BEFORE THE UNITED STATES DEPARTMENT OF TRANSPORTATION COMMENTS OF OPEN ALLIES FOR AIRFARE TRANSPARENCY

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1 BEFORE THE UNITED STATES DEPARTMENT OF TRANSPORTATION Transparency of Airline Ancillary Fees and Other Consumer Protection Issues Docket DOT-OST COMMENTS OF OPEN ALLIES FOR AIRFARE TRANSPARENCY Open Allies For Airfare Transparency ( Open Allies ) is a coalition of more than 400 independent distributors and sellers of air travel, corporate travel departments, travel trade associations and consumer organizations 1 committed to the principle that airline fares and fees should be transparent to, and purchasable by, the traveling public, enabling consumers to comparison shop for their fares on an all-in (fares+taxes+fees) basis, apples-to-apples across airlines. Open Allies believes that air travelers should be able to search, compare, and purchase basic ancillary services through all of the distribution channels that airlines have opted to use. Open Allies welcomes the opportunity to comment on the Department s proposal to require airlines to provide basic ancillary fee data to ticket agents who are authorized to sell travel services on behalf of an airline, and it urges the Department to adopt such a requirement in the final rule, with certain additional requirements. Open Allies believes the Department s core proposal needs to be accompanied by other elements to better serve the public interest and, more specifically, the interests of airline consumers. The three most critical elements that need to be incorporated into any final rule are: (1) the rule should require airlines to provide basic ancillary service fee information to ticket agents in a format that allows ticket agents not only to disclose the information to consumers but also to sell the services; (2) the rule should require airlines to 1 A list of the members of Open Allies is available on its website at

2 share dynamic and transactable information on basic ancillary services with all ticket agents through which they have chosen to market their services, including the Global Distribution Systems ( GDSs ) in which the airline participates, i.e., the Department s Option A ; and (3) the rule should include boarding and change/cancel fees as basic ancillary services, as well as any ancillary service packages offered that include a basic ancillary service, not just carry-on and checked baggage and seat reservations as proposed. I. There is a Market Failure Regarding Ancillary Fee Distribution that the Department Should Fix Open Allies strongly supports the Department s proposal to increase transparency in airline prices by requiring airlines to disclose basic ancillary fee information to ticket agents. See proposed (b). There is abundant evidence of a market failure, including comments filed in this proceeding and other DOT dockets with respect to ancillary fees, and more evidence will undoubtedly be submitted in this record. Unlike the case with base fares, ancillary fees are not clearly and consistently disclosed to consumers through all distribution channels. In particular, airlines usually do not give ticket agents access to ancillary fee information and thus ticket agents cannot effectively and efficiently disclose the information to their customers. These hidden fees lead to surprise when consumers find out usually after they have already bought their ticket that services previously included in the ticket price are no longer included and must be separately paid for. In an August 2014 survey ( Survey ) conducted by Open Allies among 1,162 U.S. adults who had traveled at least once in the past year, more than half (55%) of respondents said they had been surprised by additional fees after having purchased their tickets. A press release concerning the Survey, and a summary of Survey results, is attached as Exhibit 1. Consumers are also confused by the fees. The lack of clear disclosure makes it hard for them to ascertain which services are and are not included in the ticket price. It also makes it - 2 -

3 difficult for consumers to determine the actual cost of their travel and effectively compare prices among airlines. The absence of effective comparison shopping, in turn, causes consumers to make sub-optimal purchasing decisions and dampens competition, resulting in higher prices than would exist in a competitive market. In the Survey, an overwhelming 88% of respondents said that it was extremely or very important for the Department to require airlines to disclose basic ancillary service fees through their travel agents and websites. 2 Four out of five respondents (81%) said that current airline practices with respect to ancillary service fees are unfair and deceptive. Further, 47% of respondents said that it had become very difficult or nearly impossible for them to search and find the lowest fare for air travel across airlines, including those fees. Prompt action by the Department is needed to address this market failure. The Department has been well aware of the problem for several years. As DOT noted three years ago in its 2011 consumer protection rulemaking, consumers contend that airlines hide their fees, and that requiring disclosure will benefit consumers ability to comparison shop and avoid surprise fees. Enhancing Airline Passenger Protections, 76 Fed. Reg. 23,110, at 23,147 (2011) ( 2011 Consumer Protection Rulemaking ). For these reasons, [t]he vast majority of consumers and consumer groups (e.g., BTC, CTA, Flyersrights.org) support the Department requiring airlines to disclose their ancillary fee information to the GDSs. Id. at 23,150. The Department also observed at that time that it was too difficult currently for consumers to effectively comparison shop and determine the total cost for travel, including ancillary fees for optional services. The Department considers it to be unfair and deceptive to 2 See also Airline travelers want bag, seat fees in ticket prices, USA Today (Sept. 4, 2014) (discussing survey results), available at bag-seat/ /

4 charge an ancillary fee to a consumer, when that consumer had no simple, practical, and reasonable way of knowing about the fee prior to purchasing the ticket. Id. at 23, In the 2011 Consumer Protection Rulemaking, the Department generally deferred action on requiring transparency of ancillary service fees, although it took some initial steps to reduce consumer surprise and deception resulting from hidden fees. Specifically, the Department (i) required carriers to disclose on their websites information about changes in baggage policies and post a list of the airlines fees for optional services; (ii) mandated that carriers and ticket agents operating a website must state on the first screen in which the carrier or ticket agent offers a fare quotation for a specific itinerary selected by a consumer that additional airline fees for baggage may apply and where consumers can go to access those baggage fees; and (iii) obligated carriers and ticket agents to include on e-ticket confirmations information about the free baggage allowance and the applicable fees for carry-on and the first and second checked bag. Despite this nudge by the Department toward greater disclosure of ancillary fees, the market has not corrected the problem. Three years after adoption of that rule, there is still no consistent and convenient vehicle for consumers to determine and compare the all-in price of various travel options, even though the technology capabilities clearly exist to provide such comparisons. The Department recognizes this in the current Notice of Proposed Rulemaking ( NPRM ) 4 : While the Department considers the disclosure requirements in its 2011 final rule to be a step in the right direction, these requirements do not fully address the problem of lack of transparency of ancillary services and products. Consumers who 3 Comments filed in the 2011 Consumer Protection Rulemaking by the Interactive Travel Services Association ( ITSA ) document evidence of the problem of inadequate disclosure of ancillary fees. See ITSA Comments, Docket DOT-OST at 8-17 (Sept. 23, 2010). 4 Transparency of Airline Ancillary Fees and Other Consumer Protection Issues, 79 Fed. Reg. 29,970 (May 23, 2014)

5 NPRM at 29,975. book transportation through a ticket agent still do not receive accurate and real-time information about fees for ancillary services and products and are unable to determine the total cost of travel. Consumers also can t use the list of optional services and fees that airlines post on their website to determine the cost of travel since airlines generally provide a range of fees for ancillary services aside from baggage and acknowledge that the fees vary based on a number of factors such as the type of aircraft used, the flight on which a passenger is booked or the time at which a passenger pays for the service or product. Further, the list of optional services and fees that the airlines post on their websites are static lists. In many cases, it is not possible for consumers to know the specific fees that would apply to them based on these lists as there are numerous possible fare and fee combinations and routings for any given trip. With respect to baggage, the existing disclosure requirements mandate specific information, but passengers must still review lengthy and complex charts to determine the exact fee that they would be charged for their baggage. In addition to the many comments received from consumers, consumer groups and members of Congress during the 2011 Consumer Protection Rulemaking urging the Department to take action to ensure transparency of ancillary fees, DOT notes in the NPRM that it has since received consumer complaints, complaints from representatives of business travelers and comments in other proceedings that demonstrate that the problem persists. Id. Specifically, the Department states that consumers and consumer groups have reiterated the difficulty in determining the specific fees that apply to ancillary services. Id. at 29,975. Consumer complaints received by the Department reflect the confusion consumers experience regarding fees for ancillary services, particularly in connection with baggage and seat assignments. For example, consumers complain that when shopping for air transportation they do not know how much it will cost them to book seats together for family members or to transport all of their baggage. Id. Members of Congress have called for full disclosure of ancillary fees on behalf of their constituents. Id. Business traveler representatives also complain that it is difficult to - 5 -

6 determine the best and most cost-effective flights because the fee information for seat assignments or baggage is not readily available. Id. The Department thus remains of the view that as carriers continue to unbundle services that used to be included in the price of air transportation, passengers need to be protected from hidden and deceptive fees and allowed to price shop for air transportation in an effective manner. Id. The ancillary fee problem plainly has not and will not be cured by the market. Airlines generally appear to lack any commercial incentive to provide to the neutral travel agency channel ancillary fee information, apparently believing that their interests are best served by making the all-in price of air travel look less expensive than it actually is and by not allowing ticket agents to show the full cost of travel at the shopping stage. Showing incomplete prices undoubtedly does make air travel seem cheaper, thereby increasing the likelihood that consumers will purchase a ticket. Hiding the fees also degrades comparison shopping, lessening competition and reducing downward pressure on prices. It is unlikely that all U.S. airlines will voluntarily choose to show all or most of their ancillary service fees at the shopping stage on travel agency websites or displays because doing so would make them look more expensive (and thus less competitive) relative to other airlines that withhold this pricing information. While a number of bi-lateral agreements to distribute ancillary services have been announced between individual airlines and individual GDSs in recent years, these deals have not cured the underlying problem of consumer harm arising from a lack of full transparency. Most deals have only covered a limited number of services offered by a limited number of airlines (i.e. premium seating on some flights), and they only guarantee distribution of those fees through a single GDS, thus creating a patchwork quilt where a few - 6 -

7 scraps of disclosure continue to leave the majority of fees undisclosed to travelers and noncomparable with one another. Despite the deals announced and implemented, consumers have no ability to search through any travel agency for a ticket price across all airlines that includes all of the basic ancillary fees. Such comparisons will be impossible until all airlines are required to share all basic fees with their distribution partners, not just a selection of fees with limitations on disclosure and presentation. Indeed, until all airlines are required to transmit all fees for all basic ancillaries to all ticket agents, even carriers desiring to make full and fair disclosure of ancillary fees will have a potent built-in disincentive to provide them. That is so because if even a single competing carrier does not make similar disclosures, any airline that did would appear to offer ostensibly higher lower prices than the airline that withheld this critical component of pricing information. The only way to ensure consistency in disclosure and apples-to-apples comparisons for consumers is through a regulation that puts all airlines on a level playing field which protects the interests of the traveler, i.e., through a regulation requiring disclosure of fees so that agencies can display them to their customers early in the shopping process. II. Open Allies Supports DOT s Proposal to Improve Consumer Access to Information By Requiring Airlines to Provide Ancillary Fee Information to Ticket Agents A. The Problem of Inadequate Ancillary Fee Disclosures Is Real and Growing Add-on fees for so-called optional airline services (many of which were previously included in the price of an airline ticket) have exploded in the last several years. In 2006, they were almost unheard of. In 2014, they are one of the means by which the airline industry has - 7 -

8 returned to profitability. 5 Airline ancillary revenues skyrocketed from about $2.45 billion in 2007 to about $31.5 billion in 2013, a more than twelvefold increase. 6 And the revenues continue to grow at a vigorous pace, increasing by about 19.6% from 2011 to 2012, and by about 16.2% from 2012 to According to the Department s Bureau of Transportation Statistics, fees charged by U.S. airlines for baggage alone shot up from about $464 million in 2007 to about $3.35 billion in 2013, a 722% increase. 8 During that same period, U.S. airline revenues from change and cancel fees more than tripled, increasing from $915 million to $2.814 billion. 9 Airline revenues from ancillary fees are not the only thing going up; so are the number and variety of such fees. In May 2008, American Airlines became the first major U.S. carrier to introduce a fee for a first checked bag. Six years later, U.S. airlines have introduced fees for assigned seats, blankets, carry-on bags, drinks, meals, paper boarding passes, phone reservations, priority boarding, snacks, Wi-Fi and more. A recent GAO report remarks on the increase in ancillary fees: 5 See Airline Financial Outlook Strengthens: $12.9B Global Net Profit Expected in 2013, International Air Transport Association ( IATA ) Press Release No. 69 (Dec. 12, 2013) ( Ancillary revenues are a key driver of improved financial performance. Without ancillaries, the industry would be making a loss from its core seat and cargo products. ), available at Airline base fares have also risen in the last few years. See In a Dramatic Turn, The Domestic US is Probably the Best Market for Airlines in the World Right Now, Cranky Flier (Aug. 14, 2014), available at _medium =feed&utm _campaign =Feed%3A+CrankyFlier+%28The+Cranky+Flier%29&utm_content=Netvibes. 6 See The CarTrawler Yearbook of Ancillary Revenue, Ancillary Revenue Report Series for 2014, IdeaWorks Company (Sept. 8, 2014) ( 2014 Ancillary Revenue Report ), available at IdeaWorks tracks airline ancillary revenues annually. IdeaWorks figures for ancillary revenues include revenues derived from airline unbundling and from other activities, such as commissions from hotel bookings and revenues from the sale of frequent flyer miles to partners. 7 See 2014 Ancillary Revenue Report; Airline Ancillary Revenue Surged to $27.1 Billion in 2012 Up 19.6% in One Year, IdeaWorks Company, available at Release-78-Ancillary-Revenue-Top-101.pdf. 8 See Senate Studies Airline Fees at $6 Billion and Growing, USA Today (Aug. 19, 2014) (U.S. airlines are collecting $6 billion annually from baggage and change fees alone), available at todayinthesky/2014/08/19/senate-airlines-ancillary-fees-baggage-seat-assignment-flight-change/ /. 9 Id

9 Airline revenues have also been supplemented by the growth in ancillary fees for optional services. These include fees for services that were previously included in the price of airfare, such as checked bags, early boarding, seat selection, and meals, and for new services that were not previously available like Wi-Fi access and other entertainment options. In addition, Delta, United, and American have increased their ticket-change fees on nonrefundable tickets to as much as $200. GAO, Airline Competition: The Average Number of Competitors in Markets Serving the Majority of Passengers Has Changed Little in Recent Years, but Stakeholders Voice Concerns about Competition, GAO at 17 (Washington, D.C.: June 2014) ( 2014 GAO Report ) (citing GAO, Commercial Aviation: Consumers Could Benefit from Better Information about Airline-Imposed Fees and Refundability of Government-Imposed Taxes and Fees, GAO (Washington, D.C.: July 14, 2010) ( 2010 GAO Report )). Ancillary fees account for a significant portion of the price that consumers pay for air travel making the amount of such fees very important to consumers and for a substantial portion of revenue collected by airlines. For example, in 2013, ancillary revenues accounted for a staggering 38.4% of Spirit Airlines total revenue (an average of $51.22 per passenger). 10 See also 2014 GAO Report at 17 ( Ancillary fees comprise an increasing proportion of airline operating revenues, although the total amount is unclear because airlines are only required to report their checked bag and reservation change fees. ) (footnote omitted); id. at 34 ( Many airlines rely on these ancillary fees as a substantial portion of their operating revenues. ). Notwithstanding the importance of ancillary fees to consumers, the neutral indirect distribution channel, through which more than half of airline tickets are purchased, generally 10 See 2014 Ancillary Revenue Report. See also Last in service, first in profit margin, Spirit paves the way for barebones air travel, Chico Harlan, Washington Post (Sept. 17, 2014) (putting Spirit s add-on/total revenues figure at 40%), available at =z4&tid=ptv_rellink chec

10 does not have access to dynamic ancillary fee information, depriving consumers of this crucial information. As the Department points out: While fare, schedule and availability information is currently provided by the airlines to the GDSs, and by GDSs to the agents that display and sell to consumers, information about the cost of ancillary services is not typically shared. NPRM at 29,976. The GAO also determined that customers using online travel agencies and traditional or corporate travel agents, which together sell 60 percent of all airline tickets, cannot readily obtain and compare information on complete trip prices that include both the fare and selected service fees. This lack of information also makes it impossible for customers using online travel agencies or for travel agents using a GDS to select or make payment for optional services at the time of booking, which for many corporate customers is important for tracking payments GAO Report at 16. At the same time that airline add-on fees have become more prevalent and more substantial, the number of U.S. airline competitors has sharply contracted. As a result of eight years of mergers and acquisitions, some 82% of domestic capacity is held by just the four largest carriers, which allows for a better supply-demand balance in the industry, higher fares and skyrocketing share performance. High Times for U.S. Airlines, Wall Street Journal at B1 (Jul. 25, 2014). In this environment, it is all the more critical to have transparent ancillary fee disclosures to allow consumers to compare competing airlines prices and to know the total cost of their air travel, and to make airline competition as robust as possible. However, such transparency is lacking, making it impossible for consumers to efficiently compare airline prices: Trying to find the best deal for a flight used to be a lot easier. All you had to do was look at the price of airfare - and you could easily compare one to the next. Not anymore. As the summer travel season ramps up, it s all about the fees: fees for boarding passes; fees for seating; fees to flight changes; fees for your bags. Fees, fees and more fees. A lot of travelers are realizing they

11 can t just price-shop anymore, says Annie Wang, senior travel strategy analyst for the website TravelNerd.com. Airline Fees Complicate Travel Cost Comparisons, Mitch Lipka, Reuters (May 31, 2013). 11 In the 2010 GAO Report, the GAO found that information about [ancillary service] fees is not fully disclosed through all ticket distribution channels used by consumers, making it difficult for them to compare the total cost of flights offered by different carriers. GAO also observed that a system is being tested to fully disclose all of the fees to consumers searching for fares, but it concluded that airlines are not likely to disclose them unless compelled to do so. 12 (Emphasis added.) Open Allies agrees. In its 2010 Report, GAO recommended, among other things, that DOT: Improve the disclosure of baggage fees and policies to passengers, in accordance with DOT guidance, by requiring that U.S. airlines and foreign airlines that fly within or to or from the United States disclose baggage fees and policies along with fare information such that this information can be consistently disclosed across all distribution channels used by the airline. Require U.S. airlines and foreign airlines that fly within or to or from the United States to disclose all airline-imposed optional fees that it deems important to passengers to know and further require that this information be consistently disclosed across all distribution channels used by the airline. Id. at 35. Four years later, the GAO identified inadequate disclosure of ancillary service fees as a continuing problem GAO Report at 34-35, Similarly, the Advisory Committee for Aviation Consumer Protection, which was created by Congress to consider and make recommendations concerning aviation consumer protection measures, called on the Department to ensure transparency in air carrier pricing through 11 Available at 12 Unfortunately, GAO proved prescient. The new system, called ATPCO-OC, designed and tested by airlineowned ATPCO, was up and fully operational in October 2010, but airlines for the most part have obviously not utilized it to transmit ancillary fee information

12 greater transparency in the disclosure of ancillary fees. Report on Recommendations of the Advisory Committee on Aviation Consumer Protection As Required by Public Law , Section 411 at 4 (Mar. 22, 2013), DOT-OST The Committee also urged that all participants in the distribution system should be guided by certain principles, including that consumers should expect to know the cost of the entire trip before purchasing a ticket. See Report of the Advisory Committee on Aviation Consumer Protection at 8 (Oct. 22, 2012), DOT- OST More recently, Senator Jay Rockefeller, Chair of the Senate Committee on Commerce, Science and Transportation, sent a letter to ten U.S. airlines making clear his concern about the lack of fee transparency: In order to effectively comparison shop, consumers need clear information about specific costs of various fees that may be added to the base fare. 13 He proceeded to note that, consumers have raised concerns that fee disclosures can be confusing and difficult to compare as they are often presented as ranges instead of fixed amounts. 14 The Survey conducted by Open Allies found the aggressive airline rollout of ancillary service fees has dramatically harmed consumers ability to search for and compare the all-in price of flights across airlines. That very current canvassing of the views of consumers found, inter alia, that as of September 2014, about three-quarters (73%) of respondents say that it is very or extremely inconvenient to have to take multiple steps to buy the ancillary services they need. In short, the time has come for the Department to take effective action with respect to the ancillary service fee problem. 13 See 14 Id

13 B. As the Record Already Before DOT Shows, Consumers Want and Deserve Better Information on Ancillary Fees As of the filing date of these comments, there were over 600 comments posted in response to the NPRM. Those comments overwhelmingly express support for the Department s proposal to require increased disclosure of ancillary service fees. Consumers generally give two key reasons for supporting increased disclosure of ancillary service fees: (1) it would allow them to compare prices across various airlines; and (2) it would prevent airlines from surprising them with fees after they have purchased their airfare. The comments also indicate that ancillary fee information must be transactable in order for the purchasing process to be truly transparent for the consumer. Commenters consistently say that they are unable to compare the cost of flying on different airlines because airlines do not disclose ancillary fees. One commenter states that the current pricing used by many US airlines is, because of the hidden nature of ancillary fees for common and previously free services, anti-competitive in that it makes comparison shopping extremely difficult at best and impossible at worst. Comment Another commenter said that it is almost impossible in some cases to know what the final cost of a flight is going to be until after it has been booked I strongly support display of full costs up-front in order to do valid apple-to-apple comparisons. Comment 0534; see also Comment 0392 ( I search carefully to find the best fare a combination of price and length of flight. Because of all the ancillary charges the airlines now apply, it is almost impossible to find what the actual fare will be. I strongly hope the transparency of airline ancillary fees rule is implemented. ); Comment 0458 ( It is so frustrating to purchase an airline ticket that I do everything I can to avoid flying Spending a couple of hours on the computer trying to find out what a ticket costs, and ending up in tears with frustration, is not worth it. ); Comment 0542 ( The airline industry is making it

14 impossible for consumers to accurately compare prices between carriers with the current wave of un-bundling and lack of ancillary price sharing with ticket agents. ). Commenters also consistently say that they feel deceived or surprised by hidden fees that appear only after going through the purchase process. They emphasize that airlines tack on additional fees after the completion of a ticket purchase transaction; such as baggage, seat assignment and carry-on bags It s insane that a few dozen airlines can override the wishes and needs of the public and argue for need to deceive and mislead by obfuscating the true cost of travel. Comment 0258; see also Comment 0100 ( Sad that government has to be involved but some airlines[ ] hidden fees have made the market deceitful, destroying the opportunity for healthy competition. ). Consumers describe this as a bait-and-switch or a shell game. According to one commenter, the airlines want to use deceptive price advertisement to bait consumers and then switch the prices by adding on expensive fares for seat selections, carry-on luggage, food, taxes, airport fee, etc. Comment 0318; see also Comment 0308 ( Buying an airline ticket is like playing a shell game. ); Comment 0610 ( [I]t seems like a bait-and-switch from the airlines [T]here is no way to account for those fees unless you go all the way through the booking system which is a tremendous hassle to the consumer. ). Other commenters emphasize that ancillary fee information must be transactable for true transparency to be achieved. Comment 0619 ( [I] Recommend three changes to the ancillary fees proposal in the NPRM that are necessary to restore true transparency and comparisonshopping of the all-in price of air travel alternatives and to put an end to unfair and deceptive airline marketing practices. 1 - Require airlines to allow consumers to pay for their basic ancillary services at the time of ticket purchase through any distribution channels airlines use ); Comment 0617 ( The DOT must require airlines to allow consumers to pay for their

15 basic ancillary services at the time of ticket purchase through any distribution channels airlines use. Failing this, the consumer is exposed to the GREAT SURPRISE at the airport where the cost of the trip is suddenly much more than s/he thought. ). In addition, on September 10, 2014, a group of consumer organizations 15 filed a letter in this docket urging the Department to ensure that airline consumers can see the full cost of flying including basic ancillary fees, are able to comparison shop across airlines including passenger and flight specific ancillary fees, and are able to purchase these ancillary products at the same time that they pay for their airfares. See DOT-OST Similarly, comments filed in the docket relating to the Advisory Committee for Aviation Consumer Protection, Docket DOT-OST ( Advisory Committee Docket ), overwhelmingly express support for increased disclosure of ancillary fees. Nearly all of the comments complain about hidden fees. Many discuss being surprised by fees. For example, one commenter said that [a]fter my grandmother died [unexpectedly], I had to take a flight home and though I thought I had enough money for the trip, it turned out I did not because the flight cost more [than] was promised. Comment Another commenter said that I purchased airline tickets from Delta Airlines yesterday and was amazed to find out I had to pay an extra $240 so that my family could sit together. Even after explaining we would be travelling with a 6 year old and a 4 year old the airline would not book us next to each other unless I upgraded to comfort select seating for an extra $39 per person each way. Comment Commenters complained that hidden fees make it difficult to compare prices when shopping for airline tickets. One commenter said that when [airlines] don t disclose all the hidden fees and costs, they make it impossible to accurately compare flights between airlines. 15 Consumer Federation of America, National Consumers League, Consumer Watchdog, Travelers United, Association for Airline Passenger Rights, Airline Passengers.org, Business Travel Coalition, PlusInc, and Ed Perkins, Retired Founding Editor, Consumer Reports Travel Letter

16 Comment 0082; Comment 0195 ( I don t care to see fees regulated: as long as they are coded into the booking system so I can see them and compare them. ). Another commenter wrote that full disclosure upfront allows a consumer to make a more appropriate decision when buying an airline ticket. Need to know all the facts before we purchase... this is no different than bait and switch and it really [affects] the reputation and integrity of the airline. Comment C. Inadequate Ancillary Fee Disclosures Confuse Passengers and Impede Comparative Shopping and Efficient Purchasing Until recently, airlines included in the price of air transportation basic services such as an assigned seat on the plane, carry-on and checked bags, and priority boarding. These services were treated as intrinsic to the air transportation covered by the ticket price. Many consumers are surprised to find out that these services are no longer included in the price of their ticket. And because they do not receive complete information about ancillary services and fees at the time of booking, consumers are confused about which services are and are not included, what the additional prices for such services are, and what the total price for their air transportation will be. While Open Allies does not argue that airlines should not have the right to unbundle, it firmly believes that unbundling must be made very transparent to passengers so that passengers know the all-in price of their air transportation before they buy. The problem is that airlines have incentives to hide ancillary fees. Reducing the advertised airfare and increasing ancillary fees that are not readily apparent make the price of travel seem lower. This strategy also results in passengers often not finding out about ancillary fee prices until they have already purchased their ticket and it is too late for them to choose a different option, or to forgo their travel plans altogether. Airlines also have incentives to withhold ancillary fee information from their own agents, as evidenced by the fact that currently agents seldom have access to such information. Ticket

17 agents unlike the airlines themselves offer a comparative shopping experience, allowing consumers to easily compare the prices of multiple airlines. Comparison shopping promotes informed buyers, enhances competition and lowers prices. Consumers rely on ticket agents to provide them with accurate, efficient price comparisons that allow them to make informed choices without having to consult each airline individually. When ticket agents do not have access to ancillary fee information, consumers lose these benefits. Airlines also have incentives to withhold ancillary fee information from ticket agents because doing so forces consumers to go directly to airlines to obtain the information. This practice increases consumer search costs, reduces comparative information and impairs competition, as consumers are steered by airlines to highly-biased airline websites. For airlines, lowering their base price and boosting ancillary fees makes them appear like a better choice in a price comparison that includes only base prices. Particularly in multi-airline electronic displays, lower airfares usually mean a preferred (i.e., higher) display position and thus a greater likelihood that a consumer will choose that option, even if the all-in price ends up being more than it would have been had the consumer chosen a different option. Such practices obfuscate the true price of an airline ticket and allow some carriers to appear relatively lowerpriced when in fact their all-in price is higher. Even if passengers are aware of the existence of ancillary fees and thus are not completely surprised when, for example, they find out at the airport that they need to pay for a carry-on or checked bag they also need to know the amount of the fees when they are making their purchasing decisions. Right now, consumers are unable to easily compare all-in prices for their travel because full pricing information (which includes ancillary fees) is not being provided by airlines to ticket agents, as the Department recognizes. NPRM at 29,

18 Incomplete prices are misleading and cause consumers to make poor purchasing decisions. Consumers might think they are getting the best price based on the advertised airfare, but they may find that they overpaid because the all-in price (including the services they need or wish to buy) exceeds the all-in price of a competing airline. The inability of agents to offer consumers all-in price comparisons reduces the value that consumers receive from the comparative shopping offered by agents. In other words, consumers are losing the full benefits of a comparative shopping experience. The only way consumers can attempt to avoid the problem of incomplete information is to check directly with each airline which services are considered ancillary to their air transportation and what the price is for each such service. This is obviously a hugely timeconsuming and inconvenient task. Consumers should not be forced to bounce from site to site to try to find out how much their total ticket price really is. They should be able to easily determine, at their preferred purchase point and at the time they are shopping for travel, what their all-in price will be. Thus, agents need to be armed by airlines with data that is provided in a format that allows for the display of fees in no different format than fares are displayed. Moreover, as the Department points out, it is hard for consumers to figure out the fees for ancillary services even on the airline websites. NPRM at 29,975. Because this task significantly increases consumer search costs, some consumers will, at some point, simply throw in the towel and make a choice that is not the one they would have made if armed with full information. This is, of course, the very definition of a market failure, and consumers unquestionably are harmed as a result. Consumers are also harmed because the airlines ability to hide ancillary fees restrains competition with respect to such fees. Transparency and effective comparison shopping enhance

