INTRODUCTION March 9, 2013

Transcription

1 INTRODUCTION March 9, 2013 Contact BTC: Kevin Mitchell The Problem The airline industry has decried publicly a problem it describes as the commoditization of airline services caused by the current system of publicly available and transparent fares. As stated in an interview with Flight Global in July 2012, Tony Tyler, Director General of the International Air Transport Association (IATA), gave voice to this problem and hinted at the coordinated solution: We ve done a great job of improving efficiency and bringing down costs, but we ve handed that benefit straight to our customers, Tyler says. As soon as someone s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers and you ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditize ourselves. The Solution The world s most powerful airlines and alliances have agreed on a brazen new worldwide business model for how to price and sell tickets. The model is called New Distribution Capability, or NDC, and IATA is spearheading implementation. The goal for NDC is to terminate, by agreement among horizontal competitors, the current transparent model for the pricing of tickets, where fares are published and publicly available for comparison-shopping and purchase - by all consumers on a non-discriminatory basis. To accomplish this goal, airlines would demand consumers personal data and put their privacy, security and mobility at risk. NDC would require consumers to give up substantial personal information - before being provided offers by airlines. The personal information includes but is expressly said not to be limited to -- name, age, nationality, contact details, frequent flyer numbers, whether the purpose of the trip is business or leisure, prior shopping, purchase and travel history and marital status. The Evidence The purpose of this collection of documents is to elevate public-policy discourse and lay bare the purpose, objectives and consumer harm that would flow from NDC if implemented as discussed and outlined in IATA s documentation and presentations. The following documents can be found enclosed: IATA Resolution 787: A Binding Agreement Among Horizontal Competitors BTC U.S. House Testimony That Amplifies How Toxic NDC Would Be A BTC Brief Providing A General Overview Of NDC Supplemental Brief #1 Discussing Required Surrender Of Personal Information Supplemental Brief #2 Quoting Airlines & Academics About Comparison Shopping Supplemental Brief #3 Addressing Why NDC Eliminates Publicly Posted Prices Supplemental Brief #4 Detailing Points IATA Should Be Pressed On ASTA & BTC Presentation To Regulators Media Coverage Of NDC

2 Page: 1 of 10 RESOLUTION 787 ENHANCED AIRLINE DISTRIBUTION (new) PSC(34)787 Expiry: Indefinite Type: B RESOLVED that, Members and/or systems providers may, for online or interline carriage, provide capability to offer a wide selection of their products and services to their customers through a wide variety of distribution channels. Members and/or systems providers shall apply the following procedures when distributing enhanced content through multiple channels of distribution with their many partners. OBJECTIVES 1. General IATA standards and procedures allow airlines to better manage the distribution of their range of products and services that they wish to provide in an effective way, irrespective of the distribution channel. Enhanced standards are necessary to enable airlines to move to a dynamic content distribution model. This model recognizes that airlines and their customers need more real time dynamic interaction between all parties: airlines, distributors and travel agents so they can offer an intelligent response for all products based on who is asking. Acknowledging that a management group is required to oversee the development of new passenger distribution processes and standards, a Passenger Distribution Management Group is established in accordance with the provisions as published in Attachment A. 1.1 Scope This resolution recognizes that a standard process is required for airlines to create their own product offer within their own systems (i.e. assemble fares, schedules and availability - all in one transaction) which will be provided directly by and owned by the airline. This will enable more agile pricing and more personalized offerings. In this way, all product offers (including ancillaries) will be available for distribution through all channels that an airline wishes to sell them through. In this regard, this IATA standard will enable the creation of a Dynamic Airline Shopping engine Application Programme Interface (DAS API) based on IATA XML messages. The focus of this resolution will describe the main business processes that are required to support it.

3 Page: 2 Distribution Capability Landscape The diagram above represents the Distribution Capability landscape that will provide an interactive exchange based on knowing who is making the request irrespective of the distribution channel being used. This may involve, but not be limited to requests from passengers, agents, interline partners, and other distribution channel providers who may provide solutions to their own subscribers. Requests shall be sent using industry standard messages from the distribution channel provider to the airline s dynamic shopping engine. Airlines will determine what product offer to return in the response based on attributes that have been sent in the request. Solution providers shall be capable of providing interactive messaging to an airline s DAS API in accordance with industry standard messaging. 1.2 Key Principles Business and technical standards shall enable airlines to distribute products across all channels and allow airlines to independently offer dynamic shopping/pricing through any channel.

4 Page: Underlying messaging standards will use modern messaging technology (e.g. XML) as the most suitable and readily available messaging standard to support technologies. PADIS message standards shall be used for the transmission of data. Development of messaging standards shall be in accordance with the provisions of Resolution Such standards shall enable any third party (approved) channel to access airline content directly from the carrier With due consideration for established business processes, procedures and current system functionality, there should be no constraints driven by any requirement for backwards compatibility. Airlines may wish to establish a roadmap for migration showing justification for backwards compatibility only if there is a defined business need Enhanced Airline Distribution shall: allow individual carriers to determine its own prices and the nature of those products offered, depending on who the requestor is and what they are requesting. This will require authentication and the provision of historical data based on previous transactions, facilitate the implementation of a shopping basket capability concept allowing for the consumer to add or remove items from their basket as they choose. Each of these choices can trigger a re-pricing of the offer(s) provided by the airline, support distribution of new products as well as changes and amendments of existing orders, facilitate a transparent display of products being offered and enable comparison among different products, benefiting the consumer, ensure authentication requests for product or services include all applicable IDs, such as IATA number, passengers Frequent Flyer number, valid address or any other acceptable form of identification that is flexible to the individual carrier All data will be distributed across all channels, subject to the terms and conditions determined by the airline distributing the content This distribution model assumes that each airline distributing its individual products and services is the owner of its own content Product attributes structure should be standardized to facilitate consistent display of the product offer on third party web sites Any cost attributable to this new business model, from IT research development to implementation/operation, will not be incumbent on Members who do not wish to adopt it.

5 Page: 4 2. DEFINITIONS For the purpose of this resolution the following definitions will apply: 2.1 ANCILLARY SERVICES means anything outside of product attributes (optional or discounted). 2.2 AUTHENTICATION means the process by which a system identifies an individual or a business entity to make sure that the user or the business entity is who they claim to be, based on attributes that are sent in a message. 2.3 DYNAMIC AIRLINE SHOPPING APPLICATION PROGRAMME INTERFACE (DAS API) means a set of routines, protocols and tools for building software applications capable of processing interactive messages from a requester to an airline rules engine. 2.4 EXTENSIBLE MARK-UP LANGUAGE (XML) means a simple, flexible mark-up language which enables the exchange of a wide variety of data on the internet and supports the implementation of a wide range of web services. 2.5 INTERMEDIARIES means any entity that has the capability to interface with an airline s DAS API (e.g. metasearch engines, distribution channel IT solution providers, travel agents including online agencies, travel management and corporate travel companies, high street agencies, specialist agencies, tour and cruise line providers) and interline partners making a booking request.! 2.6 PRODUCT ATTRIBUTES means what is bundled and included in the fare, e.g. flat bed seat, in-flight entertainment, pre-reserved seating, meals etc. 2.7 PRODUCT OFFER means the response including product attributes and ancillary services capable of being displayed in the requesting system. 2.8 RULES ENGINE means the repository of an airline s business rules capable of receiving and responding to requests to provide a product offer.

6 Page: 5 3. BUSINESS PROCESS DESCRIPTION 3.1. The Business Process Description comprises the following: Authenticate and Shop Process Description The authentication and shopping process is a dialogue that is generated from a direct or indirect distribution channel to an airline rules engine via a DAS API to request a product offer from a carrier and will allow such carrier to respond with the offer based on the information received in the request. The request shall include but not be limited to: data to identify who is making the request where an intermediary is present. Data may include, but not be limited to:!! specific IATA number (generic numbers shall not be sent), agent s pseudo city code, electronic reservations service provider number, corporate or group identification, type of trip (e.g. leisure or business) data to identify on whose behalf the request is being made. Data may include, but not be limited to: Name/Age/Marital Status, Contact Details, Frequent Flyer Number or Profile number, Customer Type (e.g. adult/child), Travel History, Nationality, Shopping History, Previously Purchased Services attributes data for what is requested. Data may include, but not be limited to: ` ` Point of Sale, Travel Dates, Origin and Destination, Number of Passengers and passenger type, Trip type (e.g. open, round trip, one way).

7 Page: Personal information that may be passed will be as bilaterally or multilaterally agreed with due consideration for compliance with all government privacy laws Upon receipt of a request, the carrier shall respond with a product offer. The offer should include but not be limited to: unique request identifier, a description of the product attributes, a list of optional ancillaries for example, bundle information, name of optional ancillaries, charges, link if applicable, discounts and special offers (optional), product availability warnings (optional), promotional codes and discounts (optional), terms and conditions associated with the offer, expiration of offer Multiple repetitions of this dialogue process shall be provided Order Process Description The Order Process is a dialogue that is generated from a direct or indirect distribution channel to an airline rules engine via a DAS API that will confirm the commitment to purchase. This may also include payment information. The order process will provide the carrier the opportunity to fulfill the transaction, create the booking record, issue the document(s) and respond with confirmations The commitment to purchase data to enable the booking to be made may include but not be limited to: passenger details, name,!! address,

8 Page: 7 ` date of birth, gender, passenger profile information, frequent traveler number, special requests, payment information if applicable upon receipt of an order, if payment information is not received, carriers shall respond with either a request for payment or an option to hold the product offer either with or without a fee upon receipt of payment data, carriers will create the reservations records and issue the traffic documents (electronic tickets and/or electronic miscellaneous documents as applicable) and respond with a confirmation. This confirmation should include but not be limited to: Ticketing Information and receipts in accordance with the provisions of Resolutions 722f, 722g, 725f or 725g as applicable, Terms and Conditions of the offer, Legal Notices Carriers, that have confirmed or requested interline space shall ensure that reservations and ticketing data is communicated to their interline partners in accordance with the provisions of standard industry messages published in AIRIMP-Passenger and the UN EDIFACT and XML standards as published by IATA under the provisions of Resolution Change Process Description The Change Process is a dialogue that is generated from a direct or indirect distribution channel to an airline rules engine via a DAS API that will request a modification, addition, cancellation or refund to an existing confirmed order. The request shall include data that enables a carrier to identify the original order. The request shall also include authentication and attributes data as shown in through Upon receipt of a change request, carriers may revise the product offer and respond back to the requestor. Carriers shall respond based on the provisions of or deny the change request Changes to interline bookings should be effected in accordance with the provisions of paragraph Fulfillment of a revised order shall be in accordance with the provisions of

9 Page: 8 Attachment A PASSENGER DISTRIBUTION MANAGEMENT GROUP 1. ESTABLISHMENT OF THE MANAGEMENT GROUP A Passenger Distribution Management Group hereinafter referred to as the Management Group is established for managing the development of passenger distribution processes and standards as published in IATA Resolutions and Recommended Practices, and the development of modern technology messaging standards (e.g. XML) under the provisions of Resolution 783. The Management Group shall report to the Joint A4A/IATA Passenger Services Conference (JPSC) and shall consist of up to fifteen (15) members appointed by the JPSC. The Management Group shall include representatives from airlines and shall be able to invite other interested parties (e.g. IATA Strategic Partners and all other third party industry stakeholders) as required from time to time to reflect the multi-stakeholder nature of the passenger distribution process. The JPSC will ensure that the membership is so constituted that adequate expertise is maintained. 2. FUNCTIONS OF THE MANAGEMENT GROUP The main functions of the Management Group are: 2.1 to review and approve proposed additions, changes and deletions to the key principles of passenger distribution; 2.2 to manage the development of processes and standards; 2.3 to submit an annual report of its activities to the JPSC meeting; 2.4 to liaise closely with other A4A and IATA Committees impacting on passenger distribution standards. 3. MEETINGS OF THE MANAGEMENT GROUP 3.1 The Management Group shall meet as required but not less than once per year. A quorum shall consist of not less than one-third of the Management Group members. 3.2 The Management Group shall elect its own Chair-Person and Vice-Chairperson from IATA and A4A member airlines.

10 Page: Any IATA or A4A Member who is not a member of the Management Group may attend Management Group meetings and may vote on any issue except the nomination of officers. 3.4 Decisions of the Management Group shall be by an 80% positive vote of the IATA and A4A Members present at the meeting and entitled to vote. Abstentions do not count in the voting. 3.5 The Management Group shall determine its own working procedures and may establish sub-groups as it determines necessary. 4. AMENDMENT PROCEDURES 4.1 Proposals to amend the passenger distribution standards may be submitted by the passenger distribution sub-groups, any A4A or IATA Member, or members of the IATA Strategic Partners Program. 4.2 The Management Group shall consider all such proposals and shall act upon them as follows: Adopt the proposal if accepted by 80% of the IATA and A4A Members entitled to vote on such proposals; Reject the proposal; Refer the proposal to the next Management Group meeting for further review; If the proposal is in conflict with existing industry standards, refer the proposal to the next meeting of the JPSC for further review and resolution. 4.3 All amendments agreed by the Management Group shall be circulated to all IATA and A4A Members within thirty (30) days of the Management Group meeting. 4.4 In determination of its working procedures, the Management Group may utilize a mail vote procedure to progress proposals to amend passenger distribution standards between Management Group meetings. Utilization of the mail vote procedure is limited to amendments of an urgent nature and which are requested by or supported by five (5) or more Management Group members. Adoption of proposals using the mail vote procedure will follow the above amendment procedures. 4.5 Amendments endorsed by the Management Group shall be forwarded to the JPSC for final adoption.

11 Page: PASSENGER DISTRIBUTION IMPLEMENTATION MANUAL Whilst developing and enhancing the resolutions and messaging standards for the implementation of enhanced airline distribution it is acknowledged that there are a number of items that, whilst not appropriate for inclusion in the resolution text, are fundamental to obtaining a clear understanding of how enhanced passenger distribution is implemented. Further, given the variety of stakeholders, there is significant benefit in documenting various aspects of the overall processes to promote a common understanding and standardized approach to enhanced distribution implementation. Consequently the Management Group shall oversee the development of a Passenger Distribution Manual which provides clarifications and explanations of the functions related to Enhanced Airline Distribution as well as guidelines and best practices in accordance with the requirements as documented in this resolution. 5.1 The Passenger Distribution Implementation Manual shall contain: An end-to-end Passenger Process, A Passenger Process Toolbox covering the end-to-end process, Recommended Practices, Technical Specifications, Implementation Guides, Templates for Service Level Agreements. 5.2 A new edition of the Passenger Distribution Implementation Manual shall be issued as and when determined by the Management Group and in consultation with the Secretariat.

12 Verbal Statement of Kevin Mitchell Chairman Business Travel Coalition Before the U.S. House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial and Antitrust Law Regarding The Proposed American Airlines - US Airways Merger February 26, 2013 Mr. Chairman, this morning I am going to explain one threat to price transparency that would be substantially enabled by this merger that has been agreed to by airlines but that has not yet caught the public s eye. In 2008 when I testified before this committee, I warned of dangers the thenproposed Delta-Northwest merger would hold for consumers. And I remember well that Northwest CEO Doug Steenland testified that committee members shouldn't be concerned because the market disciplining effect of third-party distributors such as Expedia is so pervasive and so important - that they create this transparency - he said, that will keep prices low. He used this transparency, in fact, to justify the merger. And he was right about the power of transparency. Today, however, airlines including American and US Airways have agreed on a brazen and shocking new worldwide business model for how to price and sell tickets. It is designed to destroy price transparency; which is the very antidote to consolidation needed to ensure a healthy, transparent marketplace. The model is called New Distribution Capability, or NDC, and the airlines trade group, IATA, is spearheading implementation. NDC is designed to terminate, by agreement among major airline competitors, the current transparent model for the pricing of tickets, where fares are published and publicly available for comparison-shopping and purchase - by all consumers on a non-discriminatory basis. What problem are airlines endeavoring to solve? IATA has decried publicly the commoditization of airline services caused by the low-fare search capabilities of the online travel agencies Steenland lauded. For example, Tony Tyler, Director General of IATA stated in a press interview - remarkably, We ve done a great job of improving efficiency and bringing down costs, but we ve handed that benefit straight to our customers, Tyler says. As soon as someone s got a cost advantage, instead of charging the same 1

13 price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers and you ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditize ourselves. How Does NDC Work? A Binding Resolution codifies that airlines have agreed they have the right to demand from consumers, before they would be privileged to receive a fare quote, personal information including: name; age; nationality; contact details; frequent flyer numbers; whether the purpose of the trip is business or leisure; prior shopping, purchase and travel history; and of all things, marital status. Why Is NDC So Toxic? Airfares would no longer be publicly filed and available on a non-discriminatory basis for consumers to anonymously comparison-shop and then purchase through travel agencies. Instead, each price would be unique depending on the profile of the consumer. This personal information can be used to extract higher prices from less price-sensitive consumers - such as business travelers. In contrast, today when a consumer wants to travel from A to B she can go to a travel agency that has the fares and schedules. All options in the marketplace are returned so she can easily compare prices without having to divulge personal information. As airlines have publicly confirmed, it is this very price visibility that has checked the power of airlines to raise fares, lest they lose out to competitors offering a better deal. The stakes are ratcheted up with each merger. Price transparency is more important today because when Steenland testified there were 6 network airlines and subsequently 5, then 4 and now possibly 3. By eliminating transparency, airlines will have created - by concerted actions - a new system of completely opaque pricing and with it the ability to raise all fare levels to the detriment of consumers. The Nexus This merger eliminates US Airways, a maverick on airline distribution issues. It will be far easier to coordinate, expressly or tacitly, among 3 network competitors and far easier to impose this anti-consumer, anti-competitive model, especially given the enormous clout that the new American would have as the biggest carrier on the planet. The lack of transparency created by NDC further cements 2

14 the dominance of these mega carriers. And once NDC is established here in the world s largest aviation market, it s lights out, game over for consumers. The Remedies (1) DOT has the authority to approve or deny NDC. Given its anti-competitive effects, and the unprecedented invasion of privacy, upon receipt of IATA s application DOT should reject it unconditionally. (2) DOJ should serve IATA, and its members who have been spearheading the NDC scheme, with a civil investigative demand to discover documentation and compel testimony regarding the purpose and objectives of NDC and the process by which horizontal competitors reached a binding agreement on how they would price and sell tickets. Thank you Mr. Chairman. And if I might add, I am presenting this testimony also on behalf of the American Antitrust Institute, which is looking at the competitive effects of the IATA NDC proposal. 3

15 BTC Brief IATA NDC New Business Model March 4, 2013 IATA s New Distribution Capability - An Agreement Among Horizontal Airline Competitors That Raises Significant Antitrust And Privacy Law Issues Overview Certain large international airlines have used the International Air Transport Association (IATA), the worldwide trade association for airlines, as the vehicle to reach an agreement establishing a new airline industry-wide business model for the pricing and selling of air transportation services. This new model would apply to travel to and from, and within the United States, and in fact, air transportation services across the globe. This proposed new business model, agreed by IATA member airlines at a conference held on October 19, 2012 as so-called Resolution 787, would negatively and significantly impact airline competition and would drive up airline prices for consumers. It is designed to terminate by agreement among airline competitors the current market-driven and transparent model for pricing and sale of tickets, where airfares are published and publicly available for comparisonshopping and purchase by all consumers on a non-discriminatory basis. The airlines themselves have confirmed publicly that the current transparent airfare model has constrained their ability to raise airfares. This new business model would also violate the privacy rights of consumers. Under the Resolution 787 the airlines have agreed among themselves that they have the right to demand that extraordinarily intrusive personal data about specific consumers be broadcast to all airlines that might offer service, even though consumers in most cases enter into a contract of carriage with just one of those airlines. Resolution 787 on its face (Section 3.1.1) explicitly says that before they quote prices for a consumer the airlines have the right to demand from consumers personal information that includes but is not limited to the customer s: name, age, marital status, nationality, contact details [including address], frequent flyer numbers [on all carriers], prior shopping, purchase and travel history, and whether the purpose of the customer s trip is business or leisure. The Details About NDC This new business model is called New Distribution Capability or NDC for short. Because the proponent airlines of NDC and IATA chose to incorporate this new business model in an IATA Resolution as opposed to an IATA Recommended Practice, under IATA s governing rules, this new business model

16 is an agreement that is binding on all of the roughly 240 IATA-member airlines worldwide. As set forth in the preamble of this Resolution, all IATA airlines that choose to distribute enhanced content (an undefined term but overtly one that means when an ancillary service such as checked luggage or pre-reserved seating is sold along with the base fare) across multiple channels would be obliged to adhere to this new business model, and to do so both with respect to sales made by intermediaries (that is, travel agencies) and those made in their direct sales channels, such as via their websites. For carriers adopting NDC for particular markets, airfares and schedules would no longer be publicly filed and available on a non-discriminatory basis for any and all consumers to anonymously comparison shop and then purchase through intermediaries such as brick-and-mortar and online travel agencies, or via their websites. Instead, NDC airlines would create unique offers each time a particular consumer requested a fare for a specific route/date. The offers made by each airline would be customized based on personal details the airlines have agreed in Resolution 787 they will have the right to demand from consumers before quoting any prices. The personal information about each specific traveler the airlines have agreed among themselves they will have the right to demand is quite detailed and intrusive, as explained above. Many of these items of sensitive personal information can be used very effectively to pinpoint, and extract higher prices from, those travelers who are likely to be less price elastic -- such as business travelers and travelers whose shopping and travel history demonstrate they do not regard connecting services as viable substitutes for non-stop services on particular routes or do not consider alternate airports serving the same area as substitutes for one another. Importantly, the airline industry, and IATA in particular, has decried publicly what it describes as the commoditization of airline services caused by the low-fare search capabilities on-line and brick-and-mortar travel agencies have made available to consumers, capabilities that only work because of the current system of publicly available and transparent fares. And airlines have done so even as they acknowledged at the same time the benefits for consumers of the current system of fare transparency. For example, in July 2012, Tony Tyler, the Director General of IATA, just after the NDC project had been officially launched, stated as follows in an interview with Flight Global: We ve done a great job of improving efficiency and bringing down costs, but we ve handed that benefit straight to our customers, Tyler says. As soon as someone s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers and you ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditize ourselves. 2

17 [ On other occasions as well, airlines have confirmed publicly that this fare transparency and efficient comparison shopping have sharpened price competition among airlines on competitive routes and have forced them to keep their prices low, lest they lose sales to airlines offering more attractive published fares to consumers. The current distribution system has indeed been responsible for an unprecedented degree of comparison-shopping opportunities for air travelers, who can, with just a few clicks of a mouse, learn in seconds the best priced options on any carrier for their journey. It might be proper for individual airlines, at least those not holding a dominant position, to unilaterally adopt and pursue distribution business model changes that increased consumer search costs and otherwise undermined the current fare transparency they admit has been a source of significant competitive pricing pressure. However, BTC firmly believes that horizontal competitors (and indeed nearly the entire airline industry) banding together to jointly adopt such a new business model by express agreement crosses the line. In short, BTC believes that NDC is an agreement among competitors that has the purpose and will have the effect of stabilizing or raising prices and thus violates U.S. antitrust laws. BTC also submits that any ticket distribution system that, like NDC, requires consumers to surrender the types of personally identifiable information spelled out at Section for the privilege of being quoted a price for travel between points A and B is a flagrant violation of consumers elementary rights to privacy. The processing of these personal details is not for a legitimate purpose but rather to allow airlines to engage in acutely targeted price discrimination that extracts higher fares from those judged to be less price-sensitive. Further, the data enumerated by the Resolution is excessive in relation to the purpose of quoting airfares for consumers. Airlines, of course, have been quoting prices to consumers for decades and have never before demanded these intrusive details as a condition for being told what the costs of travel would be. In addition, BTC strongly holds the view that none of a person s age, marital status, frequent flyer membership, nationality, shopping, travel and purchase history and whether the purpose of a trip is business or leisure can be a proper basis for price discrimination by an airline. For example, BTC is convinced that no reasonable person would suggest that it fair or defensible to charge someone 40 years of age more, or less, than someone who is 50. And BTC would strenuously object to any suggestion that those who are married can be favored or penalized in terms of prices relative to those consumers who are not. 3

18 IATA has stated publicly that adoption of NDC will begin early this year. Thus, NDC may pose an imminent threat of higher prices for consumers of air travel as the competitive discipline that flows from the current regime of published, visible and easily comparable posted air prices is supplanted with one based on the ultimate in fare shrouding. Under NDC, consumers would be unable to conveniently and easily test what the market price for their trips should be as every fare would be unique to particular travelers. And consumers could not be confident that they were being quoted offers that were the best deal for them, or even a good one. And NDC will soon violate consumers rights to privacy on an unprecedented scale. BTC calls on the U.S. Departments of Justice and Transportation to block the deployment by airlines who are acting collectively under the supposed cover of their trade association - of this anti-consumer and anti-competitive model for the pricing and selling of airline tickets. 4

19 BTC Supplemental Brief #1 IATA NDC New Business Model March 4, 2013 NDC Why Travelers Wanting To Fly On Routes Where Carriers Have All Adopted NDC Would Have No Choice But To Surrender Detailed Personal Information The New Distribution Capability or NDC business model was adopted by all 240 IATA member airlines on October 19, 2012 in an agreement that IATA and the airlines have labeled Resolution 787. This new business model, openly agreed to by horizontal competitors, is meant to terminate the long-standing fare transparency that has served consumers well. Today, any consumer can shop anonymously for the best price on any airline by checking with the several on-line travel agencies (or calling a brick-and-mortar agency) and comparing publicly posted prices to find what he or she thinks is the best deal. Only if the consumer has decided to purchase an airline ticket is he/she required to provide personal information. Carriers have publicly explained on numerous occasions that this fare transparency, where all prices are visible and can be efficiently and conveniently shopped with minimal search costs, has constrained their ability to raise the prices consumers pay. NDC has been designed by large airlines to change all that. In markets where carriers have adopted the NDC model, carriers would not post publicly available prices that just any consumer could view and compare on a non-discriminatory and anonymous basis. Instead, the express purpose of Resolution 787 is to enable a new business model where airlines would create unique prices in response to each request for a fare depending on exactly who the consumer was who wanted to know. (See page 2 of Resolution 787 which describes the airline-felt need to authenticate who was asking for a price before an airline would manufacture an offer. And in Resolution 787, the airlines have arrogated to themselves the right to know in a very intrusive manner exactly who is requesting a price before any offer is made. Resolution 787 on its face explicitly says that before they quote prices for a consumer, the airlines have the right to demand from consumers, from GDSs (which power most travel agencies computer systems) and from travel agencies personal information that includes but is not limited to the consumer s: name, age, marital status, nationality, contact details [ address], frequent flyer numbers [on all carriers], prior shopping, purchase and travel history, and whether the purpose of the particular trip is business or leisure. (Section 3.1.1) Of course, many if not most of these personal details would facilitate the pinpointing of consumers from whom the airlines could extract higher fares, and many of them cannot be justified under any circumstances as the basis for price discrimination.

20 !! In FAQs, that is frequently asked questions and answers, concerning NDC posted on the IATA web site, that organization makes the following assertion in its attempt to sidestep the serious invasion of privacy that NDC would work: Q10 Will travelers have to provide personal information in order to purchase tickets through the NDC? A: No. Travelers will have a choice. Personal details provided by the traveler in the shopping process will enable the airline to personalize the product offered and to make the offer more relevant. Providing these details is not mandatory for the traveler. Documents IATA prepared in connection with NDC demonstrate that this statement is absolutely false in real-world terms. It is true that consumers will not be (and in fact could not be) compelled physically to surrender their person information. However, it is also undeniable, as shown by IATA s own documents, that the price a consumer would pay for insisting on his/her right to privacy in an NDC world will be that no fares or at best punitively high fares will be the only results offered. The attached IATA-prepared document was disseminated to airlines and others participating in a working group meeting regarding NDC held in Montreal November 27-30, 2012, more than one month after IATA airlines had approved this new business model. (The cover page is dated October 5, 2012 but from the page with dates of amendments one sees that the document was updated and current as of November 22, 2012). There are two passages in this IATA produced document that belie the IATA claim now that surrendering personal information is not mandatory for a consumer to get a quote of prices from point A to point B. First, at page 8 of 17, at Section 4.1.2, we see that the airlines have expressly created the right for themselves in an NDC world to decline (no shopping results returned) after receiving the request from an aggregator, such as a GDS, on behalf of a particular consumer. With carte blanche to refuse to provide a traveler any offer at all, and given the intense emphasis by carriers adopting NDC on being able to pinpoint exactly who the consumer is requesting a price, one can only reasonably expect that carriers will fully exercise this right to decline to make any offer if the consumer does not hand over the personal information that carrier has demanded. Further, on most routes no more than two carriers provide non-stop service. Thus, it would take only a few carriers implementing NDC to create the circumstance that consumers who wanted to remain anonymous would often receive no price offers whatsoever. Indeed, if the four large US network carriers (and perhaps soon three such carriers) were to adopt NDC, there are literally thousands of non-stop markets in the US where the penalty for insisting on one s right of privacy would be that the consumer!! 2

21 !! would either have no chance to travel by air or perhaps to do so only at a punitively high fare. We can expect that airlines will argue that they would never refuse to provide offers to anonymous shoppers. But if that were true, they would never have crafted in this document the express right to do just that. We also hasten to add that nothing on the face of the binding agreement the 240 IATA members have struck in Resolution 787 in any way obligates carriers to provide reasonable, market-based prices to travelers who refuse to turn over the intrusive data that Section of Resolution 787 says the carriers have the right to require. And the fundamental purpose of NDC to allow airlines to authenticate the specific consumer asking for a price would be undermined if airlines still allowed consumers to shop for and get good prices anonymously. Indeed, if consumers could continue to get reasonable rates anonymously, why would they ever hand over their sensitive personal information and especially that personal information, like whether the trip is for business or whether they only fly nonstop service on a particular route, that would make them an attractive target for a very high price? Second, at page 12 of 17, the high-level description of how the NDC process works for aggregators (like GDSs and on-line agencies) leaves no doubt that consumers who do not surrender this highly personal information can expect no offers from NDC carriers. It establishes in fact that aggregators are not even permitted to send a carrier the request for a price if the personal details the carrier requires about the passenger are not included. Specifically, the relevant text states: High-level Process 1. The traveler makes a request 2. The Aggregator interrogates the Airline Profile a. To determine the minimum criteria required in a request i. If the airline s minimum criteria is not provided by the traveler and/or aggregator, then the airline does not support the request. The shopping request will not be sent by the aggregator ii. If the airline s minimum criteria is provided by the traveler, then the airline supports the request and the shopping process can proceed. **** (Emphasis added.) In sum, IATA s blithe assertion that consumers will have a choice about surrendering their private information in an NDC world is demonstrably false and disingenuous. In markets where all airlines have adopted an NDC model for quoting prices, the only real choice for consumers would be hand over this intrusive personal information or not fly - or at least not fly without having to swallow an exorbitant ticket price.!!!! 3

22 BTC Supplemental Brief #2 IATA NDC New Business Model March 5, 2013 Statements And Analyses Of Airlines And Academic Experts Establish Having Publicly Posted Prices That Consumers Can View And Compare Anonymously Has Been A Powerful Force That Has Sharpened Airline Competition On October 19, 2012, IATA member airlines reached an agreement binding on all 240 IATA airlines on a new model for the pricing and selling of airline tickets, which they call New Distribution Capability or NDC. Airlines applying NDC in particular markets will no longer offer publicly available and easily comparable prices for those markets that can be conveniently shopped and purchased by all and any consumers on a nondiscriminatory basis. Instead, under NDC, the new business model is that carriers would customize a price in response to each request for price quotes, based on knowing the exact personal details of the particular consumer who wanted to travel. This inter-carrier agreement expressly requires consumers on an including but not limited to basis to surrender the following personal information as a condition for NDC carriers providing fares: name, age, marital status, frequent flyer number [on all carriers], nationality, contact details [ address], prior shopping, purchase and travel history [on all carriers] and whether the purpose of the particular trip is business or leisure. Importantly, since this personal information would be sent as part of the process of shopping for fares, these personal details would be broadcast to all airlines that might offer service and not just the one or perhaps two carriers with whom the consumer ultimately enters into a contract of carriage. This paper provides an overview of statements by airlines and by academic experts discussing transparency in the air service sector and the upward pressure on price due to price obfuscation in general. As will be seen, airlines themselves and academic research confirm that the current model for pricing and selling airline tickets of having transparent and easily comparable published fares that can be anonymously viewed by consumers to check the market prices and then purchased by any consumer on a non-discriminatory basis is a powerful competitive force that constrains airlines from raising prices. Consequently, the resulting decrease in price transparency, if NDC were to be permitted to go forward by aviation regulators and competition officials, would necessarily lead to increased search costs for consumers and higher ticket prices. NDC is far from being a unilateral effort by a single airline. Instead, Resolution 787 is an explicit agreement among numerous horizontal competitors on a new business model whose object and effect is to supplant the present regime of transparent pricing with a new business

23 model that would represent the epitome of price shrouding and thus enable all fare levels for NDC participants to rise. This paper will first discuss very recent and detailed economic analyses submitted by American Airlines, Inc., in its Chapter 11 proceeding in the U.S. regarding the extent and effects of the current fare transparency that characterizes the present airline distribution model. As will be seen, Dan Kasper, an expert witness for American Airlines, stated flatly in his testimony that because of the current level of fare transparency, with very low search costs, legacy carriers lost their erstwhile ability to charge higher prices than their low-cost competitors. We also catalogue other public statements by airlines that are in full accord with Mr. Kasper s testimony. This paper will then canvas recent academic literature which finds that prices for consumers and air fares specifically decline as pricing transparency increases and warns that retailers, as a consequence, have enhanced incentives to find ways to obfuscate comparison shopping and to make search costs more burdensome for consumers. While it may be proper for airlines individually to pursue distribution strategies designed to thwart comparison shopping for the purpose of stabilizing or raising prices, NDC is, as noted, far from being a unilateral effort by a single airline. The overview below quotes the most relevant statements, reports, studies, and articles, and cites for the reader s convenience the relevant paragraphs. The full texts of those documents will be provided if desired. In each case where text has been underscored, the emphasis has been added and does not appear in the original. I. WRITTEN TESTIMONY BY AMERICAN AIRLINES EXPERT MR. DANIEL KASPER OF MARCH 12, 2012 TO THE BANKRUPTCY COURT IN THE AMERICAN AIRLINES CHAPTER 11 CASE Pages 12 to 13 of 309: Among the key factors that have contributed to American s declining fortunes are: 1. Increasingly intense-and transparent- price and service competition across American s markets that has prevented and will continue to prevent the Company from earning revenues sufficient to cover its current costs. [...] 3. [...] The combination of strong downward pressure on prices from heightened competition coupled with margin pressures caused by high unit costs has made it increasingly difficult for American to fund the investments required to keep up with its competition. Page 14 of 309: Since its deregulation in 1978, the U.S. airline industry has undergone a dramatic structural transformation that has impacted virtually every aspect of the industry. The combined effect of these changes including the transition from regulated to marketbased airfares, the proliferation and widespread customer acceptance of LCCs, the opening of international markets to increased competition through Open Skies Agreements, and the increased price transparency resulting from Internet-based 2

24 search and distribution channels has been a long term, secular decline in airline prices. Page 21 of 309: In addition, other factors such as Internet-based airline search and booking tools have also put downward pressure on airfares by increasing price transparency for both business and leisure passengers. The combined effect of LCCs increasing geographic breadth and the ability of passengers to easily compare fares across all carriers and thus find the lowest available price has been a long term secular decline in airfares. Page 67 of 309: d. New Technologies Have Made It Far Easier For Passengers To Find Low Fare All of this increased competition has combined with an unprecedented level of price transparency resulting from online distribution channels to exert further downward pressure on fares over the past decade. Approximately 54% of travel (the largest component of which is airline tickets) was purchased online in 2010, up from only 20% in The rapid spread of Internet-based airfare search engines has greatly reduced (indeed, almost eliminated) the costs of searching for the lowest possible fares and thus greatly increased consumers ability to find and purchase the lowest available fares. Pages 68 of 309: Since Internet travel sites allow passengers to quickly compare fares across most carriers with a few strokes of the keyboard, these websites have contributed to the increased commoditization of airline travel, especially for price sensitive passengers. For example, as early as 2002 a New York Times article quoted a Vice President of the travel search website Farechase.com, as saying, There is almost no loyalty left.once the Internet took hold the airlines assumptions about the viability of their existing fare structures and customer bases went to hell in a handbasket [sic]. II. WRITTEN TESTIMONY BY AMERICAN AIRLINES CHIEF RESTRUCTURING OFFICER MS. BEVERLY K. GOULET OF MARCH 27, 2012 TO THE BANKRUPTCY COURT IN THE AMERICAN AIRLINES CHAPTER 11 CASE Page 13 of 152: 12. However, starting in 2001 and throughout the ensuing decade, AMR s financial fortunes reversed and deteriorated, as American faced a competitive landscape transformed by the rise of new lower cost competitors and transparency in pricing, as well as numerous exogenous shocks that affected passenger demand and costs across the industry. 3

25 Pages 16 to 17 of 152: 15. The rise of the LCCs in American s domestic network coincided with a new transparency in pricing brought about by the advent of on-line fare displays and powerful Internet search engines that enable passengers an unprecedented ability to obtain comparative fare pricing on any route at the click of a button. In light of this transparency and the availability of lower-cost alternatives, American has learned from bitter experience that if it fails to match fares on a route with lower cost competition, it loses traffic and the route becomes less profitable or more unprofitable; and if American does match fares, it may sustain or stimulate its share of passenger demand on the route, but it does so at lower yields (revenue per passenger mile), with a similar negative impact on profitability. Pages 60 to 61 of 152: 17. There are a number of reasons for AMR s weakened financial condition. The Airline Deregulation Act of 1978 was intended to, and did, transform the U.S. airline industry from an era of economic regulation to an era of intense competition. The intensity of that competition has increased markedly since the advent of Internet-based marketing and reservations systems that resulted in complete price transparency to the consumer making comparison shopping for the lowest fare extremely easy. III. EXCERPTS