In response to the U.S. Department of Transportation`s (DOT) Notice of Proposed Rulemaking on airline computer reservation system…
In response to the U.S. Department of Transportation`s (DOT) Notice of Proposed Rulemaking on airline computer reservation system (CRS) rules, Galileo International, a leading Global Distribution Services (GDS) system and subsidiary of Cendant Corp. called for substantial changes to proposed rules to ensure final rules foster fair competition and protect consumers.
As long as airlines own, maintain financial investment, or enter into preferential marketing agreements with CRSs, a free and fair marketplace is not possible and the government must maintain its oversight of the CRS industry. Rules are essential until such time that owning airlines completely divest themselves of any interest or influence over distributors, said Sam E. Galeotos, president and CEO of Galileo International and Cendant Travel Distribution Services. In our current environment, the consumer protection rules that govern CRSs are vital to ensuring the public continues to have the widest access to the best airfares, both online and offline. DOT`s current proposal is fatally flawed since it guts existing consumer protections and gives big airlines free reign to stifle independent competition and restrain consumer choice. Specifically, we are asking the DOT to retain its Mandatory Participation provision and strengthen its definition — as it originally intended in its initial draft — to also apply to airlines maintaining marketing agreements with CRSs.
CRSs are sophisticated global technology systems that connect airlines and other travel suppliers to offline and online travel agencies, which still book the majority of airfare transactions. CRSs were originally created by airlines more than two decades ago to increase ticket distribution. However, many airlines began biasing CRS displays in favor of their airlines, charging non-owners higher rates, and restricting fares and inventory from competing CRSs, consequently limiting consumer access. Owner airlines also used their market power to force travel agencies to use the airline`s CRSs to obtain fare discounts, which helped airlines secure CRS dominance in regional hub markets, which are still evident today.
In response to these egregious airline abuses, the USDOT created the CRS rules in 1984. In 1992, DOT added mandatory participation, requiring airlines owning a CRS to participate in all CRS systems equally to prevent the anti-competitive and market dominating behavior exerted by owner airlines.
Given the long and storied history of airlines owning and controlling distribution systems, DOT has a responsibility to prevent history from repeating itself and ensure appropriate rules are adopted to protect consumers and competition in the future, noted Galeotos. As currently drafted, the proposed CRS rules are one-sided and inadequate as they heavily favor major airlines at the expense of smaller and regional carriers, independent CRSs, travel agents and consumers. To avoid selective regulation with unfair market results, any new rules should strengthen mandatory participation and retain current provisions relating to CRS travel agency contracts. DOT should also acknowledge changing times by subjecting airline-owned Orbitz, which is already operating as a CRS, to the existing and any new CRS rules, said Galeotos.
Galileo`s response to DOT included reports by economists, including three currently or recently affiliated with Economists Incorporated, all of who have prior experience analyzing the CRS industry.
According to this report by Margaret Guerin-Calvert, I. Curtis Jernigan, and Gloria Hurdle, Elimination of the mandatory participation and nondiscriminatory pricing rules would pose substantial risks to competition. Their elimination would provide opportunities for the resurgence of higher charges for smaller airline competitors, which would increase their costs relative to those of larger airlines and disadvantage them in competition with larger airlines. Moreover, elimination of mandatory participation rules could provide opportunities for airlines affiliated with CRSs to withhold inventories from competing CRSs, thereby potentially reducing inter-CRS competition to the detriment of consumers and airlines.
Key highlights of Galileo`s comments include the following:
- Mandatory Participation: A cornerstone of the current CRS rules, this requires airlines owning a CRS to participate in all CRS systems equally to increase competition and consumer access. It was originally required to address historic anti-competitive abuses by airlines that owned CRSs. Mandatory participation rule should be preserved and strengthened to apply to any CRSs that maintain airline ownership, financial, or preferential marketing agreements.
- Orbitz`s Most Favored Nations (MFN) Agreements: This guarantees that Orbitz receive participating airlines` best public fares. It has had a chilling effect upon the availability of the lowest priced web fares in the marketplace. Orbitz is functioning as a CRS and its airline owners are using Orbitz strategically to control the market, hurt competition and limit wider consumer access to the best fares. The public interest is best served by requiring that Orbitz (which is owned by American, Continental, Delta, Northwest, and United) be subject to the CRS rules and its owners be subject to Mandatory Participation.
- Subscriber Contracts: Existing rules relating to subscriber contracts and productivity pricing should not be modified. If they are modified as proposed, innovative agreements like Galileo`s Momentum program, which is reducing participating airline`s distribution costs while expanding distribution channels and helping travel agencies operate more efficiently with less financial assistance, will be prohibited.
- Booking Fees: CRS fees are reasonable and remain about 2-3% of the average ticket price as was the case a decade ago. In addition CRS fees comprise only 1.5 – 2% of total airline expenditures. Moreover, despite increasing costs, the CRSs have introduced innovative new programs such as Momentum that lowers booking fees to the airlines. This sort of discounting confirms that CRSs lack market power.
- Non-discriminatory Pricing: Eliminating the ban on so called discriminatory pricing will be particularly harmful to low cost carriers, small/midsize carriers, and consumers by allowing big airlines owning or allied with CRSs to abuse their pricing power in their hub markets to disadvantage competitors.
- Potential Sunset of CRS Rules/Deregulation: Galileo would support sunset of the existing CRS rules only if airlines completely divest themselves from CRSs, including but not limited to ownership, any vested financial interest in the economic success of a CRS, or preferential marketing agreements.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