19 competition and discipline prices for base fares. However, this competitive discipline is absent for ancillary fees because such fees remain largely hidden from consumers, and consumers are unable to compare all-in airline prices that include ancillary fees. As a result, consumers are paying more for ancillary services than they would in a competitive environment. 16 This situation cries out for action by the Department. D. An Effective DOT Proposal Will Allow Consumers to Identify and Compare Fees for Certain Core Services that Are Critical to Purchasing Decisions To ensure that consumers are able to receive, at all points of sale, information regarding the prices of basic ancillary services, the Department proposes to require airlines to provide useable, current and accurate information for certain ancillary services to ticket agents that get and distribute the airline s fare, schedule and availability information. See proposed Open Allies strongly urges the Department to adopt this requirement. Consumers should have access to basic ancillary fee information through all distribution channels that an airline uses to distribute its fare, schedule and availability information. Indeed, it is particularly important that such information be made available through the indirect channel, which unlike the direct channel offers consumers the ability to efficiently compare prices across airlines. Easier access to ancillary fee information will alleviate consumer confusion and deception, allow consumers to make more informed choices, and enable more optimal purchasing decisions. 17 The proposed rule will promote greater purchasing efficiency and achieve significant time savings for consumers. Because ancillary fee information is generally not made available to ticket agents and thus cannot be obtained through a single source, 16 As the RIA points out, Transparency in product and price information is a critical component of competitive marketplaces. RIA at 32; see also RIA at 40 (greater transparency generates downward pressure on ancillary fees). 17 See RIA at 40 (stating that increased transparency will lead to consumers making more informed, and thus better, purchasing choices )

20 consumers need to engage in costly searches and make purchasing decisions based on incomplete information. The proposed rule will avoid these inefficient outcomes. The rule will also generate other cost savings for consumers. When armed with full information, consumers can adjust their behavior to reduce their costs. For example, if passengers know before they get to the airport that they will be charged for a second checked bag, they can avoid this extra charge by packing in a way that allows them to check only one bag. If passengers know that certain fees increase as the flight date approaches, they can protect against such increases by buying the services at the time of ticket purchase. If they know that they will be charged for priority boarding, they might plan to leave at home items that are difficult to carry and store in a full cabin so that they can comfortably forgo that service. Business travelers have special issues when it comes to ancillary fees. They need to ensure compliance with company travel purchasing policies and include ancillary fee information in reports and recordkeeping. These tasks are considerably more difficult now than they would be if ticket agents had access to complete ancillary fee information. It is hard to follow purchasing policies when price information is limited and prices cannot be compared. Because ancillary services often cannot be purchased at the time of ticket purchase, it is a struggle to comply with reporting and recordkeeping requirements. See, e.g., Comment 0184 in the Advisory Committee Docket ( Hidden fees are frustrating for companies that have to justify travel expense reports. ) See also RIA at 38 ( Travel managers complain that [ancillary fee] information is not readily accessible to ensure that business travel is booked according to company policy and the fee information is not readily incorporated into internal reservation tracking or accounting programs. The information must be manually entered, often based on receipts or information provided by the travelers themselves. The increased effort results in higher costs related to company travel. )

21 III. Ancillary Fee Information Should Be Made Available to All Ticket Agents in a Transactable Format A. Transactability Benefits Consumers While the Department s proposal to require airlines to disclose basic ancillary fee information to ticket agents is laudable, it does not go far enough. The Department contemplates, and solicits comments on, requiring airlines to allow ticket agents to sell basic ancillary services; however, it does not include this requirement in its proposed rule. See NPRM at 29,979 ( Although the Department has tentatively determined that it would be sufficient to require carriers and agents to disclose certain basic ancillary fee information to consumers, it has not closed the door on the possibility of also requiring that those ancillary services be available for purchase through all channels that carriers decide should sell their fares. ). 19 Open Allies urges the Department to adopt a transactability requirement, which is critical to protecting consumers and preventing further consumer injury that requires redress under Section To achieve the Department s goals of enabling transparency, comparative shopping and efficient purchasing, it is essential that ancillary fee information be provided to ticket agents in the same transactable format as fares. Ticket agents provide a comparative shopping experience for consumers that they do not receive from airlines. The ability to easily compare prices and schedules allows consumers to make better-informed choices, saves substantial search costs, and leads to better product and price offerings for consumers. Consumers lose the benefits of the comparative shopping experience when they are unable to transact services using the indirect channel See also proposed (a) ( Nothing in this section should be read to require that the ancillary services must be transactable (e.g., purchasable online). ). 20 It is noteworthy that Secretary Foxx recently spoke out about the need to allow passengers to make good comparisons in connection with choosing among airline travel options, underscoring that enhancing the ability of

22 For airline consumers, transparency and transactability are interwoven. In fact, most consumers believe that transparency and transactability are one and the same, and DOT should provide both to consumers if it wishes to address the underlying harm. In the Open Allies Survey, nearly three-quarters (72%) of air traveler respondents said that transparent pricing by definition includes transactability, demonstrating that the overwhelming consumer support for transparency in this rulemaking also extends to the transactability of ancillary services. Transactability enables one-stop shopping. If ancillary fees were required to be transactable by ticket agents, consumers could easily and efficiently compare airline prices and schedules and complete their purchase all in one place. They would have the peace of mind of knowing that they got the best all-in price for their needs and would be protected against unexpected increases in that price. Absent transactability, consumers risk losing the desired service and the quoted price. The service risk is particularly great with seat assignments, which are a perishable commodity. As DOT recognizes, consumers especially want to purchase seat assignments when they buy their ticket to ensure that they can get the seat they want and guard against price increases at the same time. 21 If passengers are not able to reserve their seats at the time of ticket purchase, they will not know whether the seats they need or want are available and whether they will remain available until they are able to reserve them. Seat location is enormously important to passengers. For families, couples, friends or business people traveling together, the inability to sit together on the plane substantially diminishes the value of the selected flight. In addition, for many passengers, not being able to get the right kind of seat (such as an aisle seat for someone passengers to engage in price comparisons is a benefit of addressing the unfair practices at issue in this rulemaking. See 21 See NPRM at 29,

23 who needs to get up frequently during the flight) results in a miserable flight. Passengers who know before they buy that they will not be able to sit together or that they will not be able to get the kind of seat they want likely would choose a different option. At the very least, they would be making an informed decision when they select the flight, knowing that they will not be getting what they want. Because seat availability affects the value of the flight, passengers should be able to lock in their seats at the time of ticket purchase if such an option exists. Passengers also risk the prices of ancillary services increasing as their flight date approaches if they are not able to purchase such services when they buy their ticket. Airlines change prices for ancillary services like seat assignments on a dynamic (potentially minute-byminute basis), so a price presented to a traveler or agent during the search process may not be the same price later charged for that service, unless the ancillary service can be purchased along with the ticket. See NPRM at 29,979 ( Prices for advance seat assignment are often dynamic and change based on route, aircraft size, availability, and time of purchase. ) The inability of passengers to lock in the price at the time of ticket purchase presents a serious bait and switch problem. Passengers are misled into thinking that their travel will cost a certain amount, and they later find out that it costs more because the airline has increased its ancillary service prices. The Department acknowledges this problem in the NPRM, noting that consumer groups and others have argued that if consumers cannot purchase ancillary services when they book their tickets, the carrier may increase the price of those ancillary services before the consumer has a chance to purchase the ancillary service on the carrier s Web site or through its reservation center. 22 This situation is fundamentally unfair to consumers and can be completely avoided if consumers have the option to purchase ancillary services when they buy their tickets. 22 NPRM at 29,

24 For carry-on and first/second checked bags, the Department has sought to avoid the problem of increasing fees by requiring that passengers must be charged the price they were quoted at the time of ticket purchase. While this requirement helps, it does not entirely solve the problem because passengers may be quoted prices that progressively escalate as their departure date draws closer, yet they are unable to protect against such escalation by buying the services when they buy their ticket. The only way for passengers to guard against the price increase is to deal with the airline directly, which essentially means they have a choice between two bad options: raising their transaction costs or losing the opportunity to buy at the lower price. Either way, the actual cost to consumers rises. Ticket agents inability to sell ancillary services also harms consumers because it forces them away from the indirect channel and into the inherently-biased airline direct channel. This causes consumers to lose the benefits of comparative shopping and make decisions based on incomplete information, since airlines do not offer information on their competitors. It also substantially increases their search costs, as consumers must go from airline to airline, hunting for information on airfares, schedules and ancillary fees. Disclosure without transactability of ancillary service fees runs counter to the shopping experience to which consumers are accustomed; typically, if consumers can view products and services for sale on the internet, they are able to purchase them. And for good reason: advertising products and services without providing the ability to purchase them makes little sense in a competitive marketplace and suggests an underlying anticompetitive rationale. It should come as little surprise that air travelers overwhelmingly favor extending the proposed rule to cover transactability as well as transparency. In the Survey, respondents said by a six-to-one margin (71% to 13%) that airlines should be required to sell their fees wherever they sell their tickets

25 Notwithstanding airline claims to the contrary, there can be no question that transactability through GDSs and travel agents is technologically feasible. The fact is that GDSs already facilitate the sale of ancillary services through travel agents. While airlines have for the most part withheld ancillary fee information, some airlines have provided GDSs with the ability to display and sell at least some of their ancillary services. 23 On this limited basis, ancillary fees have, for several years, been transacted smoothly and efficiently through GDSs using existing industry protocols and technical standards. In fact, the same airline groups claiming that transactability is not technologically feasible also point to recent GDS distribution deals as proof that the market will address this issue without DOT intervention. This contradictory argument could be summarized as we re already doing it, so you shouldn t interfere, but if you force us to do it, the technology won t allow it. Airlines have also argued that there is no precedent for a regulatory agency to require a company to sell its product through certain distribution channels. This claim falls apart on closer examination, however, as the airline industry has chosen to pursue a unique business model in disaggregating a single service the ticket into separate but necessary components (base price, seating, baggage, boarding, etc.) Because the components are all fundamental parts of the flight service itself, transactability is really a matter of pricing transparency, not mandatory distribution. Put another way, since airlines cannot sell a fee without the flight, the rule sought here would merely preclude the airlines from refusing the agents with which they have chosen to do business the right to sell anything other than the pieces of what they were already selling. 23 See, e.g., Ancillary Fees: Coming Soon to Your GDS (At Last), Michele McDonald, travelmarket report (Aug. 1, 2011), available at Airlines, GDSs slowly reach deals on ancillaries, Kate Rice, Travel Weekly (Sept. 23, 2012), available at travel-news/travel-technology/airlines-and-gdss-slowly-come-to-terms-on-ancillary-sales/

26 In short, the evidence establishes that the market has not worked and is not delivering consumer welfare-maximizing outcomes. DOT has the statutory responsibility to ensure consumers are not treated unfairly or misled. DOT must act now despite the protests of airlines that they want to be able to withhold part of the price of transportation sold via a GDS to enhance their bargaining leverage. B. DOT s Own Analysis Demonstrates that Consumers Enjoy Increased Benefits If Ancillary Services Are Transactable by Ticket Agents The Department recognizes that transactability would provide greater consumer benefits. Even under the incomplete analysis in the Regulatory Impact Analysis ( RIA ) which by its terms does not reflect all consumer benefits forecasted consumer benefits nearly triple with transactability. The RIA shows a positive swing of $49.8 million in net benefits over 10 years (from negative $21.1 million to positive $28.7 million) 24 when ticket agents are able to sell basic ancillary services. See also RIA at 12 (observing that full transparency and transactability are attributes of a well-functioning market for air travel: indeed, our analysis demonstrates that economic benefits would exceed those of the Proposed Rule nearly three-fold ). And there can be no question that as the Department readily acknowledges these figures understate the real benefits to consumers. See, e.g., RIA at 35 (observing that many expected benefits of the proposed rule are not quantified because of limited data availability). The obvious corollary to these unrealized consumer benefits is that the absence of transactability causes consumer harm in at least a commensurate amount. The Department assumes that its proposed disclosure rule will lead to transactability (even absent a DOT requirement) because transactability produces better outcomes for 24 As explained below, the net benefits are in fact considerably higher for several reasons, including that the ATPCO charges to carriers, which were erroneously included as costs of the proposed rule, should be removed and that overly-conservative figures and mistaken and incomplete calculations were used in the RIA

27 consumers. See RIA at 7 ( By requiring the industry to move in the direction of fuller disclosure, the Department believes that the market might well by itself recognize associated benefits and introduce appropriate changes, including transactability. If, over time, the Department discovers that additional regulation is necessary to protect consumers, further regulatory action can of course be considered. ); id. at 12 ( [B]y nudging the industry in the direction of fuller disclosure and transactability, the Department believes that the market will by itself recognize [the increased economic] benefits and introduce appropriate changes accordingly. If however, in the fullness of time, the Department is proven wrong in this assumption, further regulatory action can of course be considered. ). But as the Department well knows, markets do not always tend toward results that promote consumer well-being. This reality forms the very foundation for much government regulation. As discussed above, the fact is that in these circumstances there is little reason to believe that the market will tend toward transactability. Since the beginning of airline unbundling several years ago, airlines have for the most part withheld from ticket agents the ability to sell ancillary services, apparently believing that it is in their best interest to do so. In fact, airlines have commercial incentives to hide the true cost of travel at the shopping stage. The Department gave the market a nudge in the 2011 Consumer Protection Rulemaking by requiring limited ancillary fee disclosures; yet, as the Department recognizes, airlines still generally do not provide to ticket agents information on, or the ability to sell, ancillary fees. There is little to suggest that airlines will reverse course and start doing so absent a DOT mandate

28 C. DOT Has Not Offered Any Sound Reason to Reject Transactability; Transactability Will Not Weaken Airline Bargaining Power and It Will Protect Consumers According to the Department, airlines that oppose the Department taking action to ensure disclosure and transactability of basic ancillary fee information argue that the Department should not interfere in negotiations between airlines and GDSs. These airlines say they prefer to negotiate with the GDSs for the business terms acceptable to them (NPRM at 29,976), and argue that alleged GDS market power (RIA at 5, 11) should be a basis for the Department not to act. But the NPRM does not offer any specific consumer welfare reason for not requiring basic ancillary services to be transactable, while at the same time giving reasons (at 29,979) why transactability is warranted, at least for seats: Prices for advance seat assignment are often dynamic and change based on route, aircraft size, availability, and time of purchase. Proponents of transactability argue that without the ability to purchase the seats at the time of ticket purchase, consumers will be further harmed because desired seats may not be available when the passenger decides to purchase them or is allowed by the carrier to purchase them or they may cost more. The RIA, by contrast, points to concerns about Department interference in commercial arrangements between GDSs and airlines and possibly providing undue bargaining leverage to GDSs as a basis for not providing transactability, see, e.g., RIA at 5, 7. Open Allies is uncertain as to whether the RIA represents the Department s views or merely those of the outside consultants who prepared the RIA; nonetheless, Open Allies will address those concerns here. The claimed concern about depriving carriers of leverage in their negotiations with GDSs is based on outdated conceptions of the GDS and airline industries that harken back to the 1980s and 1990s. In fact, airlines are not captive to each GDS. This is evident in the fact that GDSs collectively now account for about 50% of airline tickets, with the rest sold by the airlines directly. The GDS share of airline sales has declined significantly from the late 1990s as airlines

29 began to devote more attention and resources to their websites and divested their ownership interests in GDSs. The fact that such large numbers of bookings have migrated to the carrier direct channel in and of itself highlights for airlines and GDSs the potential loss of significant business for any GDS that cannot strike a mutually-acceptable, full-content deal with any large carrier. Further, the surest evidence that airlines in the 21 st century have ample leverage in negotiations with GDSs is the fundamental fact that GDS fees to the major U.S. airlines have declined substantially since the CRS industry was deregulated in early From November 1984 to February 2004, of course, GDSs were required by DOT CRS rules to charge all airlines the same level of fees for the same level of service. The result, unsurprisingly, was to inhibit GDSs from giving booking fee discounts. The substantial reductions in GDS fees that airlines have achieved since the CRS rules sunset in 2004, combined with the growth of direct channels such as websites, demonstrates the substantial airline leverage in GDS negotiations. In public disclosures to shareholders (which must be accurate and not be materially misleading), the airlines have touted the savings and other benefits they have achieved. For example, on a US Airways earnings call of February 21, 2006, when asked by an analyst from Goldman Sachs to touch on the agreement reached with Sabre a few weeks before, the US Airways EVP Sales & Marketing said (at page 11 of transcript): We do have savings we will have savings from that agreement. It s an agreement that we are happy with. We think it s good for our customers. We think it s good for us financially, and it secures a distribution channel that a lot of our best customers want to use. See Exhibit 2 (emphasis added). 25 The defining quality of monopoly power is the ability to control price or to exclude rivals. See, e.g., U.S. v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956); Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). The prolonged descent of GDS pricing to airlines since discounting was first allowed in 2004 should have laid to rest any notion that GDSs have the power to control prices charged to airlines

30 Similarly, on an AMR Corporation earnings call of October 18, 2006, in prepared remarks, the then-ceo of AMR, said (at page 3 of 18 of transcript): Reducing our distribution cost is another important initiative this year. And I m pleased to report that in the third quarter we successfully renegotiated our agreements with Galileo and Sabre. I won t get into the details, but those agreements provide the opportunity for us to realize significant distribution costs savings, while at the same time preserving our flexibility to pursue new and cost effective technologies as they become available downstream, which we fully expect to happen. See Exhibit 3 (emphasis added). Events since 2004 have demonstrated the precise tactics airlines use to deploy their leverage to maximum effect. For instance, the airlines have used the following tactics tactics that would remain available to them regardless of any DOT action here to exert pressure on GDSs: Airlines have used the travel trade press (which is directed, inter alia, at the travel agents who subscribe to GDSs) to communicate threats to levy per-segment or perticket surcharges on, and to withhold important content from, those agencies using GDSs that do not give them prices they find attractive. For example, a Travel Weekly story of July 17, 2006 entitled, American explains $3.50-per segment fee to agencies, reported that: After issuing a warning months ago, American Airlines lowered the boom and revealed that on Sept. 1 it plans to begin charging agencies a booking source premium of $3.50 per segment for all bookings made in the U.S. through Sabre and Amadeus as well as through certain programs offered by Worldspan and Galileo/Apollo. See Exhibit 4 (emphasis added)

31 Of course, this and similar travel trade coverage caused enormous consternation among travel agencies using the disfavored GDSs, particularly those at American s hub cities. American has hardly been alone in publicly issuing threats of GDS surcharges to maximize leverage over GDSs. In fact, in August 2006 virtually the entire U.S. airline industry was simultaneously issuing similar public warnings to travel agencies. On August 7, 2006, Modern Agent/Travel Pulse reported: The American Society of Travel Agents has issued a member alert that Continental Airlines has given Amadeus subscribers a onemonth extension on its deadline for instituting booking fees for bookings made on non-preferred channels. Sept. 1 had been the date that Continental, American Airlines, United Airlines, and Northwest Airlines had said they would begin charging fees for bookings made through non-preferred channels. See Exhibit 5. Airlines have also utilized public threats of non-participation in a GDS that did not provide them the discounts they demanded. In an article of April 3, 2006, entitled, Continental: Dispute puts agents in the middle Travel Weekly reported that: Continental has joined American in warning agents it might not participate in every GDS and revealed to Travel Weekly that it, too, might consider a fee for agents who use a higher-cost distribution channel. 26 Airlines have successfully used threats of refusing to provide all their fare classes, and especially their most economical fare types, unless a GDS provided them low fees. Indeed, the full-content agreements between GDSs and airlines are premised on the exchange by the GDS of substantial discounts for comprehensive access to the airline s fare classes (and freedom from airline surcharges) that the GDS s subscribers and their clientele demand. 26 See

32 Further, airline power to withhold certain fares or types of ancillary content, impose surcharges, or engage in other negotiating conduct available to them is only increasing. Since 2006 U.S. carrier leverage vis-à-vis the GDS has grown due to consolidation in the U.S. airline industry. In 2006, there were six major U.S. network carriers (American, Continental, Delta, Northwest, United and US Airways) that negotiated with GDSs to provide those GDSs the content their travel agency subscribers and their patrons needed. Today, there are three and in multiple large hub markets across the United States serving millions of passengers just one of these carriers is the principal carrier. In addition, each of these three network carriers offers the only nonstop service in several hundred city-pair markets. Thus, to be able to offer travel agencies in many regions of the country (and across the country) a useable system for booking airline tickets, a GDS needs to negotiate arrangements to achieve the full content of each of these major network carriers. This fact gives the airlines more than sufficient bargaining power. If DOT were to proceed, as we believe it should, to require that airlines provide to ticket agents via GDSs access to basic ancillary service fee information and the ability to transact such services to enable travelers to complete their purchase at the quoted prices, all of these weapons threats of surcharges and non-participation, and the negotiation of how many of the airline s fare types will be made available for display and sale will remain in the hands of the airlines. Importantly, the airline tactics, including ticket surcharges, GDS non-participation, and withholding of fare types/classes from a GDS if a mutually acceptable deal cannot be reached, do not involve the inherent deception that is endemic when airlines disclose only a part of the price of the transportation that they sell via a GDS. That is precisely what airlines do when they provide to GDSs only the base fare for distribution to ticket agents and not the prices of the additional fees for the services the traveler may want or need. The desire of some airlines to

33 further enhance their leverage vis-à-vis GDSs is no justification for the consumer deception, confusion and harm that flow from that tactic. Put differently, it is untenable for the airlines to suggest that any producer of any good or service can legitimately mislead consumers about the all-in price of its products because the object is to force a distributor or other third party to give it more favorable terms. D. A Price-Lock Will Not Provide an Adequate Alternative to Transactability The Department has previously concluded that a prohibition on fee increases for ancillary services not purchased at the time travel is purchased should apply to all ancillary services. See 14 C.F.R and FAQ XI.7 to the 2011 Consumer Protection Rulemaking. However, after airlines complained that the blanket prohibition was too cumbersome, the Department decided through Guidance to apply a prohibition on fee increases only to carry-on and first and second checked baggage fees. See NPRM at 29, In the current NPRM, the Department proposes to maintain this prohibition on post-purchase increases in baggage fees, but not extend it to other ancillary services pending comments solicited in the NPRM on whether it should extend the prohibition beyond baggage fees. See proposed Section (limiting post-purchase increase prohibition on ancillary services to baggage fees). The Department has apparently concluded that it would be infeasible or impractical to expand the post-purchase prohibition to seat or other ancillary service fees. If there were a prohibition on increases for other ancillary services, including seat and boarding fees, such a prohibition would help to protect consumers from the bait and switch problem that arises in the absence of transactability, but would not be a complete solution to the 27 See also Guidance on Price Increases of Ancillary Services and Products Not Purchased with the Ticket, issued December 28, 2011 at Purchase%20Price%20Increase%20of%20Ancillary%20Services%20Not%20Purchased%20with%20Air%20Trans portation%20final%20dec%2028.pdf

34 absence of transactability. Airlines can and in fact do have prices that are designed to escalate as the travel date approaches. 28 Therefore, consumers would still face the inconvenience of having to go to airline sites to purchase the ancillary service to protect themselves against a higher price. This raises their transaction costs, weakens comparison shopping and diminishes competition. Clearly, the better solution is transactability. Moreover, keeping track of the many prices for ancillary services, including seat fees, that applied at the time the customer purchased the ticket is no easy matter. As noted, the airlines previously made this showing to the Department when it adopted a rule banning price increases for all ancillary services after ticket purchase. The airlines persuaded the Department that the rule was unworkable, and the Department thereupon clarified in guidance that its current fee-lock rule applies only to carry-on and first and second checked bags. In fact, the GDS sector would need to build an infrastructure that does not now exist to allow passengers to attain access under a fee-lock scenario to the level of seat fees that existed at the time that they purchased their transportation. Developing such an infrastructure would be costly and time-consuming, and entirely unnecessary if seat fees were always transactable at the time of their display on agency websites. Therefore, as a practical matter, a prohibition on post-ticket-purchase increases of prices for ancillary services is not a realistic tool in the Department s arsenal to protect consumers. Again, these problems disappear with transactability. If ticket agents are able to sell ancillary services, there is no need to prohibit price increases for unpurchased ancillary services, since consumers would have the option to purchase ancillary services and lock in their price when they buy their ticket. 28 For example, a passenger might be quoted a range of seat fees that vary depending on when the passenger actually purchases the seat. This range presumably would lock in at the time of ticket purchase, but the passenger would still need to buy the seat as soon as possible to avoid the prices at the higher end of the range

35 IV. DOT Should Adopt Option A, Under Which All Ticket Agents Receive Ancillary Fee Information The Department proposes two options for disclosure by airlines to ticket agents of basic ancillary fee information. Under Option A, airlines would be required to disclose such information to all ticket agents that receive and distribute the carrier s fare, schedule, and availability information. Under Option B, that requirement would be further qualified to apply only to ticket agents that sell that carrier s tickets directly to consumers. See proposed (b) under Option A and Option B, respectively. The RIA states: The Department does not currently have a preference between the two different implementation options. RIA at 40. Open Allies urges the Department to adopt Option A, under which airlines would be required to provide basic ancillary fee information to all ticket agents. A. The Proposed Rule Is Not Workable Without GDS Involvement Without Option A, the proposed requirement for travel agents to disclose fees could not be implemented and the Department s goals in this rulemaking would be thwarted. If GDSs do not receive ancillary fee information, most travel agents will be deprived of the most efficient and indeed the only practical means of obtaining the information that they will be required to furnish to consumers. As the Department acknowledges, GDSs are the source through which most travel agents obtain their fare information, so as a practical matter, they may be the most efficient vehicle currently available for carriers to use for dissemination of information on ancillary fees. NPRM at 29,977. In fact, there is no other feasible way for ancillary fee information to be made available to consumers through most travel agents. About half of airline tickets are sold through the indirect channel by travel agents. 29 Consumers rely on travel agents as a neutral source of airline fare and schedule information. The 29 See NPRM at 29,975 ( Approximately 50% of airline tickets are purchased indirectly through ticket agents. )

36 indirect channel allows consumers to easily and efficiently compare fares and schedules across airlines. Travel agents, in turn, rely on GDSs to facilitate their ability to offer consumers a comparative shopping experience. 30 To do so, travel agents must have access to massive amounts of information, which must be organized and presented to them in a useable way. GDSs play a key role in making this possible. As the RIA states, GDSs play an important role in the air travel industry, linking carriers and travel agencies and tour operators. They consolidate and distribute information regarding airfares including ancillary service fees, connect carriers, travel agencies and corporate travel management companies, and facilitate the sale and distribution of tickets. RIA at Under both proposed Options A and B, the more than 175 airlines that serve the United States would be required to provide ancillary fee information to tens of thousands of travel agencies, which depend on GDSs for nearly all their pricing information. The amount of information involved is huge. The only efficient way to make this information available to, and useable by, most travel agents is through GDSs because the GDSs have made the necessary technology investments to support data dissemination. Many travel agents who submitted comments in the Advisory Committee Docket expressed support for requiring disclosure of ancillary fees to GDSs. For example, one commenter said that the best way to guarantee that all travelers gain access to the same information is to ensure that airlines are required to make core add-on fees evident and bookable in every distribution channel those airlines choose to utilize, including global distribution systems (GDSs). Travel agents like me value the efficiency of GDSs and, as such, use independent distribution channels to book travel for approximately half of America s airline 30 See id. at 29, ( Ticket agents that display or sell air transportation typically get the fare, schedule and availability information about the air transportation through a GDS. )

37 passengers. Comment 0078; see also Comment 0039 ( Booking travel through a GDS system that doesn t allow the add-on s to be booked there as well, is highly inefficient and causes confusion for the traveler, as we have multiple hoops to jump through to answer their basic questions. How much is that seat going to cost? What is the seat assignment number, etc.? ); Comment 0166 ( [I]n an open market, airlines have the right to charge whatever prices they want but they should also have a responsibility to provide complete price information via the GDS which is the primary tool used by corporate travel departments and travel management companies. ). The ability of GDSs to receive and efficiently disseminate ancillary fee information to travel agencies has been tested and proven. In fact, GDSs have had this capability for several years. Nearly four years ago, on October 13, 2010, the airline-owned Airline Tariff Publishing Company ( ATPCO ) issued a press release entitled Infrastructure in place to display ancillary services in an estimated 90 percent of travel sales channels. 31 That press release said: ATPCO is pleased to announce that the infrastructure is now in place to display airlines Optional Services data in an estimated 90 percent of all sales channels worldwide. This development will enable airlines to clearly communicate their service offerings to potential customers, generating interest in their services and stimulating sales. Passengers will also be able to quickly and efficiently determine their total travel costs, including any valueadded services they may wish to purchase, through almost all points of sale. ATPCO s Optional Services, as an industry-standard solution, makes it possible for airlines to present customized and branded ancillary offerings in all channels, including the GDS-driven portals through which about 53 percent of global travelers are booking, said Rolf Purzer, ATPCO s Chief Marketing Officer. With the infrastructure advancements by ATPCO s system partners, the industry moves a step closer to full implementation of 31 Available at

38 an end-to-end solution that will allow travelers to both shop for and purchase ancillary services in every sales location. The rule should not discard this capability but instead should use it to ensure that ancillary fee information can be disseminated through all of the channels that airlines and consumers use. If ancillary fee data is not provided to travel agencies via GDSs in a way that empowers agents to make efficient pricing comparisons, agents will be unable to communicate vital pricing information to a great many travelers in a cost-effective way prior to their purchasing decisions. Inevitably, many travelers will be misled into buying an option that proves ultimately to have a higher all-in price than the traveler might have selected if more complete information had been available at the time of ticket purchase. The Department should reject such an inefficient and consumer-unfriendly outcome by adopting Option A. B. There Is No Valid Reason to Exclude Intermediaries The Department does not give any reason to support excluding intermediaries from those ticket agents that would receive ancillary fee information from airlines under the proposed rule. In fact, the NPRM and the RIA generally reflect the reality that if the Department s objectives of promoting transparency and comparative shopping are to be achieved effectively and efficiently, GDSs will need to have access to ancillary fee information. See, e.g., NPRM at 29,975 (recognizing the fact that because the Department had not required the dissemination of ancillary service fee information through GDSs agents would not necessarily have access to the most up-to-date and accurate ancillary service fee information ); id. at 29,977 ( GDSs are the source through which most travel agents obtain their fare information, so as a practical matter,

39 they may be the most efficient vehicle currently available for carriers to use for dissemination of information on ancillary fees. ). 32 Option B would ignore this reality, without any justification. Because the Department does not have a preference between Options A and B, it merely recites arguments for each without taking any real position on them. It mentions that Option B would not require that ancillary fee information be given to GDS or other intermediaries since GDSs and similar intermediaries would not be subject to any direct consumer notification requirements. NPRM at 29,977. But this approach simply and unrealistically disregards the vital role that GDSs play in the indirect distribution channel, contrary to multiple statements in the NPRM and RIA underscoring the critical nature of that role. The Department notes that airlines and airline associations have argued that requiring them to provide ancillary fee information to GDSs could reinforce the existing distribution patterns and stifle innovation in the air transportation distribution marketplace. NPRM at 29,976. These airlines claim that GDSs might use existing contracts and market power to pressure carriers to provide the information in the existing format for fare filing and carriers would therefore no longer have sufficient financial incentive to invest in new distribution technologies. Id. at 29, These arguments hold no water. In recent years there have been dramatic developments in the airline and air transportation distribution industries. Technology has continued to advance at a rapid pace, the share of tickets sold directly to passengers by airlines has increased, airlines have pursued innovative new ways to sell their tickets including on their own websites, on mobile phones and through social networks, there has been significant airline consolidation, and 32 See also RIA at 27 ( GDSs are a critical component of travel agency operations today. GDSs process 64 percent of the total U.S. airline gross sales by revenue. Since the development of early airline-owned GDSs, consumer access to information has become much easier making the search for, and decisions regarding purchase of, airline tickets much faster and easier, and allowing for better comparisons across carriers. )

40 GDSs have offered substantial discounts on booking fees. In addition, airlines have moved forward with joint efforts to develop new distribution strategies, such as the International Air Transport Association s New Distribution Capability initiative. It strains credibility to assert that requiring airlines to provide ancillary fee information to GDSs will halt these developments in their tracks particularly in light of the fact that the costs to airlines of distributing the data through existing ATPCO protocols, which were mistakenly identified in the RIA as a relatively paltry $36,000 annually for each airline, have since been shown to be zero. In any event, the expressed desire of airlines to use access to ancillary fee information as further leverage vis-à-vis GDSs is no excuse for airline behavior that misleads consumers, increases their search costs, and ultimately causes them to pay more for air transportation than would otherwise be the case. Would it be considered conduct consistent with their obligations under Section for carriers to take the position that they would only provide accurate and up-to-date fares to GDSs if the GDSs provided further discounts? The answer is clearly no, and the airlines are engaging in the functional equivalent of that conduct now by disclosing via GDSs only part of the price that travelers must pay for the services they need or want in connection with the tickets they purchase. Notably, DOT does not propose to dictate any particular method for the dissemination of ancillary fee information, and airlines and others would remain free under the proposed rule to develop new methods. As the Department points out, under both options, it is not stating the method that carriers must use to distribute the information. Carriers would be free to develop cost-effective methods for distributing this information to their agents. Carriers could use existing channels, such as filing the fee information through the ATPCO, or they could develop

41 their own systems to disseminate the information, in conjunction with the agents who would receive the information. NPRM at 29,978. It is true that dissemination of ancillary fee information through GDSs would be the lowest-cost, most-efficient method of achieving the goal of providing transparency and comparative shopping to consumers with respect to ancillary fees. At least in the near future, such dissemination might well be accomplished through existing procedures, meaning that airlines would submit fee information to the airline-owned ATPCO, and GDSs would organize that information and make it accessible and useable by travel agents. As evidenced in the record in this proceeding, the RIA significantly overstat[es] the cost to airlines of submitting ancillary fee information to ATPCO. 33 In fact, ATPCO has stated that the incremental cost to airlines will be zero. 34 Given that, it is impossible to see how requiring airlines to share ancillary fee information with ticket agents would affect their financial incentives in any way. C. Option B Would Unfairly and Unjustifiably Discriminate Among Ticket Agents Achieving the objective of wide and transparent dissemination to consumers of ancillary fee information requires that airlines disseminate such information to ticket agents. GDSs are ticket agents, as the Department and the United States Court of Appeals for the District of Columbia Circuit have found. See Computer Reservations System Regulations, 69 Fed. Reg. 976, (Jan. 7, 2004) (finding that GDSs are ticket agents as defined in 49 U.S.C (a)(45)); Sabre, Inc. v. DOT, 429 F.3d 1113 (D.C. Cir. 2005) (denying petition for review 33 See DOT memorandum placed in the docket at DOT-OST See ATPCO Disputes DOT Rulemaking Cost Analysis, The Beat (May 28, 2014) available at LETTER-ATPCo-Disputes-DOT-Rulemaking-Cost-Analysis.aspx; see also Analysis: About That $46.2 Million Error in the DOT Rulemaking Study, The Beat, available at Study.aspx (quoting ATPCO representatives to establish that there are no separate ATPCO fees for dissemination of ancillary fee data)

42 disputing that DOT finding). There is no sensible rationale for disadvantaging some agents over others, particularly where the impact will be to make fee dissemination more challenging, more costly, and less complete. If ticket agents find other ways of getting the data than through a GDS, the market should be the driver, not a DOT rule. D. Option A Will Lead to a More Efficient and Consumer-Friendly Outcome The lowest-cost method for distributing ancillary fee information to ticket agents is through the existing ATPCO standard used by GDSs. As noted, ATPCO has informed the Department that there will be no incremental cost to airlines for using ATPCO to distribute ancillary fee information. Once the ATPCO costs are removed from the cost side of DOT s costbenefit analysis (as they should be, given ATPCO s statement to DOT), the disclosure of ancillary fees to ticket agents has a positive net present value over 10 years of roughly $22 million, even based on the partial benefits quantified that is, consumer search time only and on the very conservative figures and flawed methodology used in the RIA. (As explained in Part IX below, the benefits are in fact considerably higher than this $22 million figure.) There can be no question that this cost-free option, which confers enormous consumer benefits, is the right choice for consumers. IV. The Definition of Basic Ancillary Services Should Be Expanded A. Baggage and Seats Are Core Ancillary Services That Should Be Covered Under the NPRM, covered basic ancillary services would include a first checked bag, a second checked bag, one carry-on bag, and an advance seat assignment. See proposed (b). Open Allies agrees that these services should be deemed basic. They are considered essential to travelers and before the airlines recent unbundling were part and parcel of the air transportation purchased by passengers when they bought their tickets. For most, if not all,

43 passengers, traveling without a carry-on and/or checked bag would be unthinkable and infeasible. Similarly, passengers must have a seat on the plane, and, for a substantial sector of passengers, the location of that seat is of extreme importance. 35 For example, parents will want to ensure that they have seats next to their children, caregivers must be near the person for whom they are caring, business people need to sit next to each other to work together on the plane, honeymooners will likely feel the need to be together, and persons with tight connections may need to sit closer to the front of the plane. Others have strong, often compelling, preferences (e.g., an aisle seat for a person who may need to get up frequently during the flight, a window seat for a child who is flying for the very first time, and so on). For these reasons, the prices for these basic services are critical to passengers purchasing decisions. From the passenger perspective, these services are an integral part of the air transportation they are purchasing; passengers should therefore know their prices before buying their ticket so they can factor them into their purchasing decision. Disclosure and transactability of these basic services is becoming increasingly important as more and more airlines unbundle these services and the fees for these services become increasingly complex. For example, baggage fees may vary not only by the bag (e.g., carry-on, first checked bag, second checked bag, size and weight) but also by when such fees are paid (e.g., prepaid or paid at the airport). Airlines commonly yield manage seat assignments so that they become more expensive as they become scarcer (i.e., the closer in time it gets to flight departure). It is imperative that passengers have the opportunity not only to know the price of these services but also to buy them when they purchase their ticket so that they can figure out the 35 As the RIA states, Although ancillary service fees are not required by carriers to travel, they are nevertheless not always considered optional by passengers. RIA at

44 total cost of their air transportation and protect themselves against those costs increasing. The Department recognizes this problem, particularly as it relates to seat assignments: NPRM at 29,979. Representatives of certain consumer advocacy groups and trade associations have argued to the Department that if consumers are not entitled to purchase the ancillary services at the time of booking air transportation, the carrier may increase the price of those ancillary services before the consumer has a chance to purchase the ancillary service on the carrier s website or through its reservation center. In the case of advance seat assignments, the problem is particularly acute because in addition to price increases, the consumer risks the possibility that the advance seat assignment that he or she wished to purchase will no longer be available. For these reasons, Open Allies fully supports the inclusion of carry-on, first and second checked bags and advance seat assignments in the definition of basic ancillary services covered by the proposed rule. Frankly, the Department should be more skeptical of the airline industry s opposition to broader distribution and transaction of these fees, as that opposition is in direct contradiction to other industries that seek to sell more services and products at the exact time that the customer is ready to purchase. Keeping ancillary services hidden, or available only through direct distribution methods, is a thinly-guised effort to thwart an open marketplace with comparison shopping that only ticket agents offer. B. Basic Ancillary Services Should Also Include Advance Boarding and Change/Cancel Fees Open Allies urges the Department to broaden the definition of basic services to embrace two other categories of services that are also considered essential to many travelers. The first is priority boarding. Passengers traveling with young children, those with mobility problems, those traveling with hard-to-store items such as musical instruments, and many others might well consider priority boarding to be an indispensable service. The price of that service significantly affects their purchasing decision, since their view of the all-in price for their air

45 transportation necessarily includes the price of priority boarding. As the Department recognizes, priority boarding is a service that was traditionally included in the price of an airline ticket, see NPRM at 29,974; passengers consider it an inherent part of the air transportation that they are purchasing. See NPRM at 29,977 (describing basic ancillary services as certain basic services that are intrinsic to air transportation that carriers used to include in the cost of air transportation but that they now often break out from the airfare, and the cost of those services is a factor that weighs heavily into the decision-making process for many consumers ). Consumers should have information on the fees for this service at the time of ticket purchase so that they can make informed purchase decisions. It is also important that such fees be transactable so that passengers can ensure at the time that they buy their ticket that this service will be made available to them at the airport. The RIA notes that the Department considered including early boarding fees within the scope of the proposed rule. However, it tentatively decided not to do so because many passengers with special boarding needs address them at the gate and many loyalty clubs provide early boarding perks. See RIA at 43. This rationale ignores the reality that, for the many passengers who view early boarding as a necessary or desirable service, it is essential for them to be able to know the price of that service for each offered flight option before they make their purchase decision. Consumers need that information so that they can calculate the all-in price of their air travel at the time of booking and make a fully-informed purchase decision based on comparative information. The second category is fees that passengers need to pay when their plans change after they have purchased their ticket, i.e., change and cancel fees. Some passengers know at the time of booking that their plans might change. For them, the level of change and cancel fees

46 unquestionably will be critical to their purchasing decision (as we believe it is to most passengers, who recognize that plans may change even if such change was completely unexpected). Consider a passenger who is traveling cross-country and is trying to choose between two comparably priced flights with similar schedules. If the passenger knows that the travel plans might change, and if one airline charges a $100 change fee and the other charges a $250 change fee, this fee could very well be the key factor in the passenger s purchase decision. But if the passenger does not have this information, the passenger s decision must be made with this key factor missing. The passenger has an even chance of making the right or the completely wrong decision. Such fees should also be transactable; change fees sometimes escalate as the flight date approaches, and passengers should be able to pay those fees when the need arises so that they can avoid paying a higher fee at the airport. Air travelers also strongly support the inclusion of these fees in the rule. In the Open Allies Survey, more than 80% of respondents said that the Department should expand the rule to cover at least one other type of ancillary fee, including cancellation fees (68%), change fees (64%) and priority boarding fees (49%). C. Packages that Include a Basic Ancillary Service Should Be Covered by the Rule Airlines are increasingly offering ancillary service packages that combine more than one service at a discounted package price. For example, airlines might combine advance seat assignments with inflight Wi-fi. To the extent these packages include a basic ancillary service, they should be covered by the rule. Because such packages include services that are crucial to passengers decisionmaking, passengers should have access to information on them when they make their purchase decision. Absent such information, passengers will make poor choices. Such packages should also be transactable to passengers, so that they are able to take advantage

47 of discounted prices at the time of ticket purchase and before those lower prices, or the services themselves, become unavailable. The inability to purchase these packages at the time of ticket purchase creates a bait and switch problem, as passengers may rely on the advertised price and later find out after purchasing a nonrefundable ticket, or after other flight options have disappeared that the price has increased. Moreover, if such packages were not covered by the rule, this omission would create a giant loophole that could be used by airlines to evade the requirements of the rule. VI. Open Allies Supports Disclosure of Basic Ancillary Fee Information to Consumers Provided that Airlines are Required to Disclose Fees to the GDSs under Option A A. Disclosure of Basic Ancillary Fee Information to Consumers Should be Mandatory The Department proposes to require ticket agents to disclose to consumers the basic ancillary fee information that airlines provide to the ticket agents. See proposed (c). Similarly, the Department proposes to obligate airlines to disclose to consumers their fees for basic ancillary services. See proposed (d). Open Allies supports these proposals, which will increase transparency for consumers. B. Open Allies Supports the Proposed Disclosure Requirement for Ticket Agents, When Combined With a Requirement that Airlines Must Disclose Basic Ancillary Fee Information to Ticket Agents The Department proposes to require ticket agents to disclose basic ancillary fee information to consumers on an itinerary-specific basis. See proposed (c). Itineraryspecific refers to variations in fees that depend on, for example, geography, travel dates, cabin (e.g., first class, economy), ticketed fare (e.g., full fare ticket Y class), and, in the case of advance seat assignment, the particular seat on the aircraft if different seats on that flight entail different charges. Id. Open Allies supports this requirement provided that airlines are required

48 to provide transactable fee information for basic ancillary services via the GDSs that travel agencies use as their primary sources for fare data, i.e., Option A. That data should be provided in the same format as fare data so that it can be immediately and dynamically displayed on search results screens, with the fare and tax data, in a way that facilitates total price shopping comparisons. C. Ticket Agents Must Also Have Fee Information to Enable Customer-Specific Quotes To promote transparency and fully-informed decisionmaking by consumers, it is essential that ticket agents also have the option to offer customer-specific fees if they have the necessary passenger information. The NPRM indicates that the Department intends this result: This rulemaking would require U.S. and foreign air carriers to distribute to ticket agents the fees for basic ancillary services. However, carriers would not be required to provide ticket agents information about individual customers, such as their frequent flyer status or type of credit card though these factors may impact the fee for an ancillary service. Carriers would, of course, be required to provide ticket agents the fee rules for particular passenger types (e.g., military, frequent flyers, or credit card holders). Under the proposal, the failure of airlines to share this fee information in an up-to-date and accurate fashion would be considered an unfair and deceptive trade practice in violation of 49 U.S.C NRPM at 29, Open Allies understands this language to mean that, under the proposed rule, airlines must provide complete fee information on basic ancillary services to ticket agents, including fee information that is sufficient to allow ticket agents to quote basic ancillary fees on a customer-specific basis to those customers who choose to provide their personal information to the ticket agent. Open Allies supports this approach. However, in a meeting with A4A representatives on August 7, 2014 (for which a memorandum was placed in the docket on September 16, 2014), a DOT official stated that the

49 penultimate sentence in the above-quoted paragraph was made in error. 36 Open Allies respectfully submits that the Department got it right the first time. It is imperative that ticket agents have the ability to provide customer-specific information on fees for basic ancillary services, if the customer chooses to share with the ticket agent the personal information needed for such customer-specific fee quotes. It almost goes without saying that permitting airlines to provide ticket agents partial and incomplete information on basic ancillary service fees would not be a solution to the problem of lack of transparency of such fees. Ticket agents must have complete fee information for basic ancillary services so that customers can compare actual, applicable all-in prices and know exactly what they will pay for their air travel. To be clear, this does not mean that airlines should be required to provide passenger-specific information to ticket agents. But airlines should be required to provide complete rule information to ticket agents concerning the services for which ticket agents will be required to make price disclosures to consumers. Open Allies strongly urges the Department to clarify in the final rule that it meant what it said in the NPRM. Moreover, it is critical that, when airlines provide fare rules for particular passenger types to GDSs through which their tickets are sold, those rules should not be sent to GDSs as free text messages. If they were, travel agents would need to undertake the time-consuming, manual and thus error-prone process of scrolling through multiple lines of text and data in an effort to pinpoint the exact ancillary fees a particular passenger would pay for particular basic ancillary services for a particular itinerary. Instead, the fee rules for specific passenger types should be disseminated by the carriers through ATPCO, or otherwise agreed media, using structured data 36 DOT-OST at

50 formats that can be read by GDSs and used by them to auto-calculate the exact fee for the specific traveler. If ticket agents do not have complete basic ancillary fee information, some customers will be misled into making purchase decisions that do not represent the best all-in package for the customer. For example, consider a cost-conscious family of four traveling together. The family has the choice of two nonstop airlines with similarly convenient schedules, and one is quoting a fare that is $10 less than the other. Based on the information available to the ticket agent, the ticket agent tells the family that each airline s fee for the first checked bag is $50. The family chooses the airline that appears to save them $40. However, they do not know because the ticket agent does not have the information to inform them that if they had chosen the other airline, they could have paid nothing for the checked bags, due to military or frequent flyer or some other status. The family has made a poor choice and overpaid by $160. The proposed requirement that ticket agents must inform customers that basic ancillary fees may be reduced or waived based on the passenger s frequent flyer status, method of payment or other characteristic, see proposed (c), does not solve the problem. It would leave consumers in much the same position they are in now. That is, they would still not have ready access to their actual all-in price, they would be unable to efficiently compare all-in prices, and they would need to visit multiple sites to figure out their actual price on competing airlines, substantially increasing their search costs and depriving them of the ability to determine the actual cost of their air travel using their preferred distribution channel. To be clear, Open Allies does not oppose a requirement that ticket agents must inform customers that the fees for basic ancillary services may be reduced or waived based on their frequent flyer status, method of payment or other characteristic. However, this requirement

51 should be coupled with one that enables ticket agents to respond to the customer s inevitable response which is to ask what the fees would be based on their particular characteristics. It plainly would not be in the best interest of customers if at that point ticket agents were forced to refer customers directly to each individual airline to find out that information, which is critical to their purchasing decision. D. Seat Disclosure Requirements The Department also proposes to require ticket agents (but not airlines) to disclose to passengers that seat availability and fees may change at any time until the seat assignment is purchased. See proposed (c). Open Allies does not oppose a requirement that ticket agents must disclose to passengers that decline to purchase a seat assignment that seat fees (and fees for other unpurchased basic ancillary services, except carry-on and first and second checked bags) may increase until purchased. That said, if the Department adopts such a disclosure requirement, it should apply to airlines as well as ticket agents. Direct customers of the airlines should be equally entitled to receive notice that the fees for unpurchased basic ancillary services might increase. Of course, the need for such a rule diminishes to the extent that seat fees are made readily transactable through any channel that an airline chooses to utilize. E. For Online Displays, Open Allies Supports the Proposed Rollover/Hyperlink and Seat Map Options and the Proposed Opt-Out Option, Assuming Airlines Are Required to Provide Real-Time, Dynamic Information to Ticket Agents 1. The Proposed Options for Online Displays Make Sense, If Airlines Are Providing the Necessary Information to Ticket Agents Open Allies supports the Department s proposal to require ticket agents with websites marketed to U.S. consumers to disclose basic ancillary service fees at the first point in a search process where a fare is listed in connection with a specific flight itinerary, see proposed (e), assuming that the Department also requires airlines to provide real-time, dynamic

52 basic ancillary fee information to ticket agents, as it proposes to do. Open Allies agrees with the Department that basic ancillary fee information should be disclosed to consumers before they make their purchasing decision to enable consumers to compare all-in prices across airlines and know the true cost of their air travel. See NPRM at 29,977 ( [A]s carriers continue to unbundle services that used to be included in the price of air transportation, passengers need to be protected from hidden and deceptive fees and allowed to price shop for air transportation in an effective manner. The Department believes that failing to disclose basic ancillary service fees in an accurate and up-to-date manner before a consumer purchases air transportation would be an unfair and deceptive trade practice in violation of 49 U.S.C ). Open Allies urges the Department to ensure that the final rule allows ticket agents and airlines flexibility in how fees for basic ancillary services are displayed, as the Department seems to intend. Open Allies is particularly concerned that search results may become too busy, meaning that there could be so much information on a single screen that it might be difficult for consumers to review and digest. The Department indicates that online basic ancillary fee disclosures may be made using a link or rollover. NPRM at 29,978. Open Allies supports this proposal, so long as consumers receive prominent notice adjacent to the advertised fare that additional fees apply for the basic ancillary services disclosed in the link or rollover. The Department also observes that many carriers already offer seat maps during the online booking process on their Web site that permit consumers to obtain a seat assignment at that time and that disclose the charge for each seat. This process would comply with the proposed rule as long as there is a statement adjacent to the fare on the first screen where an itinerary-specific fare is displayed that informs the consumer that there are fees for advance seat assignments and direct

53 links to the seat map. Id. Open Allies thinks this flexible approach to basic ancillary fee disclosures makes sense and urges the Department to adopt this approach in the final rule. The Department also proposes to allow ticket agents and carriers to offer an opt-out option for consumers who prefer to see only fare information without any ancillary fee information. See proposed (e). The opt-out option must not be pre-selected and must include a notice of the basic ancillary services for which fees may apply. Id. Open Allies supports this proposal, including the proposed conditions. While Open Allies doubts that most consumers would select the opt-out option, it would give consumers the flexibility to choose not to view ancillary services and fees if, for example, the consumer plans not to use any such services and therefore wishes to see only airfares. 2. There Is No Need for the Department to Adopt a Design Standard The Department requests comment on whether it should set design standards (e.g., filing of fees for ancillary services through ATPCO, EDIFACT, XML or some other technology) rather than using performance standards for transmission of ancillary fee data from airlines to ticket agents or from airlines and ticket agents to consumers. NPRM at 29,979. The Department explains that it: is not stating the method the carriers must use to distribute the information, as long as it is in a form that would allow the fee information to be displayed on the first itinerary-specific results page in a schedule/fare database. Carriers would be free to develop cost-effective methods for distributing this information to their agents. Carriers could use existing channels, such as filing the fee information through the ATPCO, or they could develop their own systems to disseminate the information, in conjunction with the agents who would receive the information

54 Id. at 29,978. The Department adds that it proposes to use performance instead of design standards in order to avoid stifling innovation and imposing more of a burden on industry participants than is necessary to solve the transparency problem. Id. at 29,979. Open Allies agrees with the Department s proposed approach of using performance instead of design standards. This approach would accommodate new methods of distributing ancillary fee information without the need to change the rule. That said, Open Allies expects that at least in the near-term, existing protocols and standards associated with the ATPCO fare filing mechanism will be used, since they represent the most efficient and effective available methodology for distributing airline price and service information. VII. To the Extent DOT Adopts a Ban on Ticket Agents Charging Additional or Separate Fees for Displaying Ancillary Fee Information, Such Ban Should Apply Only During the Term of Existing Contracts Between Airlines and Ticket Agents and Should Not Preclude Travel Agencies From Increasing Their Service Fees to Consumers The Department proposes to prohibit ticket agents with an existing contract with an airline for distributing the airline s fare and schedule information from charging separate or additional fees for the display of ancillary service fee information. See proposed (g). Specifically with respect to intermediaries, the Department states: [T]o the extent that carriers have existing contractual relationships with ticket agents acting as intermediaries, such as GDSs, to distribute fare information, those ticket agents would be prohibited from imposing charges for the distribution of ancillary service fee information that are separate from or in addition to the existing charges for the distribution of fare information as it would be unlawful to provide fare information that does not include the fees for the basic ancillary services. (Emphasis added). The Department provides very little additional explanation for this proposal, indicating only that ticket agents should not be allowed to unilaterally change contract terms to require additional

55 payments and that existing contracts should be honored until the contract expires unless mutually renegotiated. NPRM at 29,971. Open Allies does not oppose the proposed prohibition. Open Allies further requests that the Department clarify in the final rule that the ban applies only during the term of existing contracts. Specifically, the Department should modify the proposed language of (g) under Option A to state: Ticket agents with an existing contractual agreement with an air carrier or foreign air carrier for the distribution of that carrier s fare and schedule information shall not, during the term of that existing contract, charge separate or additional fees for the distribution of ancillary service fee information described in paragraph (b) of this section. Nothing in this paragraph should be read as invalidating any provision in an existing contract among these parties with respect to compensation. If the Department chooses Option B (which Open Allies does not support for the reasons given in Part IV, above), Open Allies agrees with the Department s proposal that the ban should not apply to intermediaries. See proposed (g) under Option B (proposing to apply the ban to ticket agents that sell a carrier s tickets directly to consumers and have an existing contractual agreement with an air carrier or foreign air carrier for the distribution of that carrier s fare and schedule information ). Airlines would not be required to provide ancillary fee information to intermediaries under Option B; therefore, if that option were adopted, the provision of such information to intermediaries, and the terms and conditions under which the information would be provided, would be subject to negotiations between the parties. Fairness and consumer interests demand an additional revision to the Department s proposed (g) language under Option A. For at least as long as the prohibition applies, airlines should be required to provide ticket agents the same basic ancillary fee information that they disclose on their own sites (i.e., they should not be permitted to provide only higher-priced

56 fees to ticket agents). The combination of the proposed prohibition and disclosure requirements in the NPRM would remove any ability that intermediaries might otherwise have to negotiate for the same ancillary fee information that airlines disclose on their own sites; that is, ticket agents would be required to display whatever ancillary fee information they receive from airlines, and they would be required to do so without charging the airlines anything for providing this service. Under these circumstances, airlines should be required to provide the same basic ancillary fee information that they display on their own sites. Open Allies urges the Department to add the following sentence to proposed (g): During the term of any such existing contract, the air carrier or foreign air carrier shall provide basic ancillary fee information to the ticket agent that is the same as the basic ancillary fee information disclosed on the carrier s own Web site marketed to U.S. consumers. Open Allies does not believe that the proposed rule is intended to reach charges by agents to consumers. Indeed, the purpose of the rule, as explained in the section of the preamble quoted above, was to cover ticket agents acting as intermediaries, such as GDSs as opposed to travel agents directly dealing with the public. In any event, such a prohibition would not advance any public or consumer interest. Travel agents should be able to impose charges as they see fit, and doing so does not in any way prejudice airlines. VIII. DOT Has Ample Authority Under Section to Address the Consumer Harm Caused by Opaque Airline Pricing Practices The Department s authority to protect airline consumers derives from Section of the Aviation Code, 49 U.S.C That statute authorizes the Department to take action against an unfair or deceptive practice or an unfair method of competition in air transportation or the sale of air transportation. The Department already determined in the 2011 Consumer Protection Rulemaking that it had the authority under Section to require airlines and ticket

57 agents to disclose baggage fee information to consumers. Consistent with that determination, the Department has ample authority under Section to mandate disclosure to consumers of basic ancillary fee information through all sales channels in which an airline has agreed to sell its tickets, and to require airlines to share dynamic, transactable basic ancillary fee information with ticket agents to facilitate such disclosure. In an environment increasingly characterized by opaque pricing, facilitating efficient, apples-to-apples comparison shopping particularly through the effective and efficient GDS technologies currently available should be treated by the Department as an essential objective in its effort to maintain robust competition in the air transportation market. 37 There can be no doubt that the Department has authority under 49 U.S.C to redress the inherent unfairness to consumers of a market where effective comparison price shopping is difficult or impossible, especially where, as here, pricing actions by the airlines have caused a degradation of the comparison shopping capabilities that existed previously. We will show in the following discussion that the Department can rely on ample precedents under Section and under Section 5 of the FTC Act (on which Section is modeled) to support a rule requiring fee disclosure and transactability. A. Relevant Precedents Under Section The Department may exercise its authority under Section to prohibit unfair, deceptive and anticompetitive practices by promulgating rules prohibiting particular practices. See United Air Lines, Inc. v. Civil Aeronautics Bd., 766 F.2d 1107 (7th Cir. 1985) (holding that the Department can use rulemaking to prevent unfair and deceptive practices). In the present case, the Department has a more than adequate basis to promulgate rules requiring carriers to 37 The state-of-the-art pricing capabilities of GDSs, including the display of flight specific ancillary fees alongside the applicable base fares if the needed data is provided by airlines, were demonstrated live for DOT and others at an open hearing before Advisory Committee on Aviation Consumer Protection on August 7,

58 provide GDSs and travel agents with dynamic and transactable information regarding their ancillary services and fees. Previous Department precedent establishes that the Department s authority under Section is broad enough to require distribution of such information. Section allows the Department to set minimum standards and dictate business practices that it reasonably believes are necessary to keep passengers fully informed and to prevent unnecessary harm or inconvenience to passengers. In fact, the Department has previously used its authority under that statute to address (although not fully resolve) the same problem at issue here by requiring airlines and agencies to make some disclosures of ancillary fee ranges through their websites. See 14 C.F.R The Department s decision to use its authority to address unfair and deceptive practices by imposing these requirements was not challenged on judicial review in that proceeding, and there would be no credible basis for such a challenge here were the Department to further enhance the effectiveness of its current rule. Indeed, the Department has used its Section authority to address a wide range of airline consumer issues, many involving more demanding regulation than is contemplated by a rule that requires no more than disclosure of transactable information about the fees that airlines charge for their services. For example, the Department has required airlines to adopt policies that set minimum standards during tarmac delays such as requiring that passengers be given regular status updates, that food and water be provided after two hours on the tarmac, and that carriers give passengers an opportunity to deplane after three hours on the tarmac. 38 Similarly, the Department has required that advertisements prominently list a price that includes all taxes so that consumers can more effectively comparison shop. 39 The Department 38 See 49 CFR Enhancing Airline Passenger Protections, 76 Fed. Reg. 23,110, 23,143 (Apr. 25, 2011) ( [I]n our view, air travelers will be better able to make price comparisons when they can see the entire price of the air transportation. )

59 has also stated that 14 CFR part 253 shows that we have the authority not only to require that contracts of carriage include specified terms but also to regulate the means by which contract terms are disclosed to consumers. 40 Earlier this year, the Department indicated that Section gives it the authority to require airlines to prevent passengers from talking on mobile phones because the use of mobile phones could harm passengers by increasing the noise level on flights. 41 Requiring carriers to provide real-time transactable ancillary service information so that customers better understand the prices of such services and can efficiently and effectively comparison shop for such services is consistent with the above-cited precedents requiring carriers to adopt particular policies and practices to ensure that customers are better informed and to minimize injury to passengers. And there is an ample factual record to support the need for ancillary fee disclosure rules. Relevant court precedents indicate that courts will grant a great deal of deference to the Department s conclusions regarding what constitutes an unfair or deceptive practice where such a factual record exists. The recent D.C. Circuit decision in Spirit Airlines, Inc. v. DOT, 687 F.3d 403 (D.C. Cir. 2012), in which carriers challenged the basis for various rules related to airline prices and fees, is instructive in this regard. In Spirit Airlines, Inc., the court observed that the Department s determination that a practice is unfair or deceptive should be upheld if it is supported by substantial evidence and is reasonable. 42 The court found the Department s conclusion that customers were likely to be deceived unless advertisements displayed prices that included taxes was sufficiently supported by comments in a previous rulemaking proceeding and 40 Enhancing Airline Passenger Protections, 73 Fed. Reg. 74,586, 74,590 (Dec. 8, 2008) 41 Use of Mobile Wireless Devices for Voice Calls on Aircraft, 79 Fed. Reg. 10,049, 10,051 (Feb. 24, 2014). 42 Spirit Airlines, Inc. 687 F.3d at 411,

60 a hearing on the issue several years earlier. 43 With respect to the prohibition on disclosing government taxes and fees prominently, the court upheld the Department s rule because it rel[ied] on the reasonable theory that this prevents airlines from confusing consumers about the total cost of their travel. 44 With respect to the so-called Refund Rule, the court held that the Department s finding of deception and unfairness was adequately supported by the Department s decade s worth of recorded experience which had led the Department to conclude that consumers were being misled by vague customer service policies. 45 In short, the court indicated that conclusions regarding unfairness or deception can be based on comments received by the agency, the reasonable judgment of the agency regarding the likely effect of a practice on consumers, or the Department s previous experience in dealing with the airline industry. Given the standards set forth above, the Department has ample basis to support a conclusion that not providing dynamic and transactable information to GDSs and travel agents regarding the airlines ancillary services and fees is unfair or deceptive. As noted, the Department has already received numerous comments indicating that consumers find it difficult to determine how much various ancillary services will cost them. Moreover, the NPRM in the instant rulemaking proceeding explains that the Department received comments in the 2011 Consumer Protection Rulemaking as well as complaints outside the rulemaking process indicating that consumers have difficulty determining the cost of ancillary services and cannot reasonably determine the total overall cost of travel or effectively engage in comparison shopping Id. at Id. 45 Id. at NPRM at 29,

61 With respect to transactability, the Department could and should reasonably conclude that because consumers cannot purchase ancillary services at the time of booking, the service may change in price or become unavailable by the time the consumer is able to purchase those services from the airline. Indeed, the Department has already received comments to this effect from consumer groups and trade associations. 47 If the prices or availability of services change from the time of booking a ticket to the time of purchase of the services, not only will customers be deceived regarding the price or availability of services but they will also be harmed by the inability to efficiently and effectively compare total prices for the package of services they desire and ultimately by choosing a travel option more expensive than they would otherwise have selected. Thus, the Department has ample basis in the record and ample authority under Section to conclude that the failure to distribute dynamic, transactable ancillary fee information is an unfair and deceptive practice. As explained below, this conclusion is consistent with FTC precedent, which is highly relevant to the interpretation of Section B. FTC Precedent: Unfairness The language of 49 U.S.C (a) notably regarding unfair or deceptive practices is derived from Section 5 of the Federal Trade Commission Act. 48 Accordingly, although air transportation is explicitly carved out of the FTC s jurisdiction, 49 the FTC s interpretation of the statutory language has important implications for DOT. 50 The jurisprudence that has developed 47 Id U.S.C. 15. The original language of Section 5 referred only to unfair methods of competition. The 1938 Wheeler-Lea amendment, 52 Stat. 111, added the phrase unfair or deceptive acts or practices. The amendment was explicitly intended to make clear that Congress, through Section 5, charged the FTC with protecting consumers as well as competitors U.S.C. 45(b). 50 Price Advertising, 71 Fed Reg. 55,398, 55,402 (Sept. 22, 2006) ( stating that an ad would be considered deceptive by the Department if it fail[ed] to meet the Federal Trade Commission s standards for prominence, readability, and clarity ); Computer Reservations System (CRS) Regulations; Statements of General Policy, 67 Fed. Reg. 69,366, 69,384 (Nov. 15, 2002) (indicating that the Department s unfairness standard mirrors the FTC s unfairness standard

62 over the meaning of unfair or deceptive practice at the FTC leaves no doubt that systemic impediments to what should be a readily available means for comparison shopping and efficient transactions are evidence of an unfair or deceptive practice that the Department can and should redress pursuant to the authority conferred by Section In its 1978 Eyeglass Rule, the Commission identified two essential inquiries for determining whether a practice is unfair and violates Section 5: Whether the acts or practices result in substantial harm to consumers; and Whether the challenged conduct offends public policy. 51 In that case, the Commission was faced with an array of restrictions on the advertising and sale of eyewear and related services. The restrictions had been imposed both by state governments and professional associations and were defended by proponents as necessary to protect the public from substandard service providers. Ophthamologists typically transmitted prescriptions directly to opticians, for example, without making them available to their patients. The advertising of eye examinations was widely forbidden. As a result, patients were effectively denied the ability to price shop. Following a lengthy proceeding, the Commission issued a rule that facilitated more effective price shopping by consumers. Dealing with the second inquiry first, the Commission noted that the Supreme Court in two then-recent decisions 52 had held that the consumer s right to receive price information is protected by the First Amendment. We regard this as an authoritative declaration of general public policy in this area, the Commission wrote. Even if and citing FTC precedent); PAN AM v. United States, 371 U.S. 296, 303 (1963) ( As the Court stated in American Airlines v. North American Airlines, 351 U.S. 79, 82, this section was patterned after 5 of the Federal Trade Commission Act, and we may profitably look to judicial interpretation of 5 as an aid in the resolution of... questions raised... under 411. ); United Air Lines, 766 F.2d at (stating that the predecessor to Section 41712(a) is essentially a copy of section 5 of the Federal Trade Commission Act and that the Department has the same freedom to base a finding of deceptive practice on its general experience as the Trade Commission does. ). 51 Part 456 Advertising of Ophthalmic Goods and Services, 43 Fed. Reg. 23,992, 24, (June 2, 1978). 52 Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, 425 U.S. 748 (1976); Bates v. State Bar of Arizona, 433 U.S. 350 (1977)

63 the consumer s right to receive information were not so clearly protected by the Constitution, the Commission continued, we think its importance is sufficiently established by other sources, including a number of Federal statutes. 53 As to the first issue whether the lack of pricing information injures consumers the Commission said that if price information is not available, or if it can be obtained only at high cost, consumers are deprived of the opportunity to satisfy their needs at the lowest available price. This consumer injury, coupled with the specific public policy in favor of providing information to consumers, is sufficient to support the rule. 54 The Commission made clear that while competition is obviously an essential requisite of a functioning free market, it is not the only one. There are a number of other factors involved, such as availability of information, [and] a lack of excessive transaction costs. 55 The Commission observed that efficient access to information decreases consumer search costs and reduces prices because sellers are forced to become more price conscious and price competitive. 56 Even where actual price reductions are not immediately measurable, the ability to economize on search costs is a genuine, independent consumer benefit. 57 Ready access to information also helps the consumer to assess product differences and make a rational purchase decision. 58 Noting the Commission s responsibility to promote the efficient functioning of markets, the Commission said: Acts or practices which cause consumer injury by creating, Fed. Reg. at 24, (citing, e.g., Truth in Lending Act, 15 U.S.C et seq. (1977); Fair Packaging and Labeling Act, 15 U.S.C. 145 et seq. (1976); and Real Estate Settlement Procedures Act, 12 U.S.C et seq. (1976)) Fed. Reg. at 24, Id. (citation omitted); see also id. ( [O]ne of the absolute essentials of a competitive market is information, particularly information about price. ). 56 Id. at 23, Id. 58 Id. at 23,

64 exploiting, or failing to alleviate market imperfections other than a lack of or threat to competition can be unfair within the meaning of Section In 1980, the FTC issued a Policy Statement in which it made clear that the consumer injury prong, by itself, is sufficient to warrant a finding of unfairness. 60 That prong includes three factors (all of which are easily met here): (1) the injury must be substantial; (2) it must not be outweighed by any countervailing benefits to consumers or competition that the practice produces; and (3) it must be an injury that consumers themselves could not reasonably have avoided. 61 The Commission s elaboration of the third factor is particularly relevant: [I]t has long been recognized that certain types of sales techniques may prevent consumers from effectively making their own decisions, and that corrective action may then become necessary. Most of the Commission s unfairness matters are brought under these circumstances. They are brought, not to second-guess the wisdom of particular consumer decisions, but rather to halt some form of seller behavior that unreasonably creates or takes advantage of an obstacle to the free exercise of consumer decisionmaking. 62 With respect to the public policy prong, the FTC stated that it is typically used only to provide additional evidence of consumer injury but that in some cases it can independently support FTC action where a court or legislature has already established that a practice causes injury. 63 Two years later, the Commission again took action to protect the ability of consumers to receive price information and to effectively comparison shop. In this case, the Commission 59 Id. at 24, FTC Policy Statement on Unfairness (Dec. 17, 1980, available at 61 Id. 62 Id. 63 Id

65 required funeral providers to disclose full and accurate pricing information on funeral products and services. 64 The Commission found that because consumers lacked adequate access to price information, price competition in the funeral market was severely inhibited. 65 The Commission stated that its goals in issuing the rule were to lower existing barriers to price competition and to facilitate informed consumer choice. 66 The Commission explained that the rule would help to achieve these goals by, among other things, ensuring that consumers have access to sufficient information to permit them to make informed decisions about which goods and services they wish to purchase, and guarding against misrepresentations that influence consumers decisions on which goods and services to purchase. 67 The Commission required funeral providers to provide pricing information by phone and in person; in the latter case, funeral providers must give consumers, prior to any discussions about funeral arrangements, a written list containing the prices of funeral goods and services on an itemized basis. 68 The Commission observed that the rule provides consumer benefits by reducing economic injury to consumers in two ways. First, it alerts consumers that price information is relevant and available at the critical moment of choosing a [service] provider, and ensures that consumers can obtain sufficient price information to comparison shop among different [service] providers. Comparison shopping will help stimulate price competition among [service] 64 See FTC Trade Regulation Rule, Funeral Industry Practices, 47 Fed. Reg. 42,260, 42,260 (Sept. 24, 1982) (declaring that it is an unfair or deceptive act or practice for a funeral provider to fail to furnish accurate price information disclosing the cost to the purchaser for each of the specific funeral goods and funeral services used in connection with the disposition of deceased human bodies ). 65 Id. at 42, Id. at 42, Id. 68 Id. at 42,

66 providers, thereby better enabling consumers to get the maximum benefit for their money. 69 Second, the rule gives consumers an opportunity to consider various options and purchase only those items they desire. The itemized price lists disclose the costs of different goods and services, making such comparisons possible. This information would allow consumers to see the total cost of the items they tentatively have decided to purchase and to evaluate them in conjunction with each other. 70 The Commission explained that the rule would enhance competition by giving consumers easier access to pricing information and enabling more efficient comparison shopping. It stated that the greater ease with which consumers will be able to obtain price information for purposes of comparison shopping should substantially increase the number of consumers who do so. This in turn, will create a pressure on [service] providers to price their products at competitive levels in order to continue receiving business from consumers who comparison shop. Even consumers who do not comparison shop will benefit from this overall tendency toward lower prices. 71 On appeal, the Fourth Circuit held that the rule clearly falls within the Commission s statutory authority. Harry and Bryant Co. v. FTC, 726 F.2d 993, 999 (4 th Cir. 1984) Applicability to the Ancillary Fee Problem The inability of GDSs and travel agents to quote fees for, and sell or facilitate the sale of, ancillary services at least those relating to boarding, baggage, seats and changes and 69 Id. at 42, Id. 71 Id. 72 See also In re Austin Board of Realtors, Decision and Order, Docket No. C-4167 (Federal Trade Comm n Aug. 29, 2006) (finding certain realtor board practices to be unfair in part because they made consumer searches less efficient); Advisory Opinion on Request for Comment on Senate Bill 2629, 1 (Federal Trade Comm n March 26, 2014) (arguing against laws requiring automobile dealers to close on Sundays because such laws may increase consumer search costs, make comparison shopping more difficult, reduce incentives to compete on price and lead to higher prices)

67 cancellations causes substantial consumer injury of the sort that is prohibited under Section 41712, and that the FTC has prohibited under its parallel authority under Section 5 of the FTA Act. It results in consumer confusion and deception, engenders increased search and transaction costs for consumers, causes lost buying opportunities for consumers, and ultimately leads to higher prices generally as competition diminishes with the elimination of efficient and effective comparison shopping. Absent disclosure of ancillary services through all sales channels in which an airline has decided to participate, many consumers are misled about what the total cost of their air travel will be, which services can be purchased in connection with the flights they buy, and which of those services can be purchased from which source. Without transactability, the existing and also the contemplated disclosure requirements will have limited value to a great many consumers. Upon discovering that they cannot purchase even basic ancillary services from a travel agency, consumers will very likely migrate to highlybiased airline sites where ancillary services are available for purchase. By the time they go to and search these sites for ancillary fee information, given the dynamism of airline availability and pricing, they may well lose their preferred flight options, ancillary charges might be higher, or the particular service e.g., a seat upgrade might have sold out. Moreover, such migration escalates search and transaction costs and causes consumers to lose the price and satisfaction benefits of comparative shopping. 3. FTC Precedent: Deception According to the FTC, a finding of deception is warranted when there is a representation or omission that is likely to mislead a consumer acting reasonably under the circumstances, and that representation or omission is material. 73 If the representation or omission is likely to 73 FTC Policy Statement on Deception, appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984), available at (hereinafter Deception Statement )

68 affect the consumer s conduct or decision with regard to a product or service, it is considered material. 74 Where information concerns the cost of a product or service, it is presumed to be material. 75 In the context of advertising the price of goods or services, the FTC has found advertisements to be misleading where they suggest that a given price is the total price to be paid by a customer but fail to clearly and prominently disclose other fees that may or will apply. 76 The FTC has also indicated that informing a consumer of a change in price at a point when the consumer has already invested considerable effort in the purchasing process such that he or she is unlikely to back out of the transaction despite an increase in costs is deceptive and injurious. 77 In the instant proceeding, based on the standards described above, the Department could conclude that consumers using the GDS-served indirect distribution channel will be deceived without dynamic and transactable information regarding ancillary services and fees. If carriers do not distribute real-time price information regarding ancillary services, consumers will be unable to determine the amount of additional fees that may apply when they are in the process of purchasing airfare. Even if consumers can view real-time ancillary fee information, the lack of 74 See Deception Statement. 75 See, e.g., Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000) (noting that information has been presumed material where it concerns the purpose, safety, efficacy, or cost of the product or service ) (quoting Deception Statement). 76 See, e.g., Darden Restaurants, Inc., 2007 FTC LEXIS 42, at *3-5 (2007) (stating that respondents advertised and sold gift cards without adequately disclosing that dormancy fees would be deducted from the value of the card in the event of non-use for a period of time); Gateway, Inc., 131 FTC 1208, , 2001 FTC LEXIS 107, at *5-7 (2001) (stating that respondent s advertisement was misleading because it indicated that internet services could be obtained for free or for a flat monthly fee and did not adequately disclose that customers may incur long-distance fees or charges to connect to the Internet); Jenny Craig, Inc., 1993 FTC LEXIS 247, at *7-10 (1993) (finding respondent s advertising to be misleading because it indicated that the advertised cost was the only cost associated with weight loss service and did not adequately disclose the existence of other mandatory expenses associated with the service). 77 See Peacock Buick, Inc., et al., 86 FTC 1532, (1975) ( Addition of a service charge at this late stage in a deal has the effect, whatever respondents may have intended, of exploiting this vulnerable position of a buyer who has already invested considerable effort in a transaction and for that reason is not likely to change his or her mind, even when the price ends up somewhat higher than expected. The practice is clearly deceptive and injurious. )

69 transactability will result in deception. A consumer may purchase his or her ticket due in part to the information provided regarding the cost and availability of certain ancillary services. However, by the time the consumer attempts to purchase these services from the carrier, they may no longer be available or the price may have increased. At that point, consumers will be unlikely to back out of a ticket purchase due to the effort expended in the purchase process and the costs associated with canceling a ticket. IX. The Regulatory Impact Analysis Grossly Understates the Benefits of Transparency and Transactability and Significantly Overstates the Costs The RIA does not give an accurate picture of the costs and benefits of transparency and transactability. Regarding benefits, the RIA does not even purport to show complete estimated benefits; it acknowledges that its estimates reflect only partial benefits, and, as discussed below, its methodologies and figures cause the benefits estimates to be much lower than they should be even taking into account the shortcomings that the RIA acknowledges. Concerning costs, the Department has since recognized that the estimated costs in the RIA are significantly overstated. See Memorandum re: Notice of Communication, DOT-OST (June 12, 2014). The estimated benefits of transparency and transactability are hugely understated in the RIA. Pages 46 and 47 of the RIA show estimates of partial benefits stemming from the Department s proposed transparency requirement (under which airlines provide basic ancillary fee information to ticket agents) and from the transparency requirement coupled with a transactability requirement (under which airlines provide basic ancillary service fee information to ticket agents and allow ticket agents to sell such services). Even apart from the figures used (which, as discussed below, are unduly restrictive and reflect a major calculation error), the methodology for calculating the benefit estimates dramatically skews the results toward very low estimates that are neither appropriate nor realistic

70 First, the only benefit that is measured is time savings. There are multiple additional benefits that stem from transparency and transactability. The RIA acknowledges some of these, see, e.g., RIA at 2, 40 ( greater competition, lower overall prices for ancillary service fees, decrease the information asymmetry, consumers making more informed, and thus better, purchasing choices ), but none of these is reflected in the benefits estimates. Second, the estimates apply only with respect to baggage services and ignore the benefits that would flow to passengers with respect to seat reservations (and other basic ancillary services like priority boarding). See id. at 47. Third, the estimated benefits apply only to leisure travelers and thus completely disregard benefits to business travelers, even though business travelers would also gain from transparency and transactability requirements. See id. at Fourth, the estimates apply only with respect to searches and purchases through online ticket agents and do not take account of benefits to customers who use brick-and-mortar travel agents, airline websites and other means of distribution. See id. at In other words, the estimates do not in any way reflect benefits to leisure travelers using non-ota distribution channels and business travelers using any distribution channels. Yet such travelers unquestionably would benefit from transparency and transactability requirements, just like leisure travelers using OTAs would. The figures used also cause the benefits estimates to be far too low. As an initial matter, the model assumes that only 20% of leisure travelers are interested in the price of baggage services. This figure seems greatly understated, since leisure travelers generally are on vacation not one or two-day business trips and are likely to need to pack enough to check at least one bag. (Also, some airlines charge for carry-on bags, and nearly all travelers will care about the

71 price of that service.) The model also assumes that only 13% of leisure travelers actually buy baggage service. Again, this figure seems unreasonably low. The problem of using these very low figures is then made much worse by a calculation error in the model. The error is that the RIA multiplies these two percentages, mistakenly calculating that only 13% of the 20% of travelers interested in baggage services would actually buy them, meaning that only 2.6% of travelers would purchase baggage services. This figure is wrong on its face. The model should instead have added (a) the estimated time savings values for the estimated 20% of leisure travelers who are interested in the fees for baggage services and (b) the estimated time savings values for the estimated 13% of leisure travelers who purchase baggage services. Fully correcting all the errors and omissions in the RIA would be a significant task. However, two aspects can fairly easily be corrected based on the data presented in the RIA. The first correction involves including in the benefit estimates business travelers who use OTAs. The second correction involves including travelers who use travel management companies or airline websites. REVISED TABLE (A) (B) (C) = B Plus RIA Correction to Calculation Error Correction to Include Business Travelers and Certain Other Distribution Channels Transparency: 2013 Benefit $2.9 $24.0 $52.3 Transparency: 10 Year Benefit $23.9 $199.1 $434.2 Transparency & Transactability: $9.0 $57.4 $ Benefit Transparency & Transactability: 10 Year Benefit $75.2 $476.8 $1,039.7 Note: numbers in Column A may not match RIA exactly due to rounding. Column A reports the benefits for 2013 and the 10 year analysis period presented in the RIA

72 Column B shows that benefits increase substantially if we correct the calculation error in the model, which increases OTA leisure passengers benefiting from transparency by a factor of 8.5 and those benefiting from transactability by a factor of 5.5. Column C shows that benefits increase exponentially if both leisure and business travelers using OTAs, travel management companies and airline websites are included. (Note: In calculating the benefits for travelers using airline websites, benefits from greater transparency were included, but not benefits from transactability, on the theory that airlines already make their ancillary fees transactable, which might not be true in all cases.) Even these corrected figures do not give a complete picture of the benefits that would flow from ancillary service fee transparency and transactability. For example, the above table shows estimated benefits related only to baggage services and does not reflect other ancillary services; benefits flowing to passengers using brick-and-mortar travel agencies and airline direct sales channels other than airline websites are not captured; and the estimates are calculated using the same overly-conservative figures relied on in the RIA (i.e., only 20% of passengers search fees for baggage services and only 13% purchase baggage services). 78 Notwithstanding these shortcomings, the revised table demonstrates that the benefits from transparency and transactability of basic ancillary service fees are considerably higher than those shown in the RIA. For example, the estimated 1-year transparency/transactability benefit increases from $9 million to $125 million, and the 10-year transparency/transactability benefit rises from $75 million to a whopping $1.040 billion. On the cost side, the RIA estimates the cost of transparency/transactability of basic ancillary service fees to be $36,000 annually per airline, reflecting the yearly cost each airline needs to pay to ATPCO to transmit basic ancillary service fee information to GDSs. As a Department memorandum posted in this docket makes clear, the Department was subsequently 78 Other RIA assumptions are also used, such as annual growth in passengers, the analysis period (2013 and 10 years) and the discount rate (7%)

73 informed by ATPCO that this amount is significantly overstated. 79 In fact, according to ATPCO, the actual amount is zero: We do not charge any carrier that inputs ancillary fee data into our system, nor does ATPCO charge the GDSs and other similar subscribers a separate fee to receive this data. 80 Therefore, estimated costs for purposes of the regulatory cost-benefit analysis should be zero. Open Allies urges the Department to consider these revised benefit and cost figures in determining that the benefits from adopting basic ancillary service fee transparency and transactability requirements far outweigh the costs, supporting adoption of these requirements. Open Allies also attaches a 2012 study prepared by GRA, Incorporated on the benefits and costs of increased transparency and transactability. See Exhibit 6. While the study is two years old and thus some of the figures might be somewhat outdated, the study amply demonstrates that the benefits from increased transparency and transactability are exponentially higher than those shown in the RIA, and that the benefits dwarf any costs. In this latter regard, we note that the 2012 GRA study assumes that there are ATPCO-related costs associated with ancillary service fee transparency and transactability. As noted above, ATPCO has made clear that in fact those costs are zero. We also attach an addendum to the 2012 study, see Exhibit 7, which presents a cost-benefit analysis also prepared by GRA for greater transparency alone (without transactability), which of course produces far lower benefits; for this and other reasons discussed above, Open Allies strongly supports adoption of a transactability requirement. 79 See DOT memorandum placed in the docket at DOT-OST See ATPCO Disputes DOT Rulemaking Cost Analysis, The Beat (May 28, 2014) available at LETTER-ATPCo-Disputes-DOT-Rulemaking-Cost-Analysis.aspx; see also Analysis: About That $46.2 Million Error in the DOT Rulemaking Study, The Beat, available at Study.aspx (quoting ATPCO representatives to establish that there are no separate ATPCO fees for dissemination of ancillary fee data)

74 X. DOT Should Adopt its Proposed Rule to Codify the Definition of Ticket Agent at Revised Section (s) DOT proposes codification of its current broad interpretation of ticket agent to expressly include intermediaries such as GDSs and metasearch engines, provided that they receive compensation in connection with the sale of air transportation. NPRM at 29,970, 29,972-74, 30,000. The text of the proposed Section (s) provides that the term ticket agent shall include: any person that acts as an intermediary involved in the sale of air transportation directly or indirectly to consumers, including by operating an electronic airline information system, if the person holds itself out as a source of information about, or reservations for, the air transportation industry and receives compensation in any way related to the sale of air transportation (e.g., cost-per-click for air transportation advertisements, commission payment, revenue-sharing, or other compensation based on factors such as the number of flight segments booked, number of sales made, or number of consumers directed or referred to an air carrier, foreign air carrier, or ticket agent for the sale of air transportation). The obvious wellspring for this proposal is that metasearch engines, like Google, have become important sources of information about airline prices and schedules for more and more members of the travelling public. Consequently, unless metasearch companies are held to the same standards of disclosure as other ticket agents with respect to prices and schedules, such as the Department s entire price, each-way fare and codeshare rules, a multitude of shoppers will lack the safeguards against deceptive and unfair advertising practices that the Department has decided consumers must have. If metasearch companies were not obliged to comply with DOT s mandate that ticket agents must quote most prominently the entire price of a ticket including all mandatory taxes, fees and charges, 81 then entities that did adhere to DOT s advertising rules would be C.F.R (a)

75 disadvantaged and consumers confused because the metasearch sites would show lower ostensible prices than online travel agents. Confusion and deception would also result if metasearch engines did not follow the DOT s requirement that any fare quoted on an each-way basis must prominently disclose if that price is available only when a round-trip ticket is purchased. 82 The risk to consumers of metasearch not honoring DOT consumer protection rules is hardly theoretical. In Hipmunk, Inc., Order , (Aug. 20, 2013), DOT fined a metasearch operator for failure to comply with its disclosure rules in that case, DOT s critical mandate that consumers be advised of the actual identity of the airline operating codeshare services. Open Allies fully supports the proposed codification of the Department s broad interpretation of ticket agent to include entities that operate metasearch sites for air travel, such as Google. DOT s position is well within its statutory authority. It is necessary both to afford consumers the fair advertising safeguards they deserve and to avoid an uneven regulatory playing field where competitors of metasearch companies, such as online travel agencies, must absorb the costs of regulatory compliance measures that metasearch companies could otherwise ignore. On the matter of statutory interpretation, pursuant to 49 U.S.C 40102(40), ticket agent means a person (except an air carrier, a foreign air carrier, or an employee of an air carrier or foreign air carrier) that as a principal or agent sells, offers for sale, negotiates for or holds itself out as selling, providing, or arranging for, air transportation. (Emphasis added.) There can be no serious argument that metasearch sites that enable consumers to search for flight options are not both offering for sale and holding themselves out as selling and arranging for C.F.R (b)

76 air travel. As with online travel agency sites, a consumer inputs the desired dates and routes of travel and is presented with a list of prices and schedules offered for available flights. To make the purchase, the user clicks a button labeled purchase or something similar and is routed to the website that will complete the transaction. This conduct is clearly both offering for sale and holding out as offering for sale and as arranging for air travel. 83 The metasearch companies public descriptions of their activities leave no doubt they are engaging in both of these business practices. For example, at p. 3 of its Annual Report for 2012, Google said: For instance, when users want to plan a trip, Flight Search is a feature that makes it easy for users to find flights that meet their needs. Whether they have a specific destination with dates in mind or not, Flight Search can help users quickly find the best options for their trips. 84 As to the issue of whether metasearch acts a principal or agent in these activities, in the last CRS Rulemaking proceeding, ending in 2004, DOT held that: We think Congress included the phrase as principal or agent to ensure that all persons conducting the listed functions were covered, whether or not they were acting as an airline s agent, acting under their own authority, or acting under someone else s authority. 69 Fed. Reg. 976, 996 (Jan. 7, 2004) (emphasis added). This interpretation of the term ticket agent by the Department was upheld on judicial review by the U.S. Court of Appeals for the D.C. Circuit in a case affirming that GDSs are ticket agents. Sabre, Inc. v. DOT, 429 F.3d 1113 (D.C. Cir. 2005). Because metasearch 83 Offer is defined by Merriam Webster s Collegiate Dictionary (10 th Edition) as among other things a presenting of something for acceptance. Arrange is defined among other things as to put into a proper order or to bring about an agreement or understanding concerning. Id. 84 Also see the Google Flight instructions entitled How to search and book flights found at

77 entities also offer for sale and hold themselves out as selling, or arranging for, air transportation, they are conducting the listed function and are perforce acting as either principal or agent and therefore are ticket agents. From the consumer perspective, metasearch companies perform the very same search function for travel options as online ticket agents. If the results of metasearch do not follow DOT consumer protection rules, the same risk of misleading consumers that caused DOT to impose certain advertising and disclosure requirements on traditional and online travel agents certainly will loom large in the case of metasearch. Indeed, it is when flight results with prices and schedules are returned in response to a search that the risks of consumers being confused or deceived about the correct price or actual operator of the service are greatest. The fact that a metasearch company does not actually book the flights, but rather refers the user to other sites to book them, is irrelevant to the question of whether the search results showing fares and flights are misleading. A consumer, once passed on to an inherently-biased airline website by a metasearch, may be far less likely to go back to the beginning of the search process to examine the all-in prices for other airlines than a consumer using an online travel agent. Open Allies also supports the Department s proposed compensation criterion for determining whether an entity is a ticket agent. Specifically, the Department proposes to cover any entity that arranges for or sells air transportation and receives compensation in any way related to the sale of air transportation, including cost-per-click, commissions, revenue-sharing or other compensation related to the sale of air transportation. See proposed (s). The Department explains that under its proposal, an entity that provides a flight search tool that allows consumers to select an itinerary that can be purchased on another site and displays air transportation advertisements for which the entity is compensated on a cost-per-click basis

78 would fall under the definition of a ticket agent. However, an entity that operated a Web site that simply displayed airfare advertisements without actual flight search capability under its control would not be covered. NPRM at 29,974. Open Allies agrees that the Department s proposal draws the line at the right place, and it urges the Department to adopt (s) as proposed. CONCLUSION For the reasons discussed above, Open Allies urges the Department promptly to issue a final rule in this proceeding that requires airlines to disclose to all ticket agents through which they choose to distribute their fare, schedule and availability information, including GDSs, dynamic and transactable information on basic ancillary services, and to include within the definition of basic ancillary services priority boarding, change and cancel fees, and packages that include a basic ancillary service. Open Allies also urges the Department to adopt its proposed rule to codify its broad interpretation of ticket agent to embrace intermediaries, including metasearch companies. Respectfully, Andrew Weinstein Executive Director Open Allies for Airline Transparency 913 S Street, N.W. Washington, DC September 29,

79 OPEN ALLIES FOR AIRFARE TRANSPARENCY KEEPING AIRLINE TRAVEL COMPETITIVE AND TRANSPARENT AIR TRAVEL SURVEY: CONSUMERS DEMAND ABILITY TO SEARCH, COMPARE, AND PURCHASE AIRLINE FEES 71 Percent Say Airlines Should Have to Sell Ancillary Services Wherever They Sell Tickets; 81 Percent Say Current Airline Practices on Fees Are Unfair and Deceptive Washington, D.C. - September 4, A new survey of more than 1,000 air travelers found overwhelming support for a proposed U.S. Department of Transportation (DOT) rule requiring airlines to share their fees for baggage and seat assignments with travel agents and travel websites, with 88 percent saying that requirement was "very" or "extremely" important for travelers. By a broad 71 percent to 13 percent margin, consumers also said the rule should be strengthened to require airlines to sell their basic ancillary fees wherever they sell their tickets. Conducted by Open Allies for Airfare Transparency in coordination with Travelers United (formerly the Consumer Travel Alliance), the survey found significant traveler frustration and confusion with current airline practices. Two-thirds (63 percent) of air travelers indicated that it is very or extremely inconvenient to have to take the multiple steps required to buy ancillary services today, while 81 percent called current airline practices on fees "unfair and deceptive" for not allowing travelers to see or purchase fees at all points of sale. "To protect air travel consumers, we need to fix the significant problems they face in searching, comparing, and buying ancillary fees, which have become ubiquitous in the airline industry," said Andrew Weinstein, Executive Director of Open Allies for Airfare Transparency, a coalition of more than 400 companies and organizations involved in the distribution or purchase of air travel. "The proposed DOT rule gets almost halfway there by requiring airlines to share their fees for baggage and seat assignments, but it fails to address the intertwined issue of how to buy those services at the time of ticket purchase. Playing peek-a-boo with prices will not address the underlying consumer harm, unless travelers can purchase those fees wherever they buy their tickets." According to the survey, consumer confusion over this issue is significant, with nearly threequarters of respondents (72 percent) saying they believed "transparent pricing" would include the ability to purchase the service at that same time as tickets. Among the survey's findings: More than half of air travelers (55%) said they had been surprised by additional fees after they had purchased their tickets. Two-thirds of travelers (63 percent) said that it is "very" or "extremely" inconvenient to have to take multiple steps to buy the ancillary services they need.

80 OPEN ALLIES FOP AIRFARE TRANSPARENCY KEEPING AIRLINE TRAVEL COMPETITIVE AND TRANSPARENT Roughly half (47 percent) said it has become "very difficult" or "nearly impossible" for them to search and find the lowest fare for air travel across airlines, including fees. Four out of five (81 percent) said that current airline practices on fees are "unfair and deceptive." The overwhelming majority (88 percent) said the DOT'S proposed rule to require airlines to share baggage and seat assignment fees is "very" or "extremely" important for travelers. More than 80 percent said DOT should expand the rule to cover at least one other type of ancillary fee, including cancellation fees (68 percent), change fees (64 percent), and priority boarding fees (49 percent). By nearly a 6-1 margin (71 percent to 13 percent), travelers said airlines should be required to sell their fees wherever they sell their tickets. "This survey dramatically underscores the continuing confusion consumers face when dealing with the universe of fees that airlines have created," said Charlie Leocha, Chairman, Travelers United, an advocacy group focused on travel issues. "Comparison shopping is the basis for the free market. By hiding the prices of baggage, seat-reservation and others services, airlines are deceiving consumers by only advertising and disclosing partial costs of travel." The full results of the survey can be found at Survey Methodology The survey was conducted online among 1,162 US adults who have flown at least once in the last year. The survey was conducted via SurveyMonkey.com through a representative audience sample drawn from the site's 30 million users from August 28 - September 1, The survey has a margin of error of +/- 3 percent at a 95 percent confidence level. EDITOR'S NOTE: Today, Thursday, September 4 at 11:00am (EDT) consumer and industry groups will hold a press briefing regarding the U.S. DOT's air passenger protection NPRM. Find full details at About Open Allies for Airfare Transparency Open Allies for Airfare Transparency is a coalition of more than 400 independent distributors and sellers of air travel, corporate travel departments, travel trade associations and consumer organizations. Open Allies and its members are committed to the principles of transparency, choice, competition, privacy, and innovation in the air travel marketplace. More information can be found at faretransparency.org.

81 OPEN ALLIES FOP AIRFARE TRANSPARENCY KEEPING AIRLINE TRAVEL COMPETITIVE AND TRANSPARENT Contact: Andrew Weinstein Open Allies for Airfare Transparency andrewwstn[at]gmail. com

82 Consumer Survey on Airline Fees Summary Report Survey conducted online among 1,162 US adults who have flown at least once in the last year Conducted by Open Allies for Airfare Transparency and Travelers United Margin of error of +/- 3 percent at a 95 percent confidence level Survey conducted from August 28 - September 1, 2014 For more information, visit Powered by

83 Q1: In which of the following ways have you searched for and purchased plane tickets in the past? (Check all the apply.)

84 Q2: In the last few years, airlines have started charging a wide range of fees for things like baggage and seat assignments that used to be part of the base ticket price. Which of the following fees have you paid at least once? (Check all that apply.)

85 Q3: In recent years, airlines have added dozens of new fees for everything from window seats to sitting with your family. How difficult is it for you as a consumer to search and find the lowest cost for air travel across all airlines, including those fees?

86 Q4: If you use an online travel site or travel agent, you generally cannot purchase things like baggage or seat assignments, because airlines do not currently allow most travel sites and agents to sell those services. That forces travelers to take extra steps to pay those fees at the airport or through the airlines websites. How inconvenient is it for travelers to have to take multiple steps to purchase the things they need for their flights?

87 Q5: Which extra airline fees have you been surprised by having to pay after you ve purchased your ticket, if any? (Check all that apply.)

88 Q6: Which of the following airline practices, if any, do you find unfair and deceptive to consumers? (Check all that apply.)

89 Q7: When you hear the phrase transparent pricing, which of the following is closest to your understanding of the phrase?

90 Q8: The US Department of Transportation (DOT) is considering a requirement to make airlines provide fee information for baggage and seat assignments to travel agencies and online travel sites, so travelers can search and compare them when they buy their tickets through those sources. How important do you think that rule is for travelers?

91 Q9: The proposed DOT rule would only allow travelers to search and compare baggage and seat assignment fees. Which of the following other fees do you think should also be included, if any? (Check all that apply.)

92 Q10: The proposed DOT rule would not require airlines to allow the purchase of fees at the same time as travelers buy their tickets. Should DOT require airlines to sell their basic extra fees wherever they sell their tickets?

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94 Thomson StreetEvents" FINAL TRANSCRIPT LCC - Q US Airways Group Inc. Earnings Conference Call Event Date/Time: Feb /11:00AM ET Contact Us 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

95 Feb /11:00AM, LCC - Q US Airways Group Inc. Earnings Conference Call FINAL TRANSCRIPT Doug Parker - US Airways Group Inc. - Chairman, CEO And there's also some performance tied in there, David, that we had some cash - the America West stand-alone actually ended up having operating income for the year, which means things like our old award pay system and others will end up paying the targets for the year. And we had to catch up on that. David Strine - Bear Stearns - Analyst Okay. And then last, anyone, perhaps Scott -- particularly on the West Coast what is the RASM performance looking like that - looking like there relative to the strength on the East Coast? Scott Kirby - US Airways Group Inc. - EVP-Sales & Marketing Yes, I will just talk about the whole system then. The whole system is pretty strong, including the West Coast, with the areas that are relatively weaker, although still up and up pretty strongly year-over-year, but the relative areas of weakness are Transatlantic, Caribbean and Florida. The rest of the system is extremely strong, particularly up and down the East Coast. But the West system you can see in our old US Airways numbers -- or our old America West numbers, which we report, is actually stronger than the combined East Coast network. So it continues to be a strong environment for us on the West Coast as well. David Strine - Bear Stearns - Analyst And so those are the reported numbers, but do you feel the same way about the way that's trending in through the first quarter? Scott Kirby - US Airways Group Inc. - EVP-Sales & Marketing Yes. David Strine - Bear Stearns - Analyst Okay. Thanks a bunch. Appreciate it. Doug Parker - US Airways Group Inc. - Chairman, CEO Thanks, David. Operator We'll take our next question from Glenn Engel, Goldman Sachs. Sheldon Wong - Goldman Sachs-Analyst Good morning, it's actually Sheldon Wong in for Glenn. A couple of questions. If you could just touch on the agreement you reached with Saber a few weeks ago and outline any savings there for us? Contact Us 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

96 Feb /11:00AM ; LCC - Q US Airways Group Inc. Earnings Conference Call FINAL TRANSCRIPT Scott Kirby - US Airways Group Inc. - EVP-Sales & Marketing We do have savings -- we will have savings from that agreement. It's an agreement that we are happy with. We think it's good for our customers. We think it's good for us financially, and it secures a distribution channel that a lot of our best customers want to use. We can't disclose any of the specifics, but it should affect our-- that line item on distribution expense and cause it to come down. Doug Parker - US Airways Group Inc. - Chairman, CEO We can't disclose the specifics per the terms of the agreement. Scott Kirby - US Airways Group Inc. - EVP-Sales & Marketing Correct. Sheldon Wong - Goldman Sachs-Analyst Got you. And now is that in the first quarter where we will start to see that? Scott Kirby - US Airways Group Inc. - EVP-Sales & Marketing We will see it for two-thirds of the first quarter. Sheldon Wong - Goldman Sachs - Analyst Okay. Secondly, just if you could touch on the transition agreements with the other labor groups, do you guys have a timeline for how that plays out or what your goal is? Jeff McClelland - US Airways Group Inc. - COO Yes, Sheldon, this is Jeff McClelland. Let me try. When you talk about the other labor groups, let me - the ones that we have transition agreements on are the pilots, flight attendants, and our airport passenger, service, and reservation agents. The other big groups out there are the mechanics and the fleet service. Those are actually, we are in the process we have - the first piece we have to do there is figure out who is going to represent those groups. We did get last month from the National Mediation Board a single-carrier ruling, and so we are now in the process both unions from both sides, the 1AM from the old U.S. Airways East side, the TWU for the fleet on the America West side, and the Teamsters for the mechanics on the West side. Each of those three unions have put in with the mediation board a showing of interest, meaning they want to represent the Groups, as you would expect. And we are currently working or waiting in providing information to the National Mediation Board and awaiting a ruling from them on whether or not there will be an election for that representation. We expect to get that ruling, let's say some time in the next month or so. If there is an election that will take another few months to go work out. And then we will be able to work, once we figure out who is going to represent those groups, then we will be able to go in and begin sort of the transition and the negotiations to get to a single agreement, Sheldon Wong - Goldman Sachs - Analyst Okay. That's very helpful. That's all I have. Contact Us 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

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98 Thomson StreetEvents" FINAL TRANSCRIPT AMR - Q AMR Corporation Earnings Conference Call Event Date/Time: Oct / 2:00PM ET Contact Us 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

99 FINAL TRANSCRIPT Oct / 2:00PM, AMR - Q AMR Corporation Earnings Conference Call Kenji Hashimoto - AMR Corporation - Managing Director, IR Good afternoon, everyone. Thankyou for joining us today. Starting off, Gerard Arpey will provide an overview of our performance and outlook. And then Tom Horton will provide the details regarding our earnings for third quarter, along with some perspective for the rest of the year and next year. After that, we'll be happy to take your questions. In the interest of time, please limit your questions to 1, with 1 follow-up. Our earnings release contains highlights of our financial results of the quarter. I encourage you to review that document for more specific information. We have posted our earnings release on the Investor Relations section of our website at aa.com. At that same website, interested parties may listen to a Webcast of today's call, and review our reconciliation slides. Gerard and Tom will refer to financial results that exclude the impact of special items. We believe that our results excluding special items more accurately reflect our performance on an ongoing basis. The slide deck in conjunction with the press release will contain a reconciliation of any non-gaap financial measurement we may discuss, and we encourage you to view the press release as well as the slide deck during the course of this call. The Webcast will remain available on our website for several days. Finally, let me note that many of our comments today on outlook for revenue and earnings, cost estimates and forecast of capacity, traffic, load factor, fuel costs and other matters will constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ from our expectations. These factors include changes in economic, business and financial conditions, high fuel prices and other factors referred to in our SEC filing, including our 2005 Form 10-K. With that, I'll turn the call over to Gerard. Gerard Arpey - AMR Corporation - Chairman, President & CEO Okay. Good afternoon, everyone.thankyou, Kenji. As you have seen in our press release, we earned a net profit of $15 million in the third quarter. This result includes a $99 million non-cash accounting charge in the other income expense line to reduce the book value of certain outstanding fuel hedge contracts. If you exclude that special item, we earned earned $114 million in the quarter, which is $209 million better than last year, excluding last year's special items. Tom will go into more detail regarding this quarter's special item, but I must say that in the face of higher year-over-year fuel prices and the London security events, I am pleased, overall, with this quarter's performance. Our third quarter load factor of 81.7% set another record for us. That load factor, combined with higher yields, helped us push our third quarter mainline passenger unit revenue by 7.7% year-over-year. While this is lower than last year's - or last quarter's increase, remember that last year's third quarter had a 12.6 % mainline unit revenue increase, which we are not now lapping. So the year-over-year comparison becomes a little bit more difficult. In addition, we had the London security incident, which trimmed, we estimate, more than $50 million off our revenue for the quarter. On the operational front, we had a solid quarter with our 814 on time arrival metric improving 2 points versus last year, driven by a 1.5 point improvement in our on time departure rate. I think this is especially noteworthy given the record load factor, and all of the security challenges that we've had in the quarter. So I would take my hat off to the entire American Airlines team out there in the field, who I think did a very good job this summer with lots of challenges. As we articulated earlier this year, we plan to achieve about $700 million in cost savings throughout the year, and I'm happy to report that we're on track to meet that goal. Central to all of our cost cutting goals is improved productivity and efficiency. And to that end, in September, we implemented a more efficient schedule designed to improve asset utilization, improve dependability, while maintaining, if not improving revenue opportunities. Contact Us 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

100 FINAL TRANSCRIPT Oct / 2:00PM, AMR - Q AMR Corporation Earnings Conference Call This is a continuation of all of the [depeaking] and simplification efforts that we've had underway for many years now. Reducing our distribution cost is another important initiative this year. And I'm pleased also to report that in the third quarter we successfully renegotiated our agreements with Galileo and Sabre. I won't get into the details, but those agreements provide the opportunity for us to realize significant distribution cost savings, while at the same time preserving our flexibility to pursue new and cost effective technologies as they become available downstream, which we fully expect to happen. In addition to our ongoing cost reduction efforts, we have also had success in growing our top line revenue. Over the past year, we worked very hard with the United States Postal Service to ensure our capabilities were at their high standards, and very pleased that the Postal Service awarded us a new 5 year contract that is potentially worth $500 million. And I think this is a demonstration of the hard work and collaboration of the Transport Workers Union and all of our employees, especially our cargo colleagues, for turning what might have been an adverse outcome into a very positive one for the Company. And again I really take my hat off to the Transport Worker's Union and their leadership for stepping up and working with us, and getting to the right outcome for the Company and for our front line employees. In a similar vein, a team of management and TWU employees at our largest line maintenance bases set a goal to obtain $95 million of annual value creation for the Airline by the end of This is on top of more than $1 billion in similar goals set by the maintenance employees at our Tulsa, Kansas City, and Fort Worth bases. We are also pleased that President Bush signed into law the Wright Amendment Reform Act of 2006 that applies to Love Field airport, and will codify into federal law. This local agreement that all of you are familiar with that was reached by the 5 parties, the cities of Dallas and Fort Worth, Texas, DFW airport, American, and Southwest. And again, I would thank the leadership of the North Texas Congressional delegation and all of our employees and union leaders for getting an oar in the water, and getting that legislation passed. As all of you know, we have filed for DFW to Beijing service in a continuing effort to bolster our international offerings to our customers. We believe we made a strong case, given DFW's access to so much of the U.S. We've received the support of over 117,000 individuals, including 32 senators, 76 representatives, 15 governors, and hundreds of mayors and elected officials. And so we are very hopeful about that route authority, and we will wait to see what the DOT decides. Finally, our collaborative efforts with our unions and employees over the past year helped produce a good result in August, when Congress passed a bill that enhances our ability to fund our pension obligation. Since the second quarter we have contributed an additional $ 104 million to our various defined benefit pension plans, and that brings our total 2006 contribution to to $223 million through October 13th. As we look ahead to the fourth quarter, we are cautiously optimistic, as the recent drop in fuel prices combined with the continued unit revenue growth we've been seeing 1 think bodes pretty well for the quarter. Obviously in this outlook, fuel remains a wildcard due to it's volatility, and we are continuing to watch for the residual effects of the London security events or other weaknesses in revenue. So our outlook for the fourth quarter is much improved, but a good deal of uncertainty, I think it's fair to say, remains. And with that said, I'll turn things over to Tom. Tom Horton - AMR Corporation - CFO & EVP, Finance & Planning Thanks, Gerard, and good afternoon, everyone. I'd like to start it off by discussing the special item we recognized during the quarter, and remind you of the 2 from last year. This year's third quarter has a special item related to marking to market our fuel hedges. The recent fuel price decline resulted in a $99 million charge in other income expense in the third quarter to reduce the book value of certain outstanding hedge contracts as required by Statement of Financial Accounting Standards 133, and as we've disclosed in last quarter's 10-Q. THOMSON Contact Us 2006 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

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102 American explains $3.50-per-segment fee to agencies (07/17/2006) By Dennis Schaal/Travel Weekly After issuing a warning months ago, American Airlines. lowered the boom and revealed that on Sept. 1 it plans to ' I begin charging agencies a "booking source premium" of Letter to the Editor $3.50 per segment for all bookings made in the U.S. through Sabre and Amadeus as well as through certain to ttnd an e mail totw ,, your letter could run in programs offered by Worldspan and Galileo/Apollo. a future issue! American won't charge agencies for bookings made through "competitive booking sources," including G2 SwitchWorks, Farelogix, an optional Galileo/Apollo program and Worldspan "Optional Product 1." Galileo late last week revealed the broad outlines of its optional Content Continuity Program, and Worldspan stated that it would divulge its strategy later this week. American's move was greeted by groans and howls of protest from agents. Some observers noted that the move could be part of a negotiating strategy, since American has yet to reach full-content accords with Sabre and Amadeus. American, however, said it is not currently engaged in any talks with Sabre. In a conference call with travel agencies on July 12, David Cush, American's senior vice president of global sales, said the Sept. 1 date was flexible and airline reps would work with agencies intending to switch vendors. In response to agents and corporate travel managers who wondered why American was seemingly pushing them to AA.com, where they could get full content with no fees, Cush said that was not the case. "We believe the GDS is a very efficient channel, but it was a costuncompetitive channel," Cush said. "I certainly would not encourage anyone to move off the GDS channel, in particular a Worldspan or Galileo opt-in platform, to AA.com because these are very efficient channels." Others questioned why American was picking on U.S. agents and driving them toward Internet bookings of low-cost carriers when travel agents sell high-yield tickets for the airline. Cush said American generated 90% of its sales in the U.S. and would consider instituting fees for other points of sale in the future. He said American chose to implement the fees instead of restricting content. "We do have other ways of compensating travel agencies who book the highl

103 value tickets, so we understand this may seem a little bit illogical in terms of the GDS fees," Cush said. "But we do not view the GDS fees as what is driving the high-yield business. We see it as the travel agency that is driving the high-yield business, and that's why we offer other ways of compensating the agencies when they do drive that high-yield business to American." The conference call was part of a multi-pronged effort to explain the program, which began July 12 with a letter from Cush. Details were posted on American's agency Web site at "Travel agencies that use competitive booking sources... will have guaranteed access to American's content," the letter said. "At present, American intends to make full content available through other sources in order to preserve a wide range of agency choice in distribution channels," Cush wrote. "However, these sources are more expensive to American than their competition. To the extent that an agency elects to use one of these other sources, American will require that agency to pay a premium, known as the Booking Source Premium, to defray the higher cost." The charge applies to ARC agencies and corporate travel departments in the U.S. Agents booking U.S. flights from branches in Puerto Rico and points outside the U.S. won't be billed the $3.50 per segment. American said it would invoice agencies "based upon net booked segments created, including passive segments, using the billing data provided to American by the GDS." So far, other major carriers have not announced if they will match American's fees. United said it was studying American's action. Delta declined to comment because it was in negotiations with GDSs. Northwest also declined to comment. Kevin Healy, AirTran's vice president of planning, sad the low-cost carrier had "no plans to charge agencies at this time." AirTran, along with Continental, Northwest, United, Delta and US Airways, participates in Sabre's Efficient Access Solution, which protects agencies from service fees if they agree to reduced incentives for full content. EAS is slated to kick in on Aug. 1. Cush said American had no negotiations under way with Sabre even though their Direct Connect Availability-3 agreement is slated to expire on July 31. If it expires, American would still provide full content to Sabre because their participating-carrier agreement would remain in effect, but Sabre would charge the airline fees at higher, pre-dca-3 rates. Cush said that if Sabre and American reach an agreement Sabre could become one of the competitive booking sources. Michael Berman, Sabre's vice president of corporate media relations, said Sabre was optimistic about a new agreement with American, the sole holdout among major carriers for Sabre. Travel agent reaction to American's announcement ranged from anger to resignation. Thomas DuBois, president of Esquire Travel Group, a Sabre-wired agency in Dallas, said he was shocked but not surprised. "I don't know where it will all end," DuBois said. "[American] gets free sales 2

104 services from thousands of agents. Then it bills us to provide this free service. That's an interesting concept. How can they get more money from us? I can't afford to pay that." Mary Tardi, senior director of global travel at Polo Ralph Lauren, told Cush it was "distressing" that American would implement a fee penalizing corporate travel departments for certain GDS bookings without having full reporting in place for bookings on AA.com. Paul Ruden, ASTA's senior vice president for legal and industry affairs, complained of too little information from airlines and GDSs. "Travel agents are again in the middle without adequate information to evaluate their choices," he said. Ruden urged GDSs "to get moving." "If agents have to make decisions, and if the vendor hides its cards, it may be left out," he said. Among urgent "unanswered questions," Ruden said, are the vendors' ability to impose new terms on agents and agents' options for exiting GDS contracts quickly. ARTA Chairman Barry Richcreek issued a statement saying, "ARTA opposes this attempt by American Airlines to pass along what is basically one of its costs of doing business to the travel agents who built American and Sabre over the years. While the travel agency community understands the need for legacy carriers to be competitive in today's environment, slicing and dicing at the agency sales force is not the answer." 3

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106 Continental Extends Fee Deadline for Amadeus Agents Modern Agent/Travel Pulse Published on: August 7, 2006 The American Society of Travel Agents has issued a member alert that Continental Airlines has given Amadeus subscribers a one-month extension on its deadline for instituting booking fees for bookings made on nonpreferred channels. Sept. 1 had been the date that Continental, American Airlines, United Airlines, and Northwest Airlines had said they would begin charging fees for bookings made through non-preferred channels. Continental's effective date for Amadeus subscribers is now Oct. 1. Continental's effective date for Galileo, Sabre, and Worldspan remains Sept. 1. Thus far, the only airline to designate an Amadeus booking product as a preferred channels has been United Airlines. Previously Amadeus had issued statements saying that it had extended deadlines with airlines in order to continue to provide its subscribers with content while it continued its negotiations. For full details on Continental's booking policy, visit enter the agency's IATA number and select preferred booking channels. l

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108 GRA, Incorporated Economic Counsel to the Transportation Industry Benefits and Costs of Proposed Changes in DOT Regulations Regarding Transparency and Transactability Of Ancillary Airline Fees March 14, 2012 Prepared for: Interactive Travel Services Association Prepared by: GRA, Incorporated Home Office: 115 West Avenue Suite 201 Jenkintown, PA is

109 Table of Contents Section 1 - Executive Summary 1 Section 2 - Flight Information and Distribution of Tickets: The Current Market Structure 5 Market Overview 5 Consumers 7 Airlines 9 GDSs 10 Other Non-Airline Distribution Channels 11 Online Travel Agents 11 Brick and Mortar (B&M) Agents and Travel Management Companies (TMCs) 11 Meta Search Sites 12 Case 1: Current DOT Rules and Airline Practices 25 Case 2: Full Transparency and Transactability 26 Section 4 - Search Costs and Price Obfuscation: Why Shrouding Ancillary Fees Raises Airline Prices 28 Competitive Markets 30 A Market with Only Naive Consumers 30 A Market with a Mixture of Naive and Sophisticated Consumers 31 A More Realistic Mixed Market 32 Shrouding as a Strategy 33 The Equilibrium is Stable 34 Summary: Effects of Search Costs and Price Obfuscation Strategies 36 Section 5 - Benefit-Cost Analysis 38 Economic Efficiency 38 Economic Benefits 38 Economic Costs 39 Economic Transfers 39 Estimated Benefits 40 Extra Search Time Looking Up Ancillary Fees 42 Total Search and Transactions Time Avoided by the Proposed Rule 46 Reduced Money Fare Due to the Rule Change 46 Sample Estimate of the Benefits of the Proposed Rule 46 Range of Benefits Estimates 48 Unquantified Benefits of Avoiding Suboptimal Flights 49 Estimated Costs 50 Benefit-Cost Estimates 52 Appendix: Kayak Airline Fees (January 13, 2011) 54 References 56 About the Authors 61 i GRA, Incorporated

110 Section 1 - Executive Summary The Interactive Travel Services Association (ITSA) commissioned GRA to develop a benefit-cost analysis of a proposed regulatory change that would make it easier for travelers to comparison shop among competing airline flight offers, regardless of their chosen distribution channel. In particular, the proposed regulatory change would require airlines to provide to all distribution channels they choose to participate in transactable information on ancillary fees so that they could be combined with base fares, government fees, and taxes into a Complete Price for each offer. A traveler would then be able to compare the all-in price of competing tickets, and thus more easily and effectively decide which to select. 1 Issues surrounding the disclosure of ancillary fees have emerged in the past five to seven years as airlines have unbundled some ancillary services like checking baggage and seat selection from fares and now sell them separately. While unbundling can enhance welfare for consumers who have no interest in these ancillary services, the way airlines have chosen to sell these ancillary services increases consumer search costs substantially. Instead of being presented with a simple checklist of ancillary services they are interested in buying, travelers have to work their way through multiple pages of information and/or visit airline websites or other venues to determine ancillary service pricing and availability. Ancillary services are not presented as part of a Complete Price, so consumers often have to perform mental gymnastics to sort airline offers by price and any desired ancillary services. The proposed regulation would follow DOT's regulatory action taken on April 2011, 2 which required airlines to refer consumers to information on ancillary services and fees. While this reduces the search effort, today as matters stand: Consumers searching with travel agents or travel management companies (TMCs) can comparison shop using base fares. Fare information is assembled by Global Distribution Systems (GDSs) or Other Non-Airline Distribution Channels (ONADCs), which cannot access airline ancillary fees in a transactable format. So, the consumers, by way of the travel agent, see only cumbersome information about ancillaries (a lookup table). Consumers have to perform mental calculations to sort the offers based on Complete Prices to effectively compare multiple offers. Since some of the ancillary fees are listed in ranges, there is some uncertainty about what the Complete Prices are. Ancillary services cannot be purchased from travel agents or TMCs. The agent or the consumer must instead undertake a separate transaction directly with the airline. The 1 The Department has identified the issue of access to ancillary fees for display by all sales channels as one which it plans to address in a forthcoming rulemaking entitled: "Enhancing Airline Passenger Protections III." 2 Final rules adopted in Docket OST , Enhancing Airline Passenger Protections. 1 GRA, Incorporated

111 fees and availability of some ancillaries (seat preference; early boarding) may change if the consumer is unable to conclude these transactions simultaneously and is required to separate dealing with the ancillary from buying the base fare. Economists' term for this is price shrouding or obfuscation. The airlines' strategy to shroud ancillary fees is aimed directly at the benefits consumers gain from efficient search via travel agents, travel management companies, meta sites, and other such travel related third-party websites. Approximately 50 percent of airline passengers book through these third-party sellers, most of which are powered by GDSs today. The strategy imposes time costs on consumers, reduces the value of information available and makes it more likely that air fares, referred to in this paper as Complete Prices, will rise above competitive levels. Furthermore, the equilibrium featuring shrouded prices may be stable, meaning it will not change unless there is regulatory action. The economics literature, which we review in this paper, is very clear on these points. We provide estimates of the benefits and costs of the proposed regulatory change. Our estimates of benefits are likely to be conservative because sufficient data are not available to evaluate all of the implications of price obfuscation in airline markets. The estimated key benefits are: The value of time saved in searching and transacting for baggage check services: we show that the average traveler will save at least one minute of search and transaction time per passenger flight; the value of this saved time 3 is between $357 million and $465 million per year; 1.7 million more passengers would fly as a result. Assuming no growth in passengers, over 20 years, the value of just one minute of saved time per passenger flight would be between $3.8 billion and $4.9 billion. Reduced Complete Prices for passenger air transportation: we describe in detail why the proposed rule would eliminate price shrouding and restore the consumer's ability to comparison shop; as a result, consumers will have to search less to find the right flight for them; because search costs are lower and airline Complete Prices would be available for comparison side by side, average Complete Prices would decline. Being careful to net out the transfers between airlines and passengers, we estimate that the incremental benefits to society of price reductions would add as much $85 million to $90 million annually, or over $900 million over 20 years. Our estimates likely understate total benefits of the proposed regulation. For example, our estimates of the value of search and transactions time saved are based solely on avoiding extra search for baggage fees, and do not include searches for other ancillary services such as seat selection and early boarding. These benefits are likely to be substantial because today consumers have to incur most the time required to complete a transaction before they can select a seat, buy a premium seat or early boarding amenity. Families and the disabled 3 Using DOT's value of time of $42.10 per hour. 2 GRA, Incorporated

112 traveling with a companion would be particularly advantaged if it were easier to search for these amenities. Also, we were unable to model the benefits due to more consumers finding better flights as a result of the proposed regulatory change, but these effects could be large. For example, today it is easy to imagine a consumer faced with high search and transactions costs settling for a connecting itinerary when a nonstop might otherwise be available. This would add one hour to the traveler's time, which we show below is worth about 10 percent of the average full price of travel (money plus value of time). In contrast, the enumerated benefits discussed above are worth about one percent of the full price of travel. We also provide estimates of costs of the proposed regulation. We expect the economic or resource cost of the proposed regulatory change to be negligible relative to the benefits we have estimated. The basic infrastructure for handling the flow of flight information between consumers and airlines is already in place. The proposal would not require any fundamental changes to this basic structure. We note that the Airline Tariff Publishing Company (ATPCO), an airline-owned clearinghouse, announced on October 13, 2010 that all GDS systems either had or were about to implement its data standard for Optional (ancillary) Services, which would allow GDSs to display and sell such services via agents ortmcs. Thus it appears that most of the investments and infrastructure for transparently displaying and selling ancillary services have already been made. Aviation Week 4 reports that the cost to airlines of adopting the ATPCO Optional Services is $3,000 per month per airline or $36,000 per year. 5 There were 61 marketing carriers selling tickets in the United States in the January 2012 OAG, meaning that these ATPCO costs would amount to $2.2 million per year. Even these costs may be sunk, since carriers already share this information among themselves to facilitate interline fares. Thus, we believe the cost of implementing and operating the regulation is very low. The following are our estimates of benefits and costs: Assuming costs are $2.2 million per year, annual net benefits of reduced search and transactions costs alone (i.e., assuming that there would be no reductions in Complete Prices due to the proposed rule) would be at least $354 million and 1.7 million more people could afford to fly. Over 20 years, the present value of net benefits due to reduced search and transactions costs would be at least $3.7 billion. The annual net benefits of reduced search and transactions costs plus the benefits of lower Complete Prices (which are likely) would range as high as $553 million, and 22 million people could afford to fly each year. " channel.isp?channel=comm&id=news/avd/2010/09/24/02.xmi &headline=foreign%20carriers%20blast%20dqt%200n%20pax%20rights 5 To the extent that airlines already incur these ATPCO fees in order to share information with other airlines for the purpose of building interline fares, the costs are sunk and are not incremental to the proposed rule. This appears to be the case. 3 GRA, Incorporated

113 Over 20 years, the present value of net benefits of reduced search and transactions cost plus lower Complete Prices would be at least $5.8 billion. The remainder of this document is organized as follows. Section 2 describes the market structure for flight information, including the distribution of tickets. Section 3 introduces the concepts used in this paper and provides a real world example of the search process faced by consumers even after DOT'S April 2011 rulemaking decision. It also outlines in economic terms the problems for consumers due to the shrouding of prices, including the higher search and transactions costs in airline markets in the United States in the current regulatory environment. Section 4 describes the economics of shrouding or obfuscating prices and why it leads to higher than competitive prices. Section 5 defines precisely the economic costs and benefits of the proposed regulatory change to make ancillary services and fees transparent and transactable in all distribution channels, and then provides our estimates. An appendix shows a table from one meta site of airline ancillary fees, including its disclaimer on the accuracy and timeliness of the information. We also provide a list of references to the economics literature at the end of the paper. 4 GRA, Incorporated

114 Section 2 - Flight Information and Distribution of Tickets: The Current Market Structure The market for flight information and the distribution of air passenger tickets includes several key participants including consumers, airlines, GDSs, and different types of travel agents. We describe below how flight information flows between the various interested parties and characterize the incentives that drive market behavior. Market Overview The information that is critical for consumers' decisions regarding flight choices includes the following: Base fare the money price of the flight 6 exclusive of any ancillary, add-on fees. Flight characteristics e.g., departure and arrival times, originating and terminating airports, number of stops and connecting flights, total flight time, and aircraft type. Ancillary services e.g., seat selection, baggage fees, ticket cancellation, etc. Ancillary fees charges for ancillary services and other fees exclusive of the base fare. Consumers have the following basic options for obtaining flight information: directly from airlines on line or physical locations or indirectly from travel agents, travel management companies (including corporate self-booking on the internet) and meta sites. When the traveler obtains information directly from an airline, say by visiting the airline's website, the traveler receives information only for that single airline (and its codeshare partners). As we explain later, this arrangement makes comparison shopping difficult, imposes high search costs on the consumer, and makes it difficult for the traveler to make informed decisions about flight selection. Travel agents and travel management companies also serve as intermediaries between travelers and airlines in the market for flight information. These include: Online Travel Agents (OTAs) display flight information on the internet, including via mobile devices. Brick and Mortar Agents (B&M) provide flight information and travel advice primarily through a store front or over the telephone. Travel management companies (TMCs) provide flight information and other services to business clients, including in some cases, self-booking tools that are similar to OTA's but configured to enforce corporate travel policies. 6 The Base Fare now includes all government fees and taxes, per DOT's regulatory action April GRA, Incorporated

115 GDSs perform "behind the scene" services by taking flight information from multiple airlines and formatting the data so that it can displayed by OTAs and other agents including TMCs. The ability of the consumer to view flight information in a "clearinghouse" format (i.e., from several airlines simultaneously) facilitates comparison shopping, reduces search costs, provides more options, and helps consumers make informed decisions. Some consumers may choose to use OTA's to research flight and other travel options, even when they intend to buy elsewhere. Frequently, however, information about applicable ancillary services and fees is unavailable through GDSs because airlines have withheld it, forcing consumers to incur additional search costs or to make flight selection decisions with less than perfect information. Some other non-airline distribution channels (ONADC's) are beginning to emerge that may also facilitate the presentation of airline travel offers to consumers by performing behind the scenes operations for travel agents and TMCs. These ONADC's may or may not present competing offers in a clearinghouse format. They may or may not have access to ancillary services. But, under the proposed regulation to enhance transparency and transactability of ancillary fees, they would have access to transactable ancillary service information from the airlines. Both GDSs and ONADCs connect to airline reservations systems. GDSs assemble information from various competing airlines for presentation to consumers and agents. Some ONADCs may perform some or all of these assembly functions as they develop; others may directly connect agents to airline reservation systems one at a time. In any case, the ultimate flight information source for GDSs and ONADC's is the airline. Rather than shopping for flight information on OTAs, some consumers use the services of other agents "brick and mortar" agents and travel management companies (online and off-line). These travel agents act as intermediaries between travelers and airlines, but options for information flows are similar to those for the OTAs. Non-internet based agents can also retrieve clearinghouse information by using GDS services. Business travelers can access flight information via travel management companies who are both agents and instruments through which companies control expenses. The implications for search costs and information transparency are similar to those described above for consumers shopping on OTAs. Consumers can also obtain comparative flight information from "meta sites." Meta sites may retrieve flight information displayed on the internet from OTAs and airlines and display the data in a clearinghouse format. However, consumers cannot purchase tickets on meta sites; instead they are referred back to airline or OTA sites to make purchases. Airlines also have withheld ancillary fee data from meta sites, thus reducing the comparative shopping benefits offered by these sites. It is also important to understand how revenues flow from consumers to airlines and then to other parties involved in ticket transactions. Airlines and GDSs typically negotiate contracts that provide fees to GDSs for transactions generated by GDS-supported agents. These fees are usually paid on a per segment basis. The GDSs, in turn, share some of the revenue they receive from airlines with some Travel Agents (OTAs, B&M, TMCs) they support, also typically based on 6 GRA, Incorporated

116 the number of transactions. Airlines may also pay sales commissions to travel agents. Although such sales commissions were once commonplace, they are now paid mostly for "higher than expected" sales. Finally, consumers may also pay brick and mortar fees for their services; corporations also typically pay fees to TMCs. Consumers We begin our discussion of consumer behavior with the notion that travelers must make complicated decisions with imperfect information. The consumer's decisions are complicated because flight characteristics are differentiated and inventory levels and fares are very dynamic. For example, the traveler must decide what airport to use (e.g., JFK or LaGuardia), whether to pay premiums for non-stop flights or preferred seating, whether to focus mostly on a particular airline because of differentiated benefits ( available on-board services, loyalty benefits) and must weigh the benefits and costs of different departure and arrival times. Information is imperfect because, at least initially, the consumer lacks full information about available flights, their characteristics, and their prices. Because information is imperfect, the consumer bases decisions on expectations. Specifically, the consumer weighs the expected benefits and costs of various available flight options. The consumer can improve the quality of information about flights by conducting search. However, because searching involves time, it is costly to the consumer. We focus our attention on the following three decisions the traveler must make: Whether to search for a flight Where and how long to search Which flight (if any) to purchase The consumer will commence search for a flight if the expected benefits of an available flight exceed the expected full cost of the trip. The expected full cost of the trip is composed of the following elements: P the money price of a ticket (including base fare, class of service, and ancillaries). V the value of time spent searching. T the value of travel time (including stops and schedule quality i.e., differences between actual departure and arrival times and times that are ideal for the traveler). TR the transactions costs of purchasing the ticket (including both time and fees). L the value of loyalty benefits and other factors that differentiate airlines. The expected full price of travel, 7 E(FPT), is given by the sum of the four cost components minus loyalty benefits. Specifically, 7 We use the conventional notation E() to denote expectations. 7 GRA, Incorporated

117 E(FPT)=E(P+V+T+TR-L) If the expected benefits 8 of the trip exceed E(FPT), then the consumer will commence the search for a flight; otherwise, no search will occur, and the consumer will not purchase a ticket. Once the consumer decides to commence search, the next decision involves where to search. Online search options include OTAs, airline websites, corporate sites and meta sites. Consumers may also visit or call brick and mortar locations operated by agents, corporations or the carriers. The choice of where to search depends on expectations of the full price of travel available from the various distribution channels (information sources). For example, a consumer will search via an OTA when E(FPT) for the agent is less than E(FPT) via airline websites (for a flight with a given set of characteristics). 9 Comparing the full prices of travel across competing distribution channels involves comparing the value of information offered by various agents and airlines. For example, if an OTA can provide good information on all or most airline offerings in a specific market pair, then the value of information tips in the agent's favor because the consumer can do comparison shopping across several airlines. Often, consumers may start their search on an OTA or meta site, if only because they are unaware of which airlines offer service in which markets. If, on the other hand, information available on the OTA is limited, then an airline website may offer more valuable information. Or, if an itinerary is complicated, a consumer might turn to a B&M agent to obtain expert guidance. Corporate travelers typically have similar options to use on-line booking tools, or for complex itineraries, corporate travel experts. Decisions on where to search also depend on available search strategies. Three different search strategies available to the consumer are: 10 Fixed sample search the consumer looks at a predetermined number of available options (e.g., the traveler visits a fixed number of airline websites to obtain information about flights costs and flight characteristics and selects the best option). Sequential search the consumer continues searching until an "acceptable" offer is discovered (e.g., the consumer searches various online sites for flights until an acceptable flight is identified). Clearinghouse search the consumer simultaneously compares multiple offers (e.g., comparison shopping on an OTA or meta site or as part of an in person discussion with a B&M or TMC expert). 8 In theory, expected benefits should be measured as the consumer's willingness-to-pay for the expected amenities of the trip. 9 Some corporate travelers are required to search via CTM facilities in order to enforce and manage corporate travel policies, including contract rates negotiated with carriers. 10 See Morgan and Manning (1985) for a discussion of the pros and cons of fixed sample and sequential searches. See Baye, et al. (2006) for a review of clearinghouse search models. 8 GRA, Incorporated

118 Of these three strategies, the clearinghouse strategy facilitated by GDSs is clearly the most efficient because it allows the consumer to retrieve information on a large number of available flights simultaneously and therefore at relatively low cost. Of course, because the clearinghouse strategy is not feasible on airline websites, consumers who visit these airline sites must adopt more costly fixed sample or sequential search strategies. Complicating search on airline websites is the fact that a full complement of competing hotel, rental car and other travel services may not be available, so some consumers may have to split their searches between airline and other sites or facilities. Consumers can also use the clearinghouse search strategy at meta sites; however, because these sites do not permit transactions, the consumer must incur additional transactions costs to purchase a ticket. As the consumer engages in search, expectations about the full cost of travel and the benefits of flight characteristics are revised as new information is acquired. At some point, the consumer decides that the marginal value of information associated with further search is less than marginal search costs. When this happens, the consumer terminates the search for information about flights. After the search stops, the consumer decides which flight to purchase by comparing the full price of travel to the characteristics of available flights. For a given set of characteristics, the consumer selects the flight that minimizes the full price of travel. 11 If the expected full price of travel exceeds the consumer's valuation of the benefits of all available flights, the consumer does not purchase a ticket. Airlines We adopt the usual assumption that airlines, as sellers in the market for flight services, are motivated by profit; that is, airlines' decisions about participation in the market for flight information and distribution are consistent with the goal of profit maximization. In the context of the present discussion, airlines must make the following three decisions: Whether to distribute flight information through GDSs or ONADCs. How much information to distribute through GDSs or ONADCs. How easy to make transactions completed through GDSs and ONADCs (via agents or TMCs). An airline will choose to distribute flight information via GDSs or ONADC's when the incremental revenue (above what it could earn if it distributed via its own channels) exceeds the incremental cost of participation. In this case, the airline might gain revenue it otherwise would not earn. Offering their flights through GDSs also gives airlines access to thousands of 11 After the search is terminated, E(FPT)=E(P+V+TR-L) because, at this point, search costs are sunk. 9 GRA, Incorporated

119 travel agents and travel management companies engaged in selling and/or managing travel services. Also, by listing flights on GDS supported OTAs, airlines might gain travelers who prefer to do comparison shopping on clearinghouse platforms (rather than conduct less efficient sequential searches on airline websites), or travelers who are not loyal to any particular single airline. It is important to understand the relationship between airlines' decisions to distribute flight information and airline pricing strategies, and why airlines have incentives to list low base fares via GDS supported agents, but disincentives to be transparent about ancillary fees. This strategy is a variant of so-called "loss leader" or "add-on pricing" practices. The seller advertises low prices on base goods or services, and then attempts to sell the consumer addons or ancillaries. 12 On an OTA, for example, the airline may gain an advantage by listing a low base fare, which will appear higher in search results set in order of price from low to high. These practices are examples of price "obfuscation" or "shrouding." More generally, price obfuscation or shrouding can be viewed as a strategy for raising prices. Price obfuscation imposes search costs on consumers. Some consumers, especially those that place a relatively high value on search time, will terminate searches early or avoid searching altogether and pay premiums above the lowest available price in the market for services that meet their travel needs. Airlines also have incentives to limit transactability for ancillaries via GDS supported agents. Limiting transactability via agents promotes shopping on airline websites, thus discouraging comparison shopping and allowing airlines to avoid paying fees to GDSs and travel agents. Diverting consumers to airline sites gives airlines opportunities to increase Complete Prices. To be clear, these airline incentives are the same with respect to all agents OTA's, brick and mortar agents and travel management companies. GDSs As we did for airlines, we assume that decisions made by GDSs are consistent with the goal of maximizing profits. GDSs facilitate comparison shopping by integrating flight offerings across multiple airlines and other travel providers (hotel, car rental, etc.,) worldwide. Airlines are able to extend their presence beyond their home markets via GDSs, which facilitate interline and codeshare itinerary building that would otherwise be less available to consumers. Their core value added in the market is providing platforms for flight information, comparison shopping and efficient transactions, as well as providing a mechanism for airlines to expand their market reach. From a GDS standpoint, the value of the information it can offer is maximized when it can offer most or all airline offers in most or all markets; therefore, GDSs have incentives to induce most 12 See Ellison (2005), and Ellison and Ellison (2009a) for discussions of loss leader and add-on pricing strategies. 10 GRA, Incorporated

120 or all carriers to participate. Competition among GDSs in the market may also limit the fees that any one GDS can negotiate with airlines. Airlines can also discipline GDS fees by imposing surcharges on bookings made by a particular GDS. Because GDSs also sell their services to travel agents (OTAs and B&M) and corporate travel management companies, they have incentives to induce these parties to subscribe to their services. This explains the revenue sharing that occurs between GDSs and agents. The literature discusses why GDSs do not charge consumers directly, because their contractual arrangements with airlines provide them incentives to maximize the use of their systems. 13 In summary, GDSs' ability to earn profit is constrained: (1) by the need to induce airlines to provide flight offerings; and (2) by the need to attract consumers via travel agencies. Other Non-Airline Distribution Channels OlMADC's are new entities; they are also for profit enterprises and offer their services as a full or partial substitute for traditional GDSs. Their interests may be more closely aligned with airlines who are seeking a substitute for GDSs. Where this is the case, their economic incentives will be aligned with those of airlines, and airlines may choose to share ancillary information with them. In other instances, they may be more independent of airlines, in which case their incentives will be more aligned with those of GDSs. Online Travel Agents As noted earlier, OTAs take flight information from GDSs and display data on their websites in formats that allow consumers to (1) specify desired flight characteristics (e.g., departure and arrival locations, flight dates and times, and number of stops/connections), (2) comparison shop, and (3) efficiently buy tickets. Because their revenues are linked to sales, OTAs have incentives to list all or most flight offerings in most markets. The value of services provided by OTAs is linked to saving money, search, and transactions costs for consumers while providing information on all offers available including all ancillary services and all other types of travel products including car, hotel, insurance, destination information, consumer reviews and more. Brick and Mortar (B&M) Agents and Travel Management Companies (TMCs) Typically, B&M agents offer value-added over OTAs by helping travelers with complex itineraries not easily transacted on-line. Providing this service requires detailed flight information, often involving connecting flights. Because most consumers have access to online flight information, B&M agents compete with OTAs and airline websites. Competition with other B&M agents also limits the market power held by any one B&M agent. 13 See Ellison and Ellison (2009b). 11 GRA, Incorporated

121 Travel management companies help companies implement corporate travel policies. In addition to providing flight information to business clients, travel management companies conduct ticket transactions and provide various bookkeeping and accounting services that help corporations manage travel costs. Depending on corporate policy, some business travelers may have flexibility to use OTAs. To this extent, travel Management Companies compete with OTAs and airline websites. Some TMC services are offered on-line (in formats similar to OTA's but customized for corporate travel offers and policies) or via in-person interactions similar to B&M agents, again customized for the corporation. Many corporations choose to hire third party travel management companies to implement their travel policies and manage their travel budgets and provide a wide range of services to their corporate travelers including 24X7 call center access, rebooking, and re-accommodating. Meta Search Sites Meta sites retrieve flight information posted on the internet by OTAs and airlines, and facilitate search across competing distribution channels. However, meta sites do not offer transactions and are essentially referral services. The revenues they earn from advertisers typically depend on the number of visitors (clicks) to their sites. They also earn referral fees from airlines, agents and other travel providers. Because their revenues depend on website traffic, they have incentives to include as much flight information as possible on their sites. 12 GRA, Incorporated

122 Section 3 - Search and Transactions Costs: Consumer Problems The lack of transparency about ancillary fees and the difficulties that consumers have in completing transactions for ancillary services is the central focus of this paper. In addition to impacts on prices described later in Section 4, limited transparency and transactability cause consumers to incur search and transactions costs that could otherwise be avoided and create uncertainty that makes it likely that some consumers will select suboptimal flights and may pay more for them. In this section, we focus on the consequences for airline consumers of higher search and transactions costs. Ancillary Fees Charged by Airlines The Government Accountability Office (GAO) has documented various types of ancillary fees charged by airlines in a recent report. 14 Their list includes the following: Baggage Fees fees for first checked bag, additional bags, overweight bags, and oversized bags. Ticketing Fees charges for ticket changes and cancellations, booking (via phone, in person, or online), unaccompanied minors, pets, seat selection, early boarding, and standby, frequent flyer redemption, and club membership. In-Flight Services charges for food and beverages, blankets, pillows, wireless internet, in-flight entertainment, and various miscellaneous charges. Note that some of these ancillary fees such as holiday and fuel surcharges are nondiscretionary. Others, like fees for baggage, early boarding and seat selection, are discretionary in that they are associated with optional ancillary services. Flowever, many travelers, such as families with young children or disabled people travelling with companions, may view some ancillary services as essential. Search and Transactions Costs Search costs are directly linked to transparency, and as we explain later, indirectly related to transactability. We define transparency and transactability as follows: Transparency exists when the consumer has clear and readily accessible information about the characteristics of available flights, available ancillary services, and the full money prices of tickets (base fare plus government taxes and fees plus all ancillary fees). 14 GAO (2010), "Consumers Could Benefit from Better Information about Airline-Imposed Fees and Refund of Government-Imposed Taxes and Fees," July. 13 GRA, Incorporated

123 Transactability occurs when the consumer, after having received "transparent" flight information (including fees for optional ancillary services), can immediately purchase the ticket for the selected flight bundled with preferred ancillary services. A key to transactability is the ability of the consumer to purchase the ticket for a Complete Price including the base fare, any desired ancillary services, 15 and government fees and taxes before changes in prices or availability occur. The central issue is how easily consumers can retrieve information and transact for ancillary services. From the consumer's perspective, the value of information is adversely affected when there are barriers to understanding the Complete Price of travel, comparing prices and characteristics of available flight offerings, and completing the transaction for all elements of a ticket (including ancillary services). Consider a consumer who is planning a trip and decides to initiate a search for flights on an OTA. Searching on an OTA is relatively efficient because information on base fares and characteristics (departure and arrival times, number of stops, etc.,) is available simultaneously for multiple flights. Suppose the consumer does comparison shopping, and based on the information displayed on the OTA, narrows the choice to several of the posted flight offerings. Suppose further that the information about available ancillary services and associated fees (e.g., seat selection or ticket cancellation) is opaque. Now the consumer must make a decision: purchase a ticket with limited information or search for additional information about ancillary services. She can rely on the information provided by the OTA, but that information is static and the OTA cannot warrant it is accurate. She will incur extra search time sorting out the various ancillary offers (which raises the full price of travel) and will run the risk that the information provided is not accurate (which increases the chances of making a suboptimal choice). She can visit the airline website, where she again expends additional search time which increases the full price of travel. Moreover, because each airline website includes information only for a single airline, the consumer may have to visit several airline websites, each time incurring additional search costs, or face the risk of making a purchase decision with imperfect information. The consumer faces another dilemma in her search for a flight. Airlines know that many consumers are likely to sort flights based on fares and therefore have incentives to advertise 15 Optional ancillary services include baggage fees, early boarding, premium seating, avoiding cancellation charges and other features that are made available to consumers by airlines. The base fare ancillary fees plus government fees and taxes together make up the Complete Price of a ticket, which is what the consumer buys and what he or she needs to know when comparing competing airline offers in order to make a fully informed decision. 14 GRA, Incorporated

124 low base prices and then attempt to recoup revenues by charging high ancillary fees, 16 To the extent that this occurs, the consumer receives information that is both incomplete and misleading. Limited transactability on OTAs creates similar problems for the consumer. Suppose, for the sake of argument that flight information available on the OTA is fully transparent that the full money costs, for both base fares and all ancillary services, are clearly posted for all available flights. Suppose further that the consumer can purchase a ticket for the flight directly from the OTA, but cannot complete a transaction for an ancillary service, such as reserving a preferred seat. Now the consumer must go to the airline's website (or other location) to complete the reservation for the ancillary service. The extra time spent completing the ancillary service purchase increases the consumer's transactions costs and therefore the full price of travel. 17 The additional search and transaction time also raises the risk that some ancillary services (such as three seats together), will no longer be available. As we noted earlier, limited transactability can also affect search costs. Again, suppose that the consumer initiates a search for flights on an OTA, and based on the available information, finds a flight on airline A. Because the consumer cannot purchase an ancillary service on the OTA, say a preferred seat, the consumer visits the airline's website where she discovers that her preferred seat is not available. Now the consumer must decide whether to purchase the ticket with suboptimal seating, or continue her search by returning to the OTA to examine other flight options or by visiting other airline sites to investigate seating availability. If she purchases the ticket, even though the seat is suboptimal, she has incurred transactions costs that could have been avoided if she could have completed the bundled transaction the ticket plus the ancillary service directly from the OTA. If she continues the search, she incurs search costs that could have been avoided if the information displayed on the OTA had been presented dynamically in a transactable format. The consumer may have made a different choice entirely if all of the information had been dynamically available and she would have avoided all of the extra search and transactions costs. Note that the consumer would face similar problems if the preferred seating was available on the OTA, but because of the static nature of information about ancillaries on the OTA, fees for seat reservations listed on the airlines website were higher than those posted on the OTA. Now the consumer must decide whether to purchase a ticket with a higher than expected cost or to continue searching. 16 For example, one carrier is famous for offering $9 fares, but ancillary charges may make the complete fare much higher. Some of the ancillaries are unavoidable e.g., fuel charges per seat. DOT has recently taken steps to curb this kind of advertising and now requires all such unavoidable fees to be included in the price offered. However, there is no current requirement to allow the consumer to see in a single display both the base fare and the prices of optional ancillary services like checked baggage, early boarding, or seat selection. 17 Unbundling ticket and ancillary service purchases also imposes additional reporting costs on the system. Because the ancillary service purchase is treated as a separate transaction, an additional report must be transmitted to affected parties such as the credit card company, the airlines, and the consumer. 15 GRA, Incorporated

125 The discussion above examines the case in which the consumer initiates the search and attempts to complete the transaction on an OTA. However, the same issues arise when the traveler uses the services of a brick and mortar travel agent or a corporate travel agency. These businesses act as agents for the consumer. Limited transparency and transactability cause brick and mortar travel agencies and corporate travel management companies to incur search and transactions costs that could otherwise be avoided. Ultimately, these costs are passed on to both personal and business travelers. Selecting Suboptimal Flights As we explained earlier, the consumer's decision about choosing a flight involves trade-offs between the full price of travel and the characteristics of the flight. The consumer's problem is to find the optimal or best flight available. 18 However, limited information makes searching for the optimal flight costly, and therefore increases the likelihood that the consumer will ultimately select a suboptimal flight. We illustrate this point using some of the examples described above. First, consider the traveler who initiated a flight search on an OTA, and based on information about flight characteristics and base fares, narrows the search to several alternatives. Because information on ancillary services is opaque, the consumer decides to visit several airline websites to get complete flight information. At each step in the search process, the consumer weighs the expected incremental benefits of additional search (finding a better flight) with marginal search costs. Because search is costly, at some point the consumer makes a choice with less than complete information. If the consumer has not found the optimal flight at this point, then the consumer incurs a cost equal to the difference between the consumer's net valuation of the selected flight and the optimal flight. Better information, or lower search costs, increases the likelihood that the consumer will find a better flight. Our conclusion applies equally if the consumer decides to rely on static information provided by the OTA, which is cumbersome and less than authoritative. He can easily choose a suboptimal flight. Limited transactability also can result in suboptimal flight choices. Consider the case of a consumer, who selects a flight based on information displayed on an OTA, but cannot complete the transaction for an ancillary service, say selecting a seat. The consumer goes to the airline website, but the preferred seat is unavailable or is priced higher than the consumer expects. Now the consumer must decide whether to accept a suboptimal seat (or pay a higher than expected price) or continue the search incurring additional search and transactions costs. If the consumer's expected additional search and transactions costs exceed her expected incremental benefits of a better flight, the consumer may choose the suboptimal alternative. 18 For the personal traveler, the optimal flight is consistent with utility maximization. The optimal choice for the business traveler is consistent with profit maximization. 16 GRA, Incorporated

126 Alternatively, when the consumer cannot learn about the availability or price of an ancillary service unless he or she endures most of the process of buying a ticket, the chances of selecting a suboptimal flight (or paying a higher fare) increase because search with regard to this service is devalued. We emphasize that nothing in these examples suggests that consumers behave irrationally. To the contrary, consumers make rational decisions based on expectations about the market. Suboptimal flight choices result from search and transactions costs. Recent Rule Changes Regarding Fees A rule published by the U.S. Department of Transportation in April 2011 requires, among other consumer protections, the following: 19 Full Fare Advertising requires airlines and ticket agents to include in advertised fares all mandatory fees including government mandated taxes and fees. Baggage Fees requires airlines and ticket agents to include on e-ticket confirmations information about free baggage allowance and applicable fees for baggage checking, but allows ticket agents, unlike airlines, to do so through a hyperlink. Also requires airlines and ticket agents to inform passengers on the first screen in which a fare is offered for a specific itinerary which baggage fees may apply and where consumers can go to see such fees. Other Optional Ancillary Fees requires airlines to disclose all fees for optional services through a prominent link on their homepages. While this rule will likely improve transparency, some important concerns remain. Simply requiring airlines and travel agents to provide warnings and links to baggage fees will cause consumers to incur unnecessary search costs and complicate their ability to compute the full money cost of flights. Also, the fact that the rule requires only airlines (and apparently not travel agents) to disclose other, non-baggage related optional fees will limit the ability of consumers to do comparison shopping on OTAs or through B&M agents. Finally, the rule is silent on issues related to improving transactability. As we demonstrate below, these limitations will cause consumers to incur search and transactions costs that could otherwise be avoided and create uncertainty that makes it likely that some consumers will select suboptimal flights See 76 Fed. Reg (April 25, 2011). 20 Some uncertainty about the rule's impact on consumers exists because it was implemented only on January 24, 2012 and has not yet been enforced. As the date of this paper, the effective date of the rule's implementation is January 24, See Order (Docket DOT-OST ), January 6, GRA, Incorporated

127 An Example To understand the Complete Price of a ticket (the base fare and fees for any desired ancillary services), a consumer may have to expend an extraordinary amount of time and effort even after implementation of DOT's April 2011 rules. In the following example, we illustrate this process by showing what a consumer might encounter who is interested in understanding baggage fees and the cost (if any) of a seat near the front of the plane. Baggage Fees Exhibit 3-1 shows the webpages a consumer using an OTA might have to click-through in order to ascertain the base fare and baggage fees for a ticket on a single airline. (Exhibit 3-2 shows the remainder of the search for a premium seat.) In Webpage 1, the consumer enters the desired departure and arrival cities, dates of travel, and type of ticket (economy or first class). In Webpage 2, the OTA then displays a set of offers in the market in the useful clearinghouse format mentioned earlier. However, there is a notice that the fares shown are not Complete Prices; while they include government fees and taxes per DOT's April 2011 ruling, they do not include baggage or other ancillary charges. The exact language is: Prices are per person and do not include baggage fees or other fees charged directly by the airline. The consumer selects the flight of interest; the OTA provides a link to a listing of bag fees for that flight. Webpages 3 and 4 show the list of baggage fees In this case, the list is somewhat confusing because it shows baggage fees for foreign airlines that do not even serve the market. Webpage 3 also contains the following disclaimer. Baggage Fees for Newark, NJ (EWR) to Orange County, CA (SNA) Baggage fee information in the table below is provided for your convenience, and shows the generally applicable fees for baggage collected by the airline. Discounts may apply based on when payment is made (online vs. in the airport), frequent flier status, military status, or other factors. Please click on the airline name for more detailed fee information and the baggage allowance for that airline. Additional fees for overweight/oversize bags may apply. In most cases, if you select multiple carriers for your itinerary, the applicable fees and baggage policies for the entire trip will be those of the ticketing carrier. However, in a limited number of multiple carrier itineraries, different policies could apply on your outbound and return flights. Please check the carrier links below for more details on which policy will apply. 18 GRA, Incorporated

128 Exhibit 3-1: Example of Consumer Effort Needed to Uncover a Complete Price 12 3 : -ft 4 * sss flight BSSf E3&3E3339M SEARCH FOR flsohts :,. ^ SEARCH FOR FWSH J+HOm : "ss«" U.S.'Cantido ts'yckc-d Emerge tetts'ga > :v&i ; ; l«cwtommivha <"e >«t < taifl. U«f t»e»»«l> *»»} 0 i i 1». 8 U.S.''Canada chc-eked baggage fee exceptions i»ss 19 GRA, Incorporated

129 An interested consumer would then proceed to Webpage 5, which is a link provided by the OTA to the airline's website. Here the consumer finds more information on the airline's bag policy, including the possibility that the fees may vary by ticketing date and payment method. The exact disclaimer says: Different pricing may apply based on ticketing dates and payment method. Additional restrictions may apply. See the full checked baggage policy for details Still unsure what the fee will be, the consumer proceeds to Webpages 6 and 7, which describe the baggage fee in more detail. Here the consumer finds that some travelers are exempt from baggage fees. The exact wording for the exemption is as follows: Baggage fee exceptions You may be exempt from certain baggage fees on flights operated by United, United Express and Star Alliance partner carriers based on the cabin in which you are traveling, frequent flyer program status, or military status. Please visit the U.S./Canada Checked Baggage Fee Exceptions page for more information relating to these groups Curious to see if she or he is exempt from the fees, the consumer moves on to Webpages 8 and 9, and finally learns whether she will pay $25 for the first bag and $35 for the second. Having learned this information, the consumer can then return to Webpage 2, where the flight offers are listed. If the consumer is dissatisfied with the offer including the baggage fee, she can move on to another airline's offer and may repeat the whole process again, moving from Webpage 2 through 9 on a different airline. Once the consumer settles on a flight offer, if she wants to purchase the baggage check service, she has to visit the airline website, visit a city ticket office or wait and buy the service at the airport. In other words, a whole separate transaction must take place meaning that she incurs the full transactions costs twice once on the OTA and a second time with the airline. Consumers interested in other ancillary services (early boarding, premium seating, etc.,) may find that they first have to input a great deal of data including name and other details before learning the incremental costs. In cases where consumers have interest in these ancillary services, comparison shopping is largely short-circuited. Sometimes, a consumer will have to go through most of the transaction process just to determine the price of an ancillary service. To see how the availability of information on other ancillary services affects consumers, the following section continues through the consumer's search for a premium seat on the airline's website. 20 GRA, Incorporated

130 Seat Selection Exhibit 3-2 shows the additional pages a consumer might have to transit to understand what it would cost to buy a premium seat on the same flights. She returns to the OTA screen showing flight offers in Webpage 10. She notices the Seat Preview button for each flight, and clicks on the one for the 5:25pm flight. A popup screen appears in Webpage 11, which in this case says: Available seats for this flight cannot be viewed at this time. This will not always be the case; in other instances the seat map may show availability. But, in no case will the consumer be able to determine the price and availability of premium seats on the OTA. She closes the popup, and selects the 5:25 departure anyway for the sole purpose of determining flight availability on the return flight. Webpage 12 shows the flight offers for the return flight. In Webpage 13, she has selected the Seat Preview for the 7:45am departure and again finds that no information on seats is available. On both Webpage 11 and 13, there is a note that says: The following seats are available for this flight. You will be able to select specific seats once you have selected a flight to purchase. This presents the consumer with what some might term a Hobbesian choice: Book the ticket without knowledge of seat availability; for a consumer interested in an aisle or other type of seat, this might end up being a suboptimal choice. If there are no aisle seats available, the choice would be suboptimal if competing airline offers had aisle seats available and the Complete Price and other features of the flight were otherwise the same. Or the consumer might later find out she has to pay for an aisle seat, but at this point does not know what she might have to pay. Stop the search on this flight offer and return to the OTA to explore other offers. If this is the case, the consumer will have navigated 13 webpages to determine the likely baggage fees for a roundtrip from Newark to Orange County Airport but will not know what kind of seats might be available, or what premium seats might cost. In other words, considerable time and effort would have been expended on an incomplete search. 21 GRA, Incorporated

131 Exhibit 3-1: Seat Selection ESSE53 V, Wl WELCOME TO UNITED,COM VVe'vs corripietfd «jf teatirgie website We sua fs#«bpse&s Mwnu&ea on tew te use Km vse j ivftitbeei^pavs icec/aw-jfcort ct Hutt&ai: l;,.; ; Hwe ti«sck'-i<«-v HfleasiPtes s*i». in : KfcisjsriujS fi^n^rpw:.... Hul«timnWi / VtewfUHoivattMiv... ; f thit # RK»C(V«?<4» ti* r^jntlrwilkjit euasttr j." nsm.!«>«; - v-css IBjBI ; -f 22 GRA, Incorporated

132 Exhibit 3-2 Continued Discontinue the search for now or entirely. In at least some cases, the added search effort has raised the full price of travel to a level that the consumer cannot afford. Some people who otherwise would fly will not because of the difficulty involved in determining the Complete Price of ticket with desired properties. Assume that the consumer chooses to go to the airline's website to explore seat availability and the price and availability of premium seats. Webpage 14 is the initial page on the United website. For a second time, she enters information on the origin and destination of the trip, type of ticket and dates of flights. The outbound offers are then shown on Webpage 15. To get to the seat information, she has to select a flight. She picks the 5:25pm departure. The airline website then presents the return flight offers on Webpage 16. She selects the 7:45am return flight. The airline then summarizes the itinerary selected on Webpage 17 and offers higher priced, more flexible terms for the ticket. She declines these offers and moves onto Webpage 18, where she inputs personal information and her preference for an aisle seat. Finally, on Webpage 19 she sees a seat map showing remaining seats onboard, including three middle seats (in white) and one remaining premium coach seat (blue) which is offered for $99. Webpage 20 shows the seat map for the return flight, with the same general information and the same offer of a premium seat. Summary of Example The example of consumer search presented will not apply to all consumers; some will encounter less search effort, others will encounter more. But, it is important to note that the example illustrates how a consumer using an OTA and interested in searching a single flight option could easily have to: 23 GRA, Incorporated

133 View 9 webpages just to determine flight availability and the cost of baggage fees, View 13 webpages to determine flight availability, and the cost of baggage fees, and to determine if information is available on seats. View 20 webpages including moving to an airline website, reentering all of the flight details (date, origin and destination, type of ticket) to determine the above information and the cost of a premium seat and the availability of other seats. This is the effort required to explore a single flight offer. Most consumers will want to comparison shop, determine baggage, premium seat and other ancillary charges in order to understand the Complete Prices of several offers in a market. The example illustrates how the comparison shopping offered by OTAs via GDSs or other nonairline platforms is disrupted because ancillary service charges are not transparent. It is important to note that the lack of transparency and immediate transactability based on the Complete Price can easily result in consumers paying more than they otherwise would. Earlier we noted that once the consumer determines that she cannot determine seat availability and the cost of premium seats on the OTA, she might cut off the search in favor of searching at another time. It can easily be the case that by delaying the consumer will incur higher money prices for the Base Fare, and perhaps for the premium seat. The longer the consumer delays resuming the search, the closer it is to the date of departure and the greater the likelihood that fares will increase. The result is that a consumer who was willing to buy a ticket earlier did not because of high search costs. If instead a consumer could search simultaneously for the Base Fare and ancillary service charges, and thus be able to compare Complete Prices, her search costs would be far lower, and it would be more likely she would select an optimal flight. Later in this document, we present benefit estimates of a proposed regulatory change that would facilitate comparison shopping based on Complete Prices. Due to data limitations, our results do not fully reflect the effort consumers must make to understand Complete Prices for airline tickets. Our results substantially understate the benefits of such a regulatory change. Overall, the example makes clear why it is relatively easy for airlines to increase Complete Prices by adopting the shrouding strategy. It is difficult for consumers to ascertain Complete Prices, and the search process is handicapped because only base fares are displayed. Airlines can bait the consumer with low base fares, and then switch them into paying high Complete Prices, including ancillary services whose prices are masked, sometimes until the consumer is very far into the transaction process. Readers interested in observing consumer behavior during search for airline tickets might be interested in viewing a video posted by the Consumer Travel Alliance, which is available at: US8. 24 GRA, Incorporated

134 The Benefits of Full Transparency and Transactability It is easy to demonstrate how consumers will benefit from full transparency and transactability. Consider a single traveler who has fixed dates for her trip. While she is somewhat flexible, she has hour-of-the-day preferences for both legs. She plans to check two bags, one of which is oversized. She has a strong preference for an aisle seat close to the front of the plane; a window seat is unacceptable to her. Finally, she prefers a non-stop flight, but is willing to consider a one-stop flight if she can find one with a low enough price and acceptable departure and arrival times. We consider two cases. Under Case 1, we assume that the new (April 2011) DOT rules are in place. We urge caution here, because these rules have just been implemented; also, we are mindful of airlines' incentives to interpret the rules in a manner that, to the extent possible, allows them to maintain price obfuscation strategies. Under Case 2, we assume full transparency and transactability on OTAs. Our example applies equally to bricks and mortar agency sites as well as travel management companies. Case 1: Current DOT Rules and Airline Practices We begin with the Case 1 scenario. The consumer begins her search on an OTA. She enters the dates of her trip and begins a clearinghouse search. She gets a list of available flights and is able to sort them by base fares. In compliance with the new DOT rules, the fares reflect base fares plus any nondiscretionary fees and taxes. She is also able to determine from the list displayed on the OTA, which flights are non-stop and one-stop. Departure and arrival times for each of the listed options are also identified on the OTA. After considering the trade-offs between base fares and flight characteristics, she narrows her search to three flights, Flight 1, Flight 2, and Flight 3 on three different airlines. Now she must consider baggage fees. As per the new DOT rules, the OTA has a lookup table for discretionary ancillary services or links to the airlines websites where baggage fees are disclosed. Assume she visits airline websites for each of the three flights and records fees for checking her two bags. As we saw earlier, dealing fully with each airline's baggage policy can mean viewing nine webpages per airline. Now she must add baggage fees to the base fares listed on the OTA and compare prices for the three flights (base fares plus baggage fees). Suppose that after reflection, she chooses Flight 1. It is time now for her to deal with the seat selection problem. Assume the airline will reveal both availability and price of a premium seat before she commits. Because "premium" seats (e.g., close to the front, on the aisle, in coach) are not transactable on the OTA, she must return to the airline website for Flight 1. She takes time to enter the required flight information, and goes to the aircraft seating chart where she discovers that only premium window seats are available for her flight. Since a window seat is unacceptable to her, she must reconsider her initial choice. She prefers the characteristics on Flight 3, but based on her calculations thus far, Flight 2 is a little cheaper. She provisionally selects Flight 2, goes to that flight's airline website, 25 GRA, Incorporated

135 enters in the required flight information, finds an acceptable seat, but discovers that the fees for seat selection are higher than she had expected. Finally, she goes to Flight 3's website and finds that Flight 2 and 3 have comparable total ticket costs (base fare, mandatory fees and taxes, baggage fees and the seat selection fees). Because she prefers Flight 3's characteristics, she completes the transaction for the air fare and the ancillary services on the airline website for Flight 3. She has spent an amount of time equal to three on-line transactions just to sort out her seat selection. Case 2: Full Transparency and Transactabllity Next, we consider the full transparency and transactability scenario for Case 2. As before, our hypothetical consumer begins her search on an OTA. She enters the flight information and clicks on a display that she wants to check two bags, one of which is oversized. Now she receives a list of available flights and is able to sort them based on "complete" fares. Now, however, the fares include more information: the base fare (including, as before, all mandatory fees and taxes) plus baggage checking fees. At this point, the consumer has avoided visits to three airline websites and the aggravation and time spent adding baggage checking fees to base fares for her price comparison. As we explain below, she also has better information than she did in the Case 1 scenario. Based on this information she narrows her search to three flights, Flights 1, 2, and 4. Flights 1 and 2 are the same flights selected in the Case 1 scenario, but Flight 4 is new. Flight 4 has essentially the same characteristics as Flight 3, so why did it replace the latter? The answer is that Flight 4 has a higher base fare plus mandatory fees than Flight 3, but substantially lower baggage fees. Flight 4's complete money price is lower than Flight 3's. In other words, lower search costs have changed the consumer's evaluation of her options. Suppose that, as before, the consumer provisionally selects Flight 1. Now the consumer must deal with the seat selection problem, but it is easier now with full transparency and transactability. While she is still on the OTAs website, she clicks on Flight 1 and gets a seating chart for the flight and, as in the Case 1 scenario, discovers that only premium window seats are available. She quickly clicks on Flight 3. The OTA adds seat selection costs and, again, she is finds a higher than expected seat selection fee. She clicks on Flight 4 and finds that the seating fees are acceptable, and completes the full transaction on the OTA. Note that in the Case 2 scenario, the consumer has conducted her full search on the OTA without ever having to visit airline websites. She has saved considerable time in search and transactions costs, and has avoided the aggravation of doing mental calculations needed in the Case 1 scenario to compute the money costs of the flights. Moreover, she will have made a better choice if Flight 4 has lower total money cost than Flight 3, her final selection in Case l If Flights 3 and 4 have the same characteristics, then the lower cost choice is strictly dominant and the higher cost choice strictly inferior. Strictly inferior options are always suboptimal and are costly to consumers. 26 GRA, Incorporated

136 Our example showing the benefits of complete transparency and transactability is for a relatively simple trip. Search and transactions costs for more complicated trips involving several travelers with different preferences (say, for seating) and different service requirements (e.g., early boarding) are exponentially more complex. Accordingly, we would expect exponentially larger benefits from full transparency and transactability. 27 GRA, Incorporated

137 Section 4 - Search Costs and Price Obfuscation: Why Shrouding Ancillary Fees Raises Airline Prices The effects of search costs and price obfuscation on markets have received considerable attention in the economics literature. Generally, this research shows that limited information and strategies by sellers to shroud prices and other product dimensions lead to higher than competitive prices and price dispersion (i.e., variations in prices charged by sellers even after adjusting for differences in product and service quality). In this section we report on this literature and then apply it to the issue of airline fare transparency and transactability. Much of the literature is theoretical, but recently empirical evidence has emerged that confirms the theory. One important finding is that the undesirable equilibrium that results from price obfuscation is stable, meaning that it will not change except for regulatory or other outside action. There is an intuitive explanation as to why search costs lead to higher prices. The theory of competitive markets rests on the notion that buyers will seek sellers offering a good at the lowest price. However, effective competition among sellers occurs only if buyers are informed about prices. If buyers are uninformed, then sellers have incentives to raise prices above competitive levels. Empirical evidence would then show both higher prices and greater price dispersion (variation) than one would find in competitive markets because sellers could exploit variations in consumer tastes and willingness to endure search. The conclusion that search costs leads to supra-competitive prices dates back to Stigler (1961). More recently, Ellison and Ellison (2009a) conclude that price obfuscation leads to reduced consumer sensitivity to prices. Since Stigler's study, numerous authors have investigated the effects of limits on consumer information in a variety of market settings. Consumers begin shopping with expectations about market prices and product characteristics, but can obtain information about offerings from specific sellers only by incurring search costs. Some studies have divided consumers into groups based on how informed they are about the market or by differences in willingness or ability to "shop." Salop (1979) distinguishes buyers based on differences in search costs 22 and Salop and Stiglitz (1977) divide buyers into "tourists" and "natives". Stahl (1989) considers "high" and "low" cost shoppers, and Ellison (2005) examines a market populated by consumers differing in their likelihood to purchase add-ons. Recently, Garrod (2007) distinguishes between "naive" and "sophisticated" consumers. Sellers adopt pricing and other strategies consistent with profit maximization. Bakos (1997), for example, develops a model that has sellers setting both prices and product characteristics. Ellison (2005) looks at market outcomes when sellers advertise low base prices and then obfuscate add-on prices, a strategy that results in higher overall prices. Garrod (2007) allows 22 Differences in search costs among consumers are likely because variations in consumer valuations of time spent in search are likely to exist. 28 GRA, Incorporated

138 sellers to adopt strategies about price transparency, warn buyers about price shrouding by rival sellers, and impose switching costs on consumers. Our discussion below closely follows Garrod (2007) because he applies his model to airline pricing strategies. 23 We emphasize, however, that other researchers have examined the effects of firms' strategies to shroud either price or other product dimensions in order to increase prices to supra-competitive levels. For example, Ellison and Ellison (2009) find that obfuscation strategies employed by some internet sites complicate the ability of consumers to understand a product's quality, which in turn leads to supra-competitive prices. Baylis and Perloff (2002) show that low and high price firms can both exist simultaneously because of differences in consumers' ability to compute prices proficiently. Garrod (2007) adopts the reasonable notion that firms are much more focused on their products and how they are offered than most consumers. Firms analyze the market much more vigorously than consumers who may be active in it only intermittently. This sets up the potential for information asymmetries that sellers can exploit. A few authors have conducted empirical investigations of the effects of the internet on airline pricing. Much of this literature focuses on the persistence of price dispersion in internet markets. Some economists had predicted that because the internet facilitates efficient clearinghouse search, average prices should fall and variations in prices should be reduced (less price dispersion). Clemons, et al. (2002) look at competition among online travel agents and find persistent online price dispersion. Chen (2002) examines prices listed on airline websites and online travel agents and also finds price dispersion. More recently, Orlov (2011) finds that consumer access to the internet reduces average fares and increases price dispersion. The data used in these studies predate the time when airlines' strategy of unbundling ancillary services and shrouding their fees was commonplace. 24 One conclusion that can be drawn from these studies is that when the internet is able to provide efficient comparison shopping, average prices fall; increases in price dispersion reflect remaining variations in consumer tastes and attempts by suppliers to manage offers, as is common in the airline business. In the following discussion, we discuss how consumer naivete about ancillary fees might be exploited by airlines to realize supra-competitive prices. The key to sustaining this strategy is that airlines can raise consumer search costs by shrouding ancillaries. Or, sellers can vary their fees and terms for buying ancillary services to reduce the effectiveness of sophisticated searching. Once this is possible, higher prices can be sustained. The resulting equilibrium can 23 Garrod's paper is motivated in part by airline price obfuscation strategies in the European short-haul market. He concludes that the European Commission's decision to require airlines to disclose hidden taxes and fees was justified. 24 United was the first major U.S. carrier to impose a fee on the second checked bag (May 5, 2008); American followed with a fee assessed on the first bag on June 15, Thus, airline shrouding policy dates from approximately mid-year The latest data in the studies cited ends in GRA, Incorporated

139 be stable, meaning it will not change except from some exogenous action like a regulatory change. Competitive Markets To facilitate the discussion, we first summarize the salient features of a competitive market, and then compare them to situations where airlines firms shroud some portion of their offer to consumers. Suppose that airline markets are fully competitive. We are interested in the Complete Price (P) of a ticket which is the base fare (F) plus ancillary fees (A); that is, P= F + A Suppose also that all airlines distribute their flight offers so that both the base fare F and all ancillary fees A are fully revealed to all consumers without additional search and in such a way that they can comparison shop and immediately transact for a ticket. In a competitive market, the standard result would be that the Complete Price P would equal marginal production cost (c), or P= F + A = c. Assuming constant marginal costs and homogeneous products, producer surplus would equal zero, and total surplus would equal consumer surplus. 25 This is the standard set up for a competitive market that maximizes benefits for consumers and is usually termed Bertrand equilibrium. All transactions in this market will satisfy the condition that consumer valuation (CV) exceeds or just equals marginal cost. We assume that airlines are profit maximizers. Under what circumstances would it become rational for airlines to shroud or cloak some part of their price offer to consumers in order to earn more money? And why would the resulting equilibrium be stable? The following presents the theoretical economics of such an outcome. A Market with Only Naive Consumers Take a case where all consumers are naive with respect to ancillary fees. This could happen, for example, if passengers are unaware that different airlines can charge different ancillary fees on identical routes because they mistakenly believe that fees are set by a third party and so are uniform across carriers. All naive consumers would only make purchase decisions based on the 25 Producer surplus is the amount sellers earn above the minimum amount they would be willing to accept to supply a given quantity of output. Consumer surplus is the difference between the maximum amount consumers would be willing to pay for a given amount of output and the amount they actually pay. Together they measure the benefits to society of a market activity, net of resource costs expended to produce them. 30 GRA, Incorporated

140 base fares under the belief that any ancillary fees would be identical across airlines. In this case, all airlines have incentives to compete only on the base fare and to set the ancillary fees at monopoly levels. In the limit, all firms selling homogeneous products could offer a Base Fare (F) equal to zero dollars and Ancillary Fee (A) at a monopoly price. Consumers would never search for another airline's offer because they believe that the observable base fare could not be any lower, and because they are naive, they would have no reason to search for the different ancillary charges. For the strategy to make sense, the price in this Super Naive market would exceed P in the competitive market. Total surplus would be lower than in the competitive market because the complete price in the market would exceed the P in the competitive market. Society would be worse off in the super naive market than in the competitive market because fewer consumers would be able to afford to travel at the higher prices. A Market with a Mixture of Naive and Sophisticated Consumers The Super Naive market assumes that consumers never learn about airline price shrouding tactics. Assume now that there are both sophisticated and naive consumers in the market. The sophisticated consumers take both the observable base fare and shrouded ancillary fees into account when making a purchase decision. One might think of sophisticated consumers as people who travel frequently and are otherwise more familiar with airline markets. They might be people who keep up with changing airline pricing tactics. So, sophisticated consumers will expend the effort to understand ancillary charges and form better expectations about them. If there are enough sophisticated consumers in the market, then at least one airline will opt to offer fully transparent base fares and ancillary fees. The transparent firms will set their complete prices just below the offers made by the shrouding firms (the sellers who obfuscate their ancillary prices.) In this example, there would only ever be one transparent firm in the market. The reason is that if there were more than one, they would compete for the sophisticated consumers and drive transparent complete prices down to competitive levels; one of these transparent firms would be better off switching to a shrouding strategy and exploiting the naive consumers in order to earn a supra-competitive return. In this case, sophisticated consumers would be better-off than naive consumers because they face lower complete prices and more of them can afford to travel. Assume for the moment that the naive consumers face the same supra-competitive prices as in the Super Naive market. Society is better off in the mixed case than in the super naive case. But, this mixed case is less advantageous to society than the competitive case because complete prices remain higher than would otherwise be sustainable for both naive and sophisticated consumers. 31 GRA, Incorporated

141 A More Realistic Mixed Market Missing in the previous case is search undertaken by either sophisticated or naive consumers. Let V equal search costs and TR equal transactions costs. An example of V would be the effort or value of time incurred by a consumer searching another airline's prices. An example of TR would be the effort or value of time incurred by a consumer to complete a transaction once r she has done an initial search. How does the introduction of search costs affect the sophisticated and naive consumers? We consider two cases. Case 1: All Firms Shroud: First take the case where there are no transparent firms in the market. Consider the effects on the sophisticated consumer first. Assume the sophisticated consumer searches for both the Base Fare (F) and Ancillary Fees (A) and finds that the Complete Price exceeds his expectations. In other words, F+ A > E (F+A). It would make sense for the sophisticated consumer to continue to search so long as the observed complete price F+A exceeds the expected price plus V search costs, or: F+A> E(F+A) + V. The sophisticated consumers will want to continue to search until they either find a complete price that meets expectations or until expected prices are close enough to observed prices to make further search unfruitful. But, remember in this case that all of the firms are shrouding their ancillary prices. This is the case where there are not enough sophisticated consumers to justify at least one firm becoming transparent to capture them. All firms are better off exploiting naive consumers. So the sophisticated consumers will quickly find out that search does not pay because all firms are pursuing the shrouding strategy. Complete Prices will exceed Competitive Prices. Also, sophisticated consumers may have incurred additional search costs, in which case they are worse off than they would be in the Mixed Case above. To take a real world example, consumers today may have difficulty determining the incremental charge for a premium seat; many airlines do not reveal the charge until a consumer has endured a significant portion of the transaction process. As a result, additional search on this ancillary service may be very costly. Case 1A: Now consider the naive consumers in this case. Once we introduce the possibility that naive consumers will search for better fares, we need to consider their motivations. If they remain forever naive, then they will continue to be fooled by the shrouding strategy and search would never pay off. They will observe very low base fares that met their expectations and would continue to be naive about the ancillary fees. Searching will be fruitless, and to the extent they did it, will be a waste of resources. They, and society, will be worse off than in the Mixed Case. Case IB: But consider the more realistic case that naive consumers become sophisticated if they uncover shrouded fees that exceed their expectations. Now the naive consumers will search just like the sophisticated ones. At some point, because there are now more 32 GRA, Incorporated

142 sophisticated consumers, an existing firm may change its policies and become Transparent or a new airline may enter with this strategy. But again the Transparent firm's strategy is to set its Complete Price just below those of the Shrouding Airlines. As we explained above, since only one Transparent firm can be sustained, it captures all of the sophisticated consumers. The Shrouding firms will capture the remaining naive consumers. All airlines will realize prices above competitive levels. Clearly there is potential for consumers to be better off than in the Super Naive case, but they remain worse off than in the fully competitive case so long as the Shrouding Continues (a matter discussed in the conclusion section below). Case 2: Transparent and Shrouding Firms: We consider two variations for the case in which both transparent and shrouding firms exist in the market. Case 2A: If there is a Transparent firm, then it will capture the sophisticated consumers. If naive consumers remain naive, they will be captured by the shrouding firms. Sophisticated consumers will be better off than in the Mixed Case, but overall society is worse off than in the competitive case because both Transparent and Shrouding firms will price above competitive levels. The result is similar to Case 1A. Case 2B: If instead naive consumers learn from searching, then the equilibrium is the same as in Case IB. The transparent firm will already exist, but otherwise everything is the same. Shrouding as a Strategy One must ask the question why shrouding can remain sustainable once we take account of the benefits consumers gain via search. The answer is that Shrouding firms can influence search costs and Transparent firms lack incentives to recruit naive consumers by warning them about shrouding tactics by their rivals. Introducing search for naive consumers has a beneficial effect, if they learn from the process. In the Cases 1A and 2A, we assumed that naive consumers never account for ancillary fees. If this was always the case, there would never be a reason to search. The base fare would always be low, and they would never have a reason to uncover variations in ancillary fees because of their mistaken belief that they are uniform across carriers. In Case IB and 2B, when a naive consumer uncovers a shrouded ancillary charge, he learns from the experience and becomes sophisticated. As long as the Shrouded Complete Price (F+A) exceeds the Transparent Complete Price plus search costs V, naive consumers have the potential to switch from Shrouding to Transparent firms and the prices they face will be lower. A very important point is that search costs have to be low enough to gain the lower prices for naive consumers. If the Shrouding firms make it expensive to switch to another firm, then some naive consumers will call off the search. To take a real world example, this could happen for instance by forcing a consumer to undertake extra search or fill in lots of information, and pass through several steps before finding out what the ancillary fees are. In the latter case, the 33 GRA, Incorporated

143 transaction costs are almost fully incurred by the consumer just to complete his search. In either instance, the shrouding process costs the consumer so much initially, that he will discontinue searching earlier than would be the case otherwise and may end up paying higher prices. As was noted above, if a consumer is interested in buying a premium seat, he or she must first endure a significant portion of the transaction process e before determining the fee; in this case, the airline has induced the consumer to stop searching and the consumer must incur the full transactions costs before finding out the Complete Price, including the fee for a premium seat. Shrouding carriers may cause consumers to undertake cumbersome mental accounting to account for the ancillary fees. Instead of making the ancillary charges clear, they are presented as a separate list. Consumers have to add on the ancillary charges to the transparent base fares and then mentally sort the offers to decide which is most advantageous for them. Complicating the process, the list may show ancillary charges in a range, 26 which depends on the specific flight. The shrouding carrier can also require the consumer to buy ancillaries either on the carrier's website, via the telephone or in person at the carrier's sales or airport facility. Or the carrier can change its ancillary prices and policies (who gets what for free) often enough to keep consumers from becoming too sophisticated. By changing the shrouding strategy, the airline devalues both consumer experience and the payoff from searching. The possible changes are almost endless. This is the central issue being considered by DOT. Carriers have significant incentives to shroud their ancillary prices, to change their policies and to keep search costs high. They hope that consumers learn to buy their tickets on the airline's website or other airline venue where there is no comparison shopping for base fares or ancillaries. Once the consumer is on the airline website or other venue, consumers will find it cumbersome to determine the Complete Price. Consumers become invested in the process, as search time expands. They realize that if they switch to another venue, the search will also be cumbersome. The Equilibrium is Stable In the previous section, we outlined why the shrouding strategy is sustainable despite consumers' efforts to search. The answer is that Shrouding firms can influence search costs and Transparent firms lack incentives to recruit naive consumers. Here we address one more important question that is a necessary condition for the equilibrium to be stable, meaning it is unlikely to change without intervention: What prevents Transparent firms from recruiting naive consumers by warning them about the price obfuscation strategies of the Shrouding firms? 26 Carriers may not baggage fees in a range as a result of DOT's April 2011 action. 34 GRA, Incorporated

144 Garrod (2007) considers "warning" as a strategy and concludes that Transparent firms not only lack incentives to warn, but have incentives to make it difficult for naive consumers to switch. Recruiting naive consumers increases the number of sophisticates in the market, and therefore increases incentives for more shrouding firms to become transparent. This increases competition for the incumbent Transparent firm and reduces its profits. Thus the incumbent Transparent firm will not warn consumers about the tactics of Shrouding firms and instead will make switching difficult. This equilibrium is sustainable so long as the airlines can keep search costs high and it is relatively inexpensive to shroud the fees and change the terms of sale. It is common knowledge that airlines have been leaders in revenue management, and that they vary their prices frequently and in numerous dimensions. Shrouding ancillary fees is just another manifestation of revenue management and so is a very low cost strategy with a high potential payoff. Some would object to this characterization noting that Southwest aggressively advertises it "bags fly free" policy. But this is just another manifestation of the behavior just discussed. First, Southwest limits its participation in GDSs and ONADCs, in part, to channel travelers to their website or other venues. According to the company, in 2010, 84 percent of its passenger revenue came from its website. Second, the company selectively warns; that is, they may warn about bag fees on other airlines, but are silent on their own fees for early boarding privileges. The company makes clear its aggressive pursuit of ancillary fees in its 2010 Annual Report, cited below: "Ancillary Services and Fees During 2010, the Company experienced revenue benefits from its addition in 2009 of new service offerings such as the Company's EarlyBird Check-in and Pets Are Welcome on Southwest (PAWS) products. EarlyBird Check-in allows Customers to obtain an early boarding position directly behind Business Select and A-List Customers by adding an additional $10 to the price of a one-way fare (priority boarding privileges are already included in the purchase of a Business Select fare and are a benefit of being an A-List frequent flyer - see "Rapid Rewards Frequent Flyer Program" below). The Company's PAWS offering allows Customers to bring small cats and dogs into the aircraft cabin for a $75 one-way fare. During 2010, the Company also increased its service charge for Customers who travel as an unaccompanied minor from $25 to $50 one-way to address the costs to the Company related to the administrative work and extra care necessary to safely transport these Customers. The Company's 2010 revenues from EarlyBird Check-in, PAWS, and unaccompanied minor services charges were $119 million, an increase of $95 million from The Company also expects to benefit from new ancillary revenue opportunities created by its scheduled launch in March 2011 of a new and improved Rapid Rewards frequent flyer program, which is discussed in detail below under "Rapid Rewards Frequent Flyer Program." Regardless of Southwest's actions, other airlines have chosen not to respond to Southwest to date, which suggests they are better off enduring the selective warning than responding and diluting their own revenues. In short, the airlines have incentives to keep the consumer in a naive state by making search costs high. The carriers know from experience that the industry tends to be competitive, and 35 GRA, Incorporated

145 one way to realize supra-competitive Complete Prices is to shroud ancillary fees. Given the opportunity to shroud the ancillaries on their own websites, it makes perfect sense for airlines to shroud them in all distribution channels. To do otherwise would effectively reduce consumer search costs and make it less likely that carriers can charge supra-competitive prices. Today as matters stand, consumers searching with travel agents or TMCs (via non-airline distribution channels) gain information on base fares but are given cumbersome information about ancillaries (a lookup table). Consumers have to perform mental calculations to sort the offers based on Complete Prices. Since some of the ancillary fees are listed in ranges, there is some uncertainty about what the Complete Prices are. Also, the fees and availability of some ancillaries (seat preference, early boarding, etc.,) may change if the consumer separates dealing with the ancillary from buying the base fare. Consumers may have to work through most of the transaction process for each airline offer of interest before knowing either the availability or price of some ancillary services. Further, consumers cannot buy the ancillary services via the travel agent or TMC in a single transaction; the agent or the consumer must instead undertake a separate transaction directly with the airline. Clearly this discourages comparison shopping via the agent or TMC (and GDSs) by making search and transactions costs higher which, in turn makes it more likely carriers can sustain supra-competitive fares. Summary: Effects of Search Costs and Price Obfuscation Strategies The following is a summary of the effects of search costs and price obfuscation strategies on market prices: Search costs alone either intended or unintended are sufficient to cause higher than competitive market prices. Firms have economic incentives to adopt strategies that impose search and transactions costs on consumers. Even firms that adopt transparent pricing strategies lack incentives to recruit naive consumers by warning them about price obfuscation tactics practiced by shrouding firms. Shrouding and transparent firms can coexist in market equilibrium with both naive and sophisticated consumers paying higher than competitive prices. The equilibrium may be stable, meaning only an exogenous factor like a regulatory change will alter the outcome. The presence of search costs and differences in buyer behavior (e.g., naive and sophisticated consumers) can lead to price dispersion different firms charging different prices. 27 The European Commission has responded to the effects of airline price obfuscation strategies on consumers by requiring airlines to disclose previously hidden taxes and fees in their 27 In addition to the Garrod (2007) study, the effects of search costs on price dispersion have received considerable attention in the economic literature. See Cleamons, et al. (1998) for a review. 36 GRA, Incorporated

146 advertised prices and during the booking process. 28 The regulation requires that: prices be displayed to include all unavoidable and foreseeable additional fees, any optional additional services be offered on an "opt-in" basis, a breakdown of taxes, fees and charges be provided and no price discrimination can be undertaken based on place of residence. The EU is currently considering stronger enforcement of its rule. 28 Regulation 1008/ GRA, Incorporated

147 Section 5 - Benefit-Cost Analysis Economic Efficiency The proposed policy to require full transparency and transactability in the market for airline tickets and ancillary services will affect society's well-being by causing a reallocation of resources within the economy. Specifically, the proposed policy will change the way airlines and travel agents provide flight information and the way that many consumers search for and purchase flights and ancillary services. Also, to the extent that lower full prices of travel occur, the policy will result in an increase the amount of air travel in the U.S. We adopt economic efficiency as a criterion to evaluate the economic desirability of this reallocation of resources. A policy is economically efficient if, as a result of its implementation, those individuals receiving benefits could potentially compensate those individuals bearing the costs of the policy. Benefit-cost analysis provides a consistent framework for evaluating the economic efficiency of a policy. The implementation of a policy improves economic efficiency when the resulting economic benefits exceed economic costs. Economic Benefits The economic benefits of a policy reflect affected members of society's willingness-to-pay for improvements in their well-being. As we explained earlier in this report, consumers will be the principal beneficiaries of the proposed policy. Specifically, consumers will benefit from: Time savings due to reduced search and transactions costs. Better information which will allow them to make fewer suboptimal flight choices. Increased air travel due to reductions in the full price of travel (from reduced search and transactions costs and reductions in the money price of travel). Later in this section, we provide quantitative estimates of the benefits associated with the first and third of these effects time savings and the benefits of increased air travel. Our estimates of both types of benefits are consistent with the willingness-to-pay principle. We use DOT's estimate of travelers' willingness to pay for time to estimate the benefits of time savings due to reduced search and transactions costs. Our estimates of the benefits of increased air travel are measured as the incremental increase in consumer surplus. Consumer surplus, which measures the difference between the maximum amount that consumers are willing to pay and the amount they actually pay is a close approximation of willingness-to-pay. Because of data limitations and technical complications, we do not report quantitative estimates the benefits associated with reduced suboptimal flight choices. We emphasize that this omission does not mean that these benefits are unimportant. Because of the size of the U.S. market for air travel, relatively small percentage reductions in suboptimal flight choices due to better informed consumers could potentially result in quantitatively large benefits. We illustrate this point later in the discussion. 38 GRA, Incorporated

148 Economic Costs The economic costs of a policy reflect society's willingness to be compensated for the consumption alternatives forgone as a result of resources being diverted to accomplish the policy's goals. To be more specific, the proposed policy may require some expenditure in resources to develop and maintain a system whereby consumers have full transparent and transactable information about airline ancillary services. In theory, the economic cost of these resources are society's willingness to be compensated for the loss of goods and services that the diverted resources could otherwise produce and make available for consumption. There are two types of costs that are likely to be incurred to implement our proposed policy. These are: Investment costs some upfront, one-time costs to design a system for transmitting and displaying information to consumers will be necessary. Most of these costs will be incurred by GDSs, nonairline distribution channels and airlines. Some re-design for online travel agent websites may also be necessary. Many of these costs may already have been incurred and are now sunk and should not be counted against the proposed rule. Maintenance costs some ongoing maintenance cost to keep the information system operating will also likely occur. As we explain later (see Cost Estimates), these costs are likely to be small. Some of the investment costs are sunk, and more streamlined reporting will likely offset some of the recurring maintenance costs. Economic Transfers The implementation of most policies results in some economic transfers. An economic transfer occurs when something of value is transferred from one group to another. Because economic transfers are exactly offsetting from the perspective of the overall economy, they do not affect conclusions about the economic efficiency of a policy. Earlier in Sections 3 and 4, we explained that a policy of full transparency and transactability will likely result in lower money prices for air travel. Some of the effect of lower prices will result in a transfer from airlines (i.e., lower revenues per ticket) to consumers (i.e., lower expenditures per flight). When we report benefit estimates of the proposed policy (see Benefit Estimates), we are careful to report total benefits net of transfers. It is important to recognize that some of the effect of lower money prices for air travel is not a transfer. Lower money prices will increase the amount of air travel enjoyed by consumers and will result in an increase in consumer surplus net of any transfers. The benefit estimates we report later in this section do include the increase in consumer surplus resulting from the incremental increase in air travel. 39 GRA, Incorporated

149 Estimated Benefits In this section, we estimate the benefits of modifying DOT regulations to require airlines to disclose data on ancillary services in order to facilitate presentation of Complete Prices, comparison shopping and completion of the transaction via all distribution channels the airlines choose to participate in. The benefits of the rule change can be separated into two pieces: The value of the pure resource savings in search and transaction time if consumers, travel agents and travel managers avoided o having to separately identify and comprehend ancillary charges and then mentally sort airline offers to identify the lowest Complete Price when searching o having to make a separate visit to an airline website or other airline location to purchase ancillary services The benefits to consumers from lower Complete Money Fares less the losses to airlines due to lower prices. We use the following data to characterize the U.S. passenger airline market. The average Complete Money Fare (base fare plus bag fees plus cancellation and change fees) for passengers on U.S. and foreign carriers for the year ended second quarter 2011 was $265.14, calculated as the dividend of o $144.4 billion in passenger revenue derive from Dblb ticket sample of base fares (including taxes and fees) plus bag and cancellation/change fees reported on Form 41 for the period, marked up to include estimated foreign carrier revenue o million origin-destination passengers reported from DBlb by US and foreign carriers for the period, marked up to include foreign carriers. 29 Using Comscore Clickstream data on internet purchases made on line, Nair (2010 ) reports that the average consumer making a purchase on-line spends minutes (or 0.51 hours) searching before making a purchase; we assume that all consumers spend this much time regardless of distribution channel. US DOT (2011) recommends using $42.10 as the value of airline passenger time per hour. 30 Thus the full price of travel (money price plus search time) is $ or $ hours x $ We assume that these data describe the current annual equilibrium for U.S. carriers as illustrated in Exhibit 5-1, which shows the money demand curve (Dm) and the full price of travel 29 To account for foreign carrier offers in the market, we assume their share of passengers is proportional to their share (2,75 percent) of total seat offers as reported in the same period in DOT T100 data. We assume that foreign carrier average base money fare is identical to US carrier international base money fare ($539). 30 USCOT: Revised Departmental Guidance on Valuation of Time 40 GRA, Incorporated

150 demand curve (Df). There are million passengers paying an average complete money fare of $265.14; if we include the value of their time searching, the full price of travel is $ Consumer net benefits (consumer surplus) for the year is the area in the triangle abc. Exhibit 5-1: U.S. Annual Market for Passenger Service Year Ended Second Quarter 2011 Full Price = $ Money Price = $ Df Dm Passenger (m) The data shown in Exhibit 5-1 are from a time that precedes the recent change in rules promulgated by DOT. 32 Thus, the search costs and money prices shown do not reflect the benefits that are now enjoyed by consumers due to DOT's regulatory change. Consumers can now find some information on ancillaries on the home pages of airline and agent websites in the form of a static list or table. Travel agents and travel management companies have access to the same information on their GDS-based systems. Our estimates of consumer benefits due to the proposed rule must be incremental to the benefits consumers already enjoy due to DOT's regulatory action. To be more precise, we want to estimate the change in consumer search time occasioned by a proposed change in the rule to allow consumers to Identify the cost of ancillaries they want to buy, Price them for different airline offers, Include them in the displayed Complete Price of ticket in a manner that would facilitate comparison shopping on-line or via a travel agent or corporate manager Buy based on the complete price 31 We have not included other measures of travel time in our estimates because we do not model the effects of consumers changing their flight selections once they experience lower search costs. To the extent that better information allows consumers to select flights that more closely correspond to their desired mix of travel time, money fare, and other factors, then we have underestimated the benefits of the proposed rule. 32 DOT-OST (April 21, 2011) 41 GRA, Incorporated

151 Kayak for instance has recently implemented a facility on its website that allows consumers to select the number of bags they intend to check; the website then provides an estimated Complete Price (including base fare and baggage fees) for each airline, subject to the following disclaimer: "Baggage fee estimates are provided for your convenience and are subject to changes by the airlines. Actual fees may differ in certain circumstances, including if you pay the fee at the airport instead of online. In addition, fees may be waived by the airline based on frequent flyer status or cabin class. Be sure to verify the actual fees with your chosen airline(s) before you travel. For round-trip flights the fee includes both legs of the trip." 33 While this may be helpful for some consumers, the disclaimer obviously reduces the value of information that Kayak or other non-airline services can provide to consumers. Closer inspection of the listing of ancillary fees on Kayak shows that some of the information was as much as 163 days old as of January 13, (See the Appendix) If the information via all distribution channels allowed consumers to search for Complete Prices, there would obviously be savings in time. If airlines were required to provide the information, consumers would be sure that the information was accurate. If consumers could transact for the Complete Prices via agencies, or travel management companies, then they could avoid having to spend time making a separate transaction with the airline if they choose to shop via these distribution channels that are designed to facilitate comparison shopping. Extra Search Time Looking Up Ancillary Fees Consider the extra search time consumers must now undertake to lookup ancillary fees. Start with a consumer who visits one non-airline website and completes a transaction on the site. If he is not interested in any ancillary services (and knows that he can avoid them if he is persistent) then he incurs no incremental time searching under the current rules. If instead he is interested in one or more ancillary services (e.g., checked baggage), he can adopt a variety of search strategies, but all of them involve consuming more time. The following are two examples. Strategy 1: One option is for the consumer to find the Optional Services disclosure on the Home webpage. Different vendors give these page different names. He loads the separate page, reads it, comprehends it, adds it to the base fares and mentally sorts the various offers and makes his selection. The greater the number of airlines being considered, the more ancillary fees he has to look up, comprehend, add to base fares and mentally sort. The effort compounds quickly and we would expect search time and effort to expand at a greater than proportional rate. In some cases, the consumer will be frustrated because premium seat charges are not revealed on some carriers until after he or she commits to a purchase. 33 Kayak.com (January 13, 2012) 42 GRA, Incorporated

152 Now suppose the consumer is using more than one site or location to search. To get Complete Prices, she has to repeat the look up process on each site. Again the search time and effort expands quickly. Exhibit 5-2 shows the number of times a consumer would have to consider ancillary charges depending on the number of airlines under consideration and the number of sites/locations visited. The simple math of the "extra lookups" is: (number of airlines where the consumer is considering ancillaries) x (number of websites/ locations visited). 34 Exhibit 5-2: Number of Extra Lookups of Ancillary Fees Under Current Rules Websites/ Locations Visited Airilne Ancillaries Considered at each Site/Location It is important to note here that we have data only on the percentage of passengers interested in checking luggage, and average numbers of sites visited. Thus, our analysis is restricted to the shaded area of the exhibit. This partially explains why our estimates of benefits are likely to be understated. Strategy 2: Alternatively, the consumer can ignore the ancillary charges, sort on the base fares, make her selection and then look up and add-on the bag fee. But, using this strategy, she runs the risk of choosing a more expensive option or a lower quality one (e.g., wrong times, non-stop vs. multi-stop). Realizing this, she might go back, pick a different airline's offer, and repeat the sequence. Regardless of the strategy, on a non-airline site or distribution channel, the actual price for the ancillary is subject to the disclaimer each vendor displays - consumers do not know what the actual price will be. Obviously, this reduces the value of the search. Using Comscore Clickstream data on consumer airline purchases made on line, Nair (2010) reports that consumers spend about 1.09 minutes on each webpage. 35 We assume that consumers spend this much additional time searching, comprehending, sorting and making a decision regarding shrouded ancillary fees in instances when they are interested in buying ancillary services. This is likely to underestimate search effort, since as we saw in the example 34 As we saw in Section 2, comprehending baggage fees for a single airline can involve viewing nine webpages. In that case, the matrix underestimates the consumer's effort. 35 This is also consistent with data provided by Yandalo.com (January 10, 2012) 43 GRA, Incorporated

153 in Section 2, a consumer may have to view up to nine webpages to fully comprehend one airline's baggage fee. Yandalo 36 reports that the average consumer spends about 5.8 minutes on each airline or travel website. We assume this is the extra time consumers will spend if they buy a base fare via a non-airline channel and make a separate purchase of an ancillary service from an airline channel. Given these data, we use information from PhoCusWright (2011) on sales by distribution channel to estimate incremental time all consumers would avoid if DOT enacted a rule requiring full transparency and transactability of airline ancillaries via all distribution channels. The calculations are shown in Exhibit 5-3. The exhibit shows that the average expected savings in consumer search and transaction time across all distribution channels ranges between.93 minutes (if only 30 percent of passengers pay baggage fees as reported by Ideaworks) and 1.21 minutes (if 50 percent of passengers pay baggage fees as reported by ASCI). Our objective is to estimate the expected incremental time per passenger that could be saved by the proposed rule change. The calculations are made for each distribution channel 37 and depend on: The share of transactions for each distribution channel, o o The percent of passengers in a channel paying for ancillary services, The number of sites (virtual or physical) where searches are conducted as part of a transaction, The time needed to identify, comprehend, sort and deal with ancillary fees, The time needed to complete a separate transaction when buying base fares from a non-airline channel and ancillaries from an airline channel, The number of pre-transactional searches done by households for each transaction completed, The incremental time during pre-transactional searches consumers needed to identify, comprehend, sort and deal with ancillary fees Ibid. 37 We assume that consumers using central reservations or walk-in facilities operated by airlines directly do not incur extra search time. Presumably airline representatives can provide information directly to consumers on the costs of ancillary services at the time of purchase if consumers ask. But, consumers give up the benefits of comparison shopping in this channel, unless they have done searches prior to contacting the airline. Because we assume there is no incremental search time in this channel, if consumers have done do prior searches, we have omitted the time incurred dealing with shrouding in our benefits estimates. If they have not conducted a prior search, they may pay more or end up with a suboptimal choice. Also, the convenience afforded by improved transparency and transactability is likely to increase the number of consumers who transact baggage checking online; our estimates do not capture this benefit. 38 Airlines do not separately disclose the percentage of passengers buying one or more ancillary services; we have used estimates of those paying baggage fees as a surrogate, which likely underestimates the percentage. 44 GRA, Incorporated

154 Details of the calculations assuming only 30 percent of travelers pay baggage fees are shown in Exhibit 5-3. The exhibit reports the equations used to make the estimates. Exhibit 5-3: Extra Time Avoided Via Transparency and Transactability by Distribution Channel Extra Time Avoided via Transparency and Transactability by Distribution Channel Where Transaction Takes Place On-Line ; Central Res/ TMC- TMC-Agent OnLine OTA Airline Walk In Channel Share a 15.5% 15.5% 16% 23% 30.00% Source Percent paying to check bags b 30% 30% 30% 30% Ideaworks/ ASCI Percent only site visited c 43% 32% 32% 43% Nair Number of extra webpages if visit only 1 site d Percent visiting more than one site e 57% 68% 68% 57% Nair Number of extra webpages if visit more than one site f Nair Number of extra transactions with airline to buy ancillaries Extra time per web page (minutes) h Nair Extra time for airline transaction (minutes) i Nair Expected extra time in base case that could be eliminated by a rule change = a x b (c xd x h +e x f x h+ g x i) TOTAL Extra Time per Transaction 1.27 Passengers Per transaction 1.5 GRA estimate One way trips per passenger 2 Expected extra time per passenger one way (minutes) 0.42 Other web searches not involving transaction Number of website searches per transaction j Percent interested in bags likely to pay k 30% 30% Extra lookups per transaction= j x k I Passengers Per transaction m Minutes per lookup n Per Directional Pax = 50% 0 50% 50% Percent of Tix a 16% 23% Total Extra Minutes per Pax= (l/m) x n x o x a Nair TOTAL Expected Minutes per Pax Nair reports that households searching for travel average 12 website visits before beginning a final search that results in a transaction. We apply this only to the online travel agent and airline website channels, which are aimed at household and non-managed business travel. 45 GRA, Incorporated

155 We believe that our estimates are conservative. Consider consumers or business persons searching via an on-line agency or a travel management site; together they account for 31.5 percent of the transactions. Between 30 and 50 percent of them want to buy an ancillary service. It could easily take many minutes for them to understand alternative ancillary fees listed on a website, apply them to base fares, sort the results and determine which flights to buy; they would then have to make a separate transaction (on-line, over the phone, on an airline website or at the airport) to purchase the ancillary services they desire. Furthermore, some consumers will want to buy multiple ancillary services, which will compound their search time. By comparison, we are assuming that the average passenger can expect to spend only about an extra minute completing these tasks. As we saw in Section 2, comprehending one airline's baggage policy may require viewing nine webpages, which would take more than nine minutes according to averages reported by Comscore. In contrast, we assume the consumer spends about one extra minute. Total Search and Transactions Time Avoided by the Proposed Rule For purposes of analysis, the total expected amount of time that the average consumer would save if the proposed rule were implemented is between.93 minutes and 1.21 minutes. At DOT's value of time of $42.10 per hour ($0.70 per minute), an average consumer could avoid search and transaction time worth between $0,654 and $0,852. Reduced Money Fare Due to the Rule Change With more accurate and more easily obtained information on ancillary charges, consumers are more likely to shop more intensively. They will benefit more from GDS-enabled travel agencies and travel management companies, and meta sites, where they can comparison shop. Orlov (2011) reports that on average and across all flights, the search and comparison shopping made possible by the internet (before airlines began to shroud ancillaries) saved the average passenger 2.8 percent on a ticket. To be clear, this would is a savings of 2.8 percent on the Complete Price of a ticket. We cannot be sure how effective the airline's shrouding strategy has been in terms of raising prices. However, shrouding is aimed directly at the main benefit of having access to internet search the ability to comparison shop and make purchases in a clearinghouse format where all or most services are available. We provide a range of estimated effects on society's economic surplus due to price reductions ranging from 0 percent (no impact) to 2.8 percent, the full benefit of internet search. We carefully distinguish transfers from airlines to passengers from the net benefits of price reductions. Sample Estimate of the Benefits of the Proposed Rule To illustrate how the surplus and transfer estimates were made, take a single case where consumers save: 46 GRA, Incorporated