through airline websites. The approximately 33,000
travel agencies in the United States range from small firms, many
with less than $1 million in total revenues, to large multifaceted
corporations like American Express, with billions of dollars in
revenues and thousands of employees. In the last few years,
independent electronic agencies, such as Microsoft's Expedia and
Preview Travel, have also begun selling airline tickets through the
Internet. Travel agencies, regardless of their size or form, offer
three basic services for consumers: (1) price comparison, (2) ticket
processing, and (3) information and expertise.
Airlines' relationships with travel agencies have changed
considerably over the last two decades. At the time of airline
deregulation in 1978, airlines and travel agencies sold about the
same number of tickets, and travel agencies' commissions averaged
about 8-percent of the value of tickets sold. Following
deregulation, airlines sought to lower the cost of selling their
tickets and shifted more of their ticket sales to travel agencies.
Airline competition for travel agency sales led to higher commission
rates and the payment of additional commissions, called overrides, to
agencies exceeding certain sales targets. Commission payments
allowed travel agencies to offer free services, such as trip planning
and ticket processing, to their customers.
Airlines set their own fares and commission rates, but the listing of
fares and the settlement of ticket payments and commissions are
generally handled by jointly held airline companies. Over 550
airlines provide their fare information to the Airline Tariff
Publishing Company, which is owned by 24 domestic and international
airlines. This company distributes the fare information to computer
reservation systems.\1 These systems provide computer terminals that
the travel agencies use to search airfares and schedules and book
airline tickets. Payment for travel agencies' ticket sales is
handled through the Airlines Reporting Corporation (ARC),\2 an
airline-owned company that remits travel agency payments (less the
commissions) to airlines.
--------------------
\1 The computer reservation systems are Sabre, 82.8 percent of which
is owned by the parent company of American Airlines (AMR); Apollo USA
(operated by Galileo International), owned by United (15.2 percent),
British Airways (6.7 percent) and Swissair (6.7 percent); WORLDSPAN,
owned by Delta (40 percent), Northwest (34 percent), and TWA (26
percent); and Amedeus (formerly Systems One), owned by Air France
(29.2 percent), Iberia (29.2 percent), Lufthansa (29.2 percent), and
Continental (12.4 percent).
\2 ARC is owned by 14 airline shareholders, although more than 140
domestic and international carriers participate in ARC's settlement
program.
EFFECTS ON TRAVEL AGENCIES AND
CONSUMERS FROM CHANGES IN THE
WAY AIRLINES SELL TICKETS
------------------------------------------------------------ Letter :3
Changes in the way airlines sell tickets have contributed to airline
profits while they have had mixed effects on travel agencies and
consumers. Airlines have cut the commission rates paid to travel
agencies and, through the use of new technology such as the Internet,
have found ways to increase the percentage of tickets they sell
directly to consumers. These actions have reduced travel agencies'
revenues. The effect on consumers is mixed. Consumers now have new
ways to buy tickets while retaining access to agencies for other
travel needs. The extent to which airlines have passed their savings
on commission costs along to consumers through fare reductions is
difficult to measure given the variety of other factors that also
affect ticket prices; however, leisure passengers have likely
benefited more than business passengers. Moreover, any fare savings
may be offset to some degree by many travel agencies' imposition of
service fees.
LOWER COMMISSION COSTS AND
OTHER FACTORS CONTRIBUTE TO
AIRLINE PROFITS
---------------------------------------------------------- Letter :3.1
Airline profits have risen dramatically since record losses earlier
this decade. As figure 1 shows, operating profits for U.S. airlines
topped $8.6 billion in 1997, following a loss of nearly $2.5 billion
in 1992, according to Air Transport Association data. Both airline
operating profits and net profits have increased every year since
then.\3
Figure 1: Airlines' Operating
and Net Profit, 1978-97
(See figure in printed
edition.)
1997 dollars in billions
Note: To measure real change in airline profitability, annual
amounts have been restated in 1997 dollars using the chain-type price
index for gross domestic product.
Source: Air Transport Association and U.S. scheduled airlines.
Growth in passenger demand and lower costs have contributed to
airlines' turnaround. Passenger traffic grew 26 percent between 1992
and 1997. A decline in airlines' costs, notably fuel and commission
costs, also contributed to improved profits, according to Air
Transport Association data. Commission costs, generally airlines'
fourth largest expense after labor, aircraft, and fuel, rose faster
than overall costs until 1993, when commission costs amounted to 10.9
percent of airlines' total operating costs. Since then, airlines'
commission costs have fallen to 6.5 percent of their total operating
costs. As figure 2 shows, commission costs have nearly returned to
their 1982 levels and have helped stabilize airlines' total costs.
Figure 2: Airlines' Cost
Indices, 1978-98
(See figure in printed
edition.)
Note: A cost index is an aggregate measure of the relative change in
related costs. Airlines' total costs include labor, fuel, aircraft,
landing fees, maintenance, financing and insurance, and commissions
and other costs of sales. For example, the total cost index for 1998
is 134.1, which means that total costs have increased by 34.1 percent
since 1982 when the index equaled 100.
Source: Air Transport Association and U.S. major and national
airlines.
--------------------
\3 Operating profit (or loss) is the difference between operating
revenues (passenger, charter, freight, and mail revenues) and
operating expenses (labor, fuel, promotion and sales, and other
costs, including depreciation). Net profit (or loss) is the result
of operating profit after taxes, interest on debt, and other items.
COMMISSION CUTS HAVE COST
TRAVEL AGENCIES AS MUCH AS
$4.3 BILLION IN REVENUES
---------------------------------------------------------- Letter :3.2
Airlines' commission reductions have reduced travel agencies'
revenues. In 1995, the major airlines capped commission payments on
domestic fares at $50 per round-trip ticket�effectively reducing the
commissions airlines paid to travel agencies for tickets costing more
than $500, given the 10-percent commission rate in effect at that
time. In 1997, all the major airlines--except Southwest
Airlines--reduced their commission rates for domestic ticket sales to
8 percent.\4 In 1998, major U.S. airlines also set commissions on
international tickets at 8 percent and capped total commissions at
$100 per round trip ticket. Furthermore, most airlines have set
commissions for tickets purchased on-line from Internet travel
agencies at 5 percent, with a $10 maximum commission per transaction.
Accordingly, commission rates for domestic fares peaked in 1994 at
10.05 percent, and, 1 year later, commission rates for international
fares peaked at 16.24 percent.\5 Commission rates have steadily
declined since then. Through April 1999, average domestic and
international commission rates were 6.57 and 12.88 percent,
respectively.
Figure 3: Travel Agencies'
Commission Rates, 1989-98
(See figure in printed
edition.)
Note: Data excludes override payments.
Source: Airlines Reporting Corporation.
Although commission rates have been declining for several years,
travel agencies' revenues from commissions did not begin to decline
until 1998. Revenues did not decline as quickly as commission rates
because the total value of tickets sold by travel agencies has
increased. However, travel agencies would have earned up to $4.3
billion more between 1995 and 1998, as depicted in figure 4, had
domestic and international commission rates remained at their peak
levels.\6 The majority of these lower revenues, about $3.45 billion,
were due to reductions in domestic commission rates, which began in
1995. Declines in commission rates for international tickets cost
U.S. travel agencies another $858 million in revenues.
Figure 4: Actual and Reduced
Commission Revenue, 1994-98
(See figure in printed
edition.)
Dollars in billions
Source: GAO's analysis of Airlines Reporting Corporation data.
In addition to reduced commission costs, airlines have lowered their
ticketing costs in other ways. Electronic or �e-ticketing,� whereby
an airline issues a confirmation number and receipt to a passenger
instead of a ticket, is cheaper and easier to process than a paper
ticket since there is no need to print a ticket. Introduced in 1995,
e-ticketing now accounts for an estimated 30 percent to 60 percent of
all tickets sold. In addition, airlines have increased the
percentage of tickets sold through new distribution channels,
especially the Internet. The percentage of tickets sold by travel
agencies peaked in 1993 at 85 percent, according to the Air Transport
Association, slipping to 75 percent in 1996, the most recent year
analyzed.
Changes in airline ticketing practices have strained relationships
between the travel agency and airline industries. A complaint
registered with the Department of Transportation by the United States
Travel Agent Registry in 1998, an organization that represents travel
agency interests, is illustrative of this strained relationship. In
the complaint and subsequent rebuttal to the airlines' response, the
Travel Agent Registry asserted that U.S. airlines are attempting to
remove travel agencies from the business of selling airline tickets,
in violation of federal statutes.\7 By way of example, the Travel
Agent Registry cites commission cuts, special fares and incentives,
and other inducements available only to customers who buy directly
from airlines. Airline officials countered that airlines' actions
are intended only to reduce their ticketing costs. Moreover, airline
officials said that travel agencies, as agents of the airline, are
not competitors in the sale of airline tickets. The Department of
Transportation has yet to rule on this complaint.
--------------------
\4 Southwest Airlines maintained a 10-percent commission with no cap.
\5 All average commission rates and amounts paid are based on
commissions paid by all airlines exclusive of any override payments,
as provided by ARC.
\6 To estimate an upper bound for travel agencies' reduced revenues,
we assumed that declining commission costs did not result in a change
in ticket prices. To the extent that airline commission cost savings
led to reduced ticket prices, the quantity of tickets sold would have
increased and, therefore, the loss in commission revenue would have
been less than $4.3 billion.
\7 The complaint cites 49 U.S.C. 41712, �Unfair and deceptive
practices and unfair methods of competition in air transportation or
the sale of air transportation;� United States Travel Agent Registry
v. Delta (OST-98-4776), v. United (OST-98-4785), v. American
(OST-98-4786), Nov. 18, 1998; and v. Continental (OST-98-4836),
Dec. 1, 1998. See app. I for a summary of this and other
complaints.
THE TRAVEL AGENCY INDUSTRY
IS ADAPTING TO AIRLINE
INDUSTRY CHANGES
---------------------------------------------------------- Letter :3.3
The number of travel agencies peaked in 1996, when industry data
showed a total of 33,715 agencies (see fig. 5). By 1998, the number
stood at about the same level as in 1994--32,694, a decline of 1,021
agencies over the 2-year period.
Figure 5: Number of Travel
Agencies, New Agencies, Closed
Agencies, and Total Agencies,
1990-98
(See figure in printed
edition.)
Source: Airlines Reporting Corporation.
Faced with declining commissions from airline ticket sales, many
travel agencies have cut their costs and begun charging fees for
their services. According to a 1998 travel agency industry survey,
77 percent of travel agencies have reduced their operating costs
since the commission cuts took place. This includes reducing staff
or compensation and making greater use of automation. Between 1995
and 1997, the percentage of agencies charging service fees for
processing airline tickets increased from 19 percent to 42 percent
for leisure travel and from 10 percent to 38 percent for business
travel. In a 1998 survey of 500 agency members of the American
Society of Travel Agents, 64 percent indicated that they charge
service fees compared with 2.6 percent before the reduction in
commission rates.
Travel agencies have adapted in other ways as well, becoming larger,
more diverse, and somewhat less reliant on airline ticket commissions
than they were just a few years ago. For example, with the advent of
reduced airline commissions, the financial relationship between
travel agencies and their government and corporate clients has
substantially changed. Rebating commissions to customers, popular
before commission reductions, is quickly being replaced with
management or transaction fees. Agencies are also consolidating, in
part because larger agencies have proven to be more profitable. In
1997, for example, 92 percent of travel agencies with more than $5
million in sales made a profit, compared with 62 percent of agencies
with less than $1 million in sales, according to a 1998 survey of
travel agencies.\8
Moreover, many travel agencies have increased their business in areas
that are more profitable than airline tickets, such as the sale of
cruise packages. In 1997, the most recent year for which data were
available, travel agencies' revenues totaled $126 billion, a
25-percent increase over 1995. Airline ticket sales accounted for 56
percent of this revenue, down from 61 percent 2 years earlier,
according to the same survey.
--------------------
\8 Travel Weekly, Aug. 27, 1998 (Vol. 57, No. 68) biennial survey
of travel agencies conducted by Louis Harris and Associates, last
published in 1998 based on 1997 industry results.
NET EFFECTS ON CONSUMERS ARE
MIXED
---------------------------------------------------------- Letter :3.4
The effects of airline and travel industry changes on consumers are
mixed and less apparent than the effect on travel agencies. Some
portion of the airlines' $4.3 billion cost savings from reduced
commission rates has likely been passed on to consumers through lower
airfares. We could not quantify the extent to which cost savings
have been passed on because many other factors also affect ticket
prices, including changes in other airline costs, airline
competition, and consumers' varying demand for air travel. However,
to maximize their profits, airlines segment their passenger markets
and are more likely to pass cost savings along through fare cuts to
leisure travelers than to business travelers. This is because the
demand for leisure travel is more sensitive to price change, and, as
a result, the percentage increase in leisure travel resulting from a
given fare reduction will be greater than the percentage increase in
business travel. Therefore, cutting fares for leisure travel is more
likely to increase airlines' profits than cutting fares for business
travelers.\9
The differences in business and leisure airfares over the last
several years demonstrate airlines' ability to segment leisure and
business travelers. The typical one-way business fare (lowest
published fare free of onerous restrictions) in 1998 was $454,
compared with $121 for the lowest published discount (leisure) fare.
Furthermore, in recent years, business fares have increased more
quickly than have discounted leisure fares. Since 1992, the typical
business fare has increased 61 percent, while the average lowest
published discount fare has increased only 3 percent (less than the
rate of inflation during this period). While many factors can
contribute to this difference, these trends are consistent with
airlines being more likely to have passed on savings from commission
reductions to leisure rather than business travelers. Figure 6
depicts annual average business and discount fares in each of the
last 7 years.
Figure 6: Average Published
One-way Airfares, 1992-98
(See figure in printed
edition.)
Note: This figure reflects one-way fares in 215 domestic city pair
routes. Fares shown are those published by the airline with the most
service on each route. Routes were selected on the basis of the
number of passengers or on the basis of geographic representation.
The typical business fare is based on the lowest published fare that
was free of onerous restrictions. The lowest discount fare
represents the absolute lowest fare available and, given fare
restrictions, is generally not useful for business travelers.
Source: American Express Domestic Airfare Index.
The introduction of service fees by many travel agencies offsets to
some extent the benefit of any fare cuts for consumers that use those
agencies. Between 40 percent and 60 percent of travel agencies now
charge service fees for at least some types of transactions,
typically ranging from $10 to $50 for their ticketing and other
services. For example, American Express estimated that the 1998
reductions in international commissions would cost consumers $500
million in additional service fees.
Changes in the travel industry allow consumers to benefit from the
emergence of new ways to buy tickets. The growth in Internet sales,
for example, demonstrates that some consumers prefer this way of
purchasing tickets. According to Jupiter Communications, a
technology and consulting firm, Internet sales of airline tickets
have already grown to $3 billion in 1999, or 4 percent of total
sales. In another study by Forrester Research, an estimated 8.2
million leisure trips were booked on-line in 1998. By 2003, the
company estimates that on-line sales will grow to 65.5 million
leisure trips worth $29.5 billion. Some consumers are also
benefiting from deeply discounted last-minute fares offered on
airline websites that previously may not have been offered for sale.
At the same time, some consumer and travel agency groups argue that
the continued viability of travel agencies is important to consumers.
Travel agencies provide important price comparison and information
services for some consumers. The complexity of airline ticket
pricing--many different fares, itineraries, and restrictions;
continuous fare changes; and airline linkages, such as frequent flyer
and code-sharing arrangements�increases uninformed consumers'
difficulty in completing their travel plans. Regarding price, for
example, there is some evidence that a travel agency can find lower
fares than can a consumer acting alone. In 1997, the U.S. Public
Interest Research Group compared 2,160 price quotes for 73 airline
routes and found that the lowest fares were more often obtained from
travel agencies than from airlines.
--------------------
\9 For additional information on the price sensitivity of business
and leisure travelers, see app. I to Passenger Facility Charges:
Program Implementation and the Potential Effects of Proposed Changes
(GAO/RCED-99-138, May 19, 1999).
AIRLINE POLICIES GENERALLY
APPLY TO ALL TICKET SALES
------------------------------------------------------------ Letter :4
Airlines generally apply the same ticketing policies to themselves
and to travel agencies. The travel agency industry has alleged that
airlines apply their policies more strictly to travel agencies than
to themselves, intending to lure customers away from travel agencies.
While admitting some unintentional lapses in the past, airlines argue
that they have a strong financial incentive to enforce their
rules--if they did not do so, business passengers would buy the
lower-priced tickets intended for leisure travelers. Furthermore,
airline representatives say, even if airlines did not have this
financial incentive, airlines are not precluded from having different
rules for travel agencies and for themselves.
CONTROVERSY CENTERS ON
AIRLINE TICKETING
RESTRICTIONS
---------------------------------------------------------- Letter :4.1
The travel agency industry contends that airlines enforce their rules
more strictly for tickets sold by travel agencies than for tickets
sold directly by airlines. The industry's complaints center on three
practices prohibited by airlines:
-- Issuing �back-to-back� tickets. Back-to-back ticketing involves
the purchase of multiple discounted round-trip tickets and the
use of the tickets out of sequence. This practice is intended
to circumvent the fare conditions normally applicable to
discount fares, such as the requirement to stay over a Saturday
night or to fly on a particular day of the week. For example, a
traveler may attempt to buy two discounted overlapping
round-trip tickets between Dallas and Miami�one ticket
originating from Dallas on May 4 and returning on May 28, 1999,
the other originating from Miami and departing on May 7 and
returning on May 25, 1999. Using the tickets out of sequence,
the traveler could create two round trips between Dallas and
Miami for May 4-7 and May 25-28 and avoid (1) staying over on
Saturday nights or (2) paying for the more expensive
unrestricted business class tickets. In a complaint filed in
September 1997, before the Department of Transportation,\10 the
Association of Retail Travel Agents alleged that airlines allow
their reservation agents to issue back-to-back tickets while at
the same time penalizing travel agencies that do so.\11
-- Issuing �hidden city� tickets. Hidden-city ticketing involves
the purchase of a less expensive ticket that is beyond the
traveler's actual destination. For example, a traveler flying
from Atlanta, Georgia, to Chicago, Illinois, may attempt to
purchase a less expensive ticket for a flight that stops or
connects in Chicago. Having obtained the ticket, the traveler
would depart the plane in Chicago, and throw away the remaining
portion of the ticket. Airlines prohibit travel agencies from
booking hidden-city tickets, but according to travel agency
representatives, airlines will issue these tickets to customers
who call the airline directly.
-- Refunding nonrefundable tickets. Airlines sell discounted
nonrefundable tickets as another way to segment their market and
to manage their seat inventory. The travel agency industry
contends that airlines refuse to allow a travel agency to refund
nonrefundable tickets, yet when contacted directly, refund the
tickets themselves and bill the agency for any commission paid.
--------------------
\10 Association of Retail Travel Agents v. American, Delta,
Northwest, and United, OST-97-2908-1. The Department has not ruled
on this complaint.
\11 We did not evaluate the extent to which airlines comply with
their various ticketing policies. Such an evaluation, even if
permitted by airlines, would require more time and resources than
were available for this review.
AIRLINES HAVE A FINANCIAL
INCENTIVE TO APPLY THEIR
TICKETING POLICIES UNIFORMLY
---------------------------------------------------------- Letter :4.2
Six of the seven largest U.S. airlines have policies that expressly
disallow back-to-back ticketing, hidden-city ticketing, and refunding
nonrefundable tickets.\12 Representatives of the six airlines said
their policies apply both to travel agencies, as part of their
agreements with airlines, and to airlines' reservation agents. For
example, one airline official said that an airline reservation agent
would be disciplined�and possibly terminated�for not complying with
the airline's policies.
Airline officials acknowledged that in some cases their reservation
agents have unknowingly issued back-to-back and hidden-city tickets.
For example, a customer could buy back-to-back tickets through
different airline reservationists or even through different airlines.
However, airlines have a strong economic incentive to enforce their
ticketing policies. This incentive revolves around airlines'
approach to yield management--that is, maximizing the revenues from
each seat on every airplane. To do this, airlines attempt to segment
their passenger market between business and leisure travelers. For
example, for leisure travelers, who tend to be more discretionary
about their travel and, consequently, more sensitive to
price--airlines offer some seats at lower prices. In return,
airlines place requirements and restrictions, such as the need for
advance purchase, restrictions on refunding tickets, and a
requirement for Saturday night stayover for leisure fares.
Conversely, business passengers tend to have less discretion in their
travel and require greater flexibility to purchase tickets at the
last minute or to change their flight times and therefore are willing
to pay more for a ticket with no restrictions.
--------------------
\12 The six airlines are American, Continental, Delta, Northwest,
United, and US Airways. The seventh--Southwest Airlines--permits
back-to-back and hidden-city tickets because Southwest does not
attempt to segment its customer base between business and leisure
travelers. Collectively, these seven airlines accounted for 85
percent of all domestic airline traffic in January 1999.
AIRLINES CAN APPLY DIFFERENT
TICKETING RULES TO TRAVEL
AGENCIES
---------------------------------------------------------- Letter :4.3
While airlines' ticketing rules apply to all ticket sales, an airline
is free to apply different rules to and among travel agencies than it
applies to itself. Airlines have historically carried out different
ticketing practices among travel agencies�for example, offering
special fares, booking privileges, and incentive payments to some
favored agencies and not others. In addition, the courts and the
Department of Transportation have upheld an airline's right to apply
different rules on a travel agency than it applies to itself. In
1989, a federal court ruled that an airline, as the �principal� party
to the relationship, could impose different rules on its �agents.�\13
The Department of Transportation ruled in 1995 that an airline could
require travel agencies to pay for discounted tickets within 24 hours
of sale, even though the airline does not impose the same requirement
on its customers.\14
In keeping with their right to impose different ticketing
requirements, airlines apply rules for Internet-based electronic
ticket agencies that are different from those that they apply to
other travel agencies and to themselves. For example, airlines
impose more stringent rules on the number of passengers and flight
segments that electronic agencies can book as well as the length of
time that they can hold a reservation. Airlines also require
electronic agencies to provide more passenger and payment information
than traditional agencies are required to provide. Electronic travel
agencies also receive a lower commission--5 percent, capped at $10
per transaction--than do traditional travel agencies. Electronic
agencies, and traditional agencies that would like to sell
electronically, contend that these differential policies and the
lower commissions limit the growth of electronic agency sales while
providing airlines with an advantage in selling tickets through their
own websites. Airlines argue that more stringent requirements are
necessary for electronic agencies to protect the airlines' inventory
of seats from abuse and to prevent fraud that could harm airlines or
undermine consumers' confidence in booking on-line; the lower
commissions, they say, are due to cheaper processing costs for
electronic agencies.\15 In April 1999, the American Society of Travel
Agents asked the Department of Justice to take action against alleged
antitrust violations by airlines; the allegation of antitrust
violations is based in part on the lower commissions paid to online
agencies. Justice is reviewing the complaint.
--------------------
\13 In 1989, a federal court found that travel agencies are �agents�
of the airline they represent and that the restrictions placed on the
operations of travel agencies by an airline are lawful under
antitrust laws, just as when restrictions are placed on one's own
employees. Illinois Corporate Travel, Inc. (�McTravel�) v.
American Airlines, 889 F.2d 751 (7\th Cir. 1989).
\14 Pacific Travel International, Inc. v. American Airlines.
Department of Transportation Order 95-1-2, docket 49808, Jan. 4,
1995.
\15 These ticket agencies are like traditional travel agencies in
that they provide comparative fare information and allow travelers to
make reservations and purchase tickets. However, because their
business is conducted electronically, they typically have lower costs
than traditional �brick and mortar� travel agencies.
AIRLINES RESTRICT ACCESS TO
DEEPLY DISCOUNTED FARES
------------------------------------------------------------ Letter :5
U.S. and some foreign airlines offer special discount fares that are
available only through their Internet websites. Airlines have
developed these websites to lower their costs, increase sales, and
better manage their inventory of airline seats, according to airline
officials. Travel agency representatives assert that airlines have
developed these sites to drive travel agencies from Internet sales.
Travel agencies and Consumers Union, a consumer advocacy group,
contend that airlines should make all their fares equally available
through all ticketing channels. Currently, airlines are not required
to make their fares equally available.
SOME INTERNET FARES ARE
AVAILABLE ONLY THROUGH
AIRLINE WEBSITES
---------------------------------------------------------- Letter :5.1
The travel agency industry, particularly electronic agencies, are
concerned that they do not have access to all airline fares,
especially heavily discounted fares. According to industry
representatives, airlines are acting anticompetitively in reserving
these special fares exclusively for their direct sales. Consumers
Union has also voiced concern that only people with access to a
computer can obtain the discounted fares since they are typically
available only through airlines' websites.
So far, the special fares on airlines' websites have generally
applied to heavily discounted weekend fares on near-term flights that
airlines believe are unlikely to sell out--a small percentage of all
fares. These fares are announced via e-mail to consumers who
subscribe to the announcements and can be obtained by booking on-line
through an airline's website (and in some cases by calling the
airline, but typically with an additional surcharge). Previously,
many of these seats were likely to have gone unsold. Airline
officials stated that because these tickets are so deeply discounted
and short-term, it is not cost-effective to pay (1) computer
reservation systems to list these fares or (2) travel agency
commissions. As a result, many airlines choose to sell their deeply
discounted, last-minute seats exclusively through their
websites--airlines' least expensive method for selling tickets.
According to a 1999 Merrill Lynch study, on average, it costs America
West $6 to process a ticket through its website compared with $13
through the airline's own reservation agents, $20 through independent
electronic agencies, and $23 through a traditional travel agency.\16
Airlines' website sales account for a small percentage of all airline
ticket sales but are expected to grow dramatically. Merrill Lynch
estimates that airlines' Internet sales account for only 1 to 2
percent of total airline revenues, though some low-fare carriers may
derive as much as 8 percent of their revenue from Internet sales. As
Internet sales have grown, the market share of independent electronic
agencies has declined because of faster growth in airlines' website
sales. Electronic agencies' market share has fallen from 80 percent
to about half of Internet-based sales in the last several years.
--------------------
\16 �e-Commerce: Virtually Here,� Merrill Lynch, Apr. 8, 1999.
AIRLINES CAN CHOOSE THEIR
METHODS FOR SELLING TICKETS
---------------------------------------------------------- Letter :5.2
The Department of Transportation has supported airlines' efforts to
establish new ticket sales channels, provided they do not
unreasonably discriminate and are not deceptive. For example, in
September 1996, the Assistant Secretary for Aviation and
International Affairs, in responding to travel agencies' complaints
about Microsoft's Internet sales of airline tickets, stated that the
Department is unwilling to interfere with airline ticketing methods
as long as they do not harm the public. Furthermore, he noted that
airlines' development of more efficient sales methods should promote
airline competition. Moreover, in April 1999, the Department of
Transportation dismissed a 1996 complaint by the Association of
Retail Travel Agents against several foreign airlines.\17 The
complaint alleged deceptive practices, unfair methods of competition,
and antitrust violations against the International Air Transport
Association (an international rates-setting body) and three foreign
airlines for the sale of tickets below international rates through
the Internet. In dismissing the complaint, the Department's Office
of Aviation Enforcement stated that its policy is to allow airlines
the same freedoms to choose their terms and sales methods that firms
in unregulated industries have.
The Department is also considering a petition for rulemaking--filed
by a lone petitioner--regarding airlines' disclosure of their special
discount fares.\18 The petition alleges that airlines do not reveal
Internet fares to customers seeking the lowest fares through computer
reservation systems or airline reservation agents and, as a result,
that airlines discriminate against customers without Internet
access.\19
Airlines' sale of tickets via the Internet is not unique. For
example, AMTRAK offers discount fares exclusively through its
website. The fares must be purchased online and are not available
for sale at AMTRAK ticket locations or reservation counters, on board
trains, or through travel agencies. Car rental agencies, hotels, and
cruise lines also sell discount products exclusively through the
Internet. Manufacturers and suppliers of other products, from
clothing to automobiles, are also beginning to sell their products
through the Internet, in some cases reserving some products for sale
only through the Internet�a practice that has angered traditional
retailers.
--------------------
\17 Order 99-4-19, Docket OST-96-1995-6, issued Apr. 29, 1999.
Association of Retail Travel Agents v. International Air Transport
Association, Cathay Pacific, Aer Lingus, and Icelandair,
OST-96-1995-1, Dec. 2, 1996.
\18 Donald Pevsner's Petition for Rulemaking, OST-97-2061-1, Jan.
13, 1997.
\19 14 C.F.R. 255.7(b) requires that any airline with significant
ownership of a computer reservation system that chooses to list its
commonly available fares on its computer reservation system must also
list those fares on all the other systems in which it participates.
The major airlines--most of which have an ownership interest in one
of the four main systems�choose to list the majority of their
available fares. Airlines that do not have an ownership interest in
a computer reservation system are not required to list, or post,
their fares on computer reservation systems used by travel agencies.
AIRLINES' USE OF TRAVEL AGENCY
SALES DATA IS PERMITTED BY
CURRENT REGULATIONS
------------------------------------------------------------ Letter :6
U.S. airlines obtain data on travel agency sales from computer
reservation systems and other sources and use the data to determine
their market share and the shares of other airlines. Airline
officials told us that the airlines also use this information to
manage their incentive programs for travel agencies. Airlines'
incentive payments to travel agencies, called commission overrides,
are a controversial practice in the airline industry because they
could encourage travel agencies to steer travelers toward more
expensive fares. The travel agency industry contends that these data
are proprietary. Airline representatives, however, state that
sharing travel agencies' sales data is permitted.
COMMISSION OVERRIDES ARE
CONTROVERSIAL
---------------------------------------------------------- Letter :6.1
Each airline combines data from several sources to develop the
information it needs to manage its commission override program. One
source is the computer reservation systems, which provide airlines'
sales data to interested airlines, as authorized by federal
regulations. The data provide transaction details on each
reservation, including the travel agency that booked the ticket.
According to Department of Transportation officials, the Department
will consider whether its rules should be amended to bar systems from
making travel agencies' booking data available to all airlines in its
pending rulemaking on computer reservation systems.\20 Another source
is the data airlines receive on their travel agency sales from the
Airlines Reporting Corporation.\21 > When airlines combine these two
sources of data, they can determine the market share for each travel
agency. Typically, an agency will earn a commission override payment
if an airline's share of an agency's sales exceeds the airline's
share of all travel agency bookings in that area.
The payment of commission overrides is a controversial practice in
the airline industry. Such payments are intended to reward travel
agencies that sell a particular airline's tickets. In 1996, we
criticized the practice of paying overrides as anticompetitive.\22 In
a survey of 9 of the top 10 travel agencies, accounting for one-third
of all ticket sales, we found that commission overrides are an
important consideration by travel agencies in selecting an airline,
especially when all other things are equal. According to the 1998
Travel Weekly survey, 52 percent of agencies received override
payments in 1997. Two-thirds of the agencies receiving these
payments said they usually or sometimes book a particular airline in
order to receive them. In March 1999, the Department of
Transportation's Inspector General reported that these overrides
change the relationship between passengers, travel agencies, and
airlines.\23
Specifically, the Inspector General concluded that overrides
transform the role of travel agencies from a neutral seller of
airline tickets to a direct distribution agent for a particular
airline. While the Inspector General found no direct evidence of
travel agencies misleading their clients, he was concerned that
travel agencies do not disclose their override agreements and
therefore recommended that travel agencies disclose the existence and
nature of these agreements.
--------------------
\20 The Department of Transportation is currently revising computer
reservation system rules under a rulemaking filed Sept. 10, 1997, 62
Federal Register 47606.
\21 Under the ARC agency agreement, travel agencies must report their
sales on a weekly basis. ARC, in turn, transmits the sales data to
the respective airlines. An airline is not provided with sales data
for competing airlines.
\22 Airline Deregulation: Barriers to Entry Continue to Limit
Competition in Several Key Domestic Markets (GAO/RCED-97-4, Oct. 18,
1996). See also, Airline Competition: DOT's Implementation of
Airline Regulatory Authority (GAO/RCED-89-93, Jun. 28, 1989) and
Airline Competition: Industry Operating and Marketing Practices
Limit Market Entry (GAO/RCED-90-147, Aug. 29, 1990).
\23 Office of Inspector General Audit Report, �Report on Travel Agent
Commission Overrides,� CE-1999-060, Mar. 2, 1999.
RULINGS SUPPORT AIRLINES'
USE OF TRAVEL AGENCIES'
SALES DATA
---------------------------------------------------------- Letter :6.2
While the travel agency industry has long complained about airlines'
access to travel agencies' sales data, the Department of Justice and
an independent mediation panel reviewed the practice and did not find
it to be unlawful. In 1984, the Department of Justice reviewed ARC's
formation, including the travel agency reporting requirements, and
concluded that the efficiency benefits of a common ticket clearing
system outweighed the potential for the restraint of trade.
Specifically, Justice found that the ARC agreement, including the
requirement for travel agencies to submit weekly sales reports, is
related to maintaining airlines' financial integrity and
administrative efficiency. In 1990, the Association of Retail Travel
Agents requested that ARC stop sharing data on travel agencies'
sales. ARC declined, and the Association and the American Society of
Travel Agents appealed to an independent arbitration panel.\24 In
1991, the arbitration panel denied the appeal, determining that the
alleged misuses of the data had not been demonstrated.
--------------------
\24 The arbitration panel had been established as part of a
settlement agreement arising from an antitrust lawsuit brought by the
Association of Retail Travel Agents against the Air Transport
Association and ARC.
AGENCY COMMENTS
------------------------------------------------------------ Letter :7
We provided a draft of this report to the Departments of
Transportation and Justice for their review and comment. The
Department of Transportation provided editorial and technical
comments, which we incorporated as appropriate. Justice had no
comments on the draft report. We also provided relevant sections of
the report to the Air Transport Association, the American Society of
Travel Agents, the Association of Retail Travel Agents, and the
Airlines Reporting Corporation. Each of these organizations provided
technical comments, which we incorporated as appropriate.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8
To assess how changes in the way airlines sell tickets have affected
travel agencies and consumers, we met with airline and travel agency
representatives, consumer groups, and officials from the Departments
of Transportation and Justice. We also collected and analyzed
financial and other information on airlines and travel agencies. To
estimate the amounts of travel agencies' reduced commission revenues,
we obtained and analyzed historical data on commissions and fares and
projected commission revenues, assuming those commission rates would
have remained at their historical highs with no change in ticket
prices. Furthermore, we evaluated studies on the role of travel
agencies in serving consumers, including finding the best fares.
Finally, we reviewed relevant complaints before, and rulemakings and
orders by, the Departments of Transportation and Justice.
To compare airlines' policies and practices for the sale and use of
airline tickets sold by travel agents with those sold directly by
airlines, we reviewed complaints before the Department of
Transportation and other relevant case law and spoke with airline and
travel agency representatives. We contacted the seven largest
domestic carriers, which account for about 80 percent of passenger
traffic, to obtain their ticketing policies.\25 We did not audit
airlines' actual adherence to their policies.
To determine airlines' policies and practices for making their
airfares, particularly their discounted fares, accessible to travel
agencies and consumers, we met with airline, travel agency, and
consumer group representatives; obtained airlines' policies; examined
practices in other industries; and reviewed relevant legal materials.
We also obtained information from the seven major domestic airlines
on how airfares are made available to the public and travel agencies,
especially discounted fares and fares available on airlines'
websites. Moreover, we met with consumer groups and travel agent
organizations to discuss their concerns about access to airfares.
Finally, we contacted representatives of organizations that publish
airfares and operate computerized reservation systems.
To determine airlines' policies and practices regarding the use of
data on travel agency sales, we spoke with officials representing
airlines, computer reservation systems, ARC, travel agencies, and the
Departments of Transportation and Justice to obtain relevant
information and documentation. Finally, we reviewed prior GAO and
Department of Transportation reports, relevant court cases,
complaints, and legal opinions.
We performed our review from December 1998 through July 1999 in
accordance with generally accepted government auditing standards.
--------------------
\25 The seven airlines are American, Continental, Delta, Northwest,
Southwest, United, and USAirways.
---------------------------------------------------------- Letter :8.1
We are also sending copies of this report to appropriate
congressional committees; the Honorable Rodney Slater, Secretary of
Transportation; the Honorable Janet Reno, Attorney General; the
Honorable Jacob Lew, Director, Office of Management and Budget; and
other interested parties. We will send copies to others upon
request.
If you or your staff have any questions about this report, please
call me at (202) 512-2834. Other contacts and acknowledgements are
listed in appendix II.
Sincerely yours,
John H. Anderson, Jr.
Director, Transportation Issues
SUMMARY OF THE DEPARTMENT OF
TRANSPORTATION'S DOCKETS
=========================================================== Appendix I
Table I.1 lists requests, petitions, and notices of rulemakings filed
before the Department of Transportation relating to various aspects
of airline ticket sales. The Department has completed its review and
issued orders on two of these requests, while seven others are still
pending.
Table I.1
Department of Transportation's Dockets
on Various Aspects of Airline Ticket
Sales
Docket
number Date Parties Nature of complaint Departmental status
---------- ---------- -------------------- --------------------- --------------------
OST-49808 10/3/94 Pacific Travel Request for Order 95-1-2, Jan.
International, Inc. restraining order 4, 1995, dismissed.
v. American against American
Airlines, Inc. Airlines for engaging
in unfair business
practices against
complainant
(requiring 24-hour
payment for
discounted tickets).
OST-1996- 12/2/96 Association of Request for Order 99-4-19, Apr.
1995-1 Retail Travel Agents enforcement 29, 1999, dismissed.
v. International Air proceedings with
Transport respect to Internet
Association, Cathay offers of
Pacific, Aer Lingus international
and Icelandair passenger air
transportation below
tariff rates.
OST-1997- 1/13/97 Donald Pevsner Petition for a Pending.
2061-1 rulemaking to
prohibit carriers
from discriminating
against non-Internet
users.
OST-1997- 6/16/97 Consumers Union Petition for a Pending.
2622-1 rulemaking to require
commercial passenger
carriers to disclose
directly to
consumers, and make
available to computer
reservation system
vendors, the most
recently available
average airfare and
lowest fare charged
by the carrier for
the route and class
quoted to the
inquiring party.
OST-1997- 9/10/97 Advance notice of Advance notice of Pending.
2881-1 proposed rulemaking proposed rulemaking
to solicit comments
62 on whether the
Federal Department of
Register Transportation should
47606 continue or modify
its existing rules
governing airline
computer reservation
systems. Unless
extended, the
existing rules will
expire Mar. 31, 2000
(64 Federal Register
15127, Mar. 30,
1999).
OST-1997- 9/16/97 Association of Request for an Pending.
2908-1 Retail Travel Agents enforcement
v. American proceeding and
Airlines, Delta petition for
Airlines, Northwest rulemaking, with
Airlines, and United respect to alleged
Airlines unfair and
anticompetitive
practices, that is,
�back-to-back�
ticketing.
OST-1998- 4/8/98 Request for comments Request for comments Pending.
3713-1 by the Department of on the Department's
Transportation enforcement policy
regarding unfair
exclusionary conduct
in the air
transportation
industry.
OST-1998- 11/18/98 Association of Emergency request for Pending.
4775-1 Retail Travel Agents a rulemaking to
establish travel
agency rights to
renegotiate or
arbitrate computer
reservation system
contracts when
airlines reduce
commissions.
OST-1998- 11/18/98 United States Travel Request for the Pending.
4776-1 11/18/98 Agent Registry v. Department to rescind
4785-1 11/18/98 Delta, United, commission reductions
4786-1 12/01/98 American, and on international
4836-1 Continental Airlines airfares.
-----------------------------------------------------------------------------------------
GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
========================================================== Appendix II
GAO CONTACTS
Kathleen Turner, (202) 512-2834
Paul Aussendorf, (206) 287-4800
ACKNOWLEDGMENTS
In addition to those named above, David Bryant, Jr.; Jay Cherlow;
David Hooper; Joseph Kile; and Stan Stenersen made key contributions
to this report.
*** End of document. ***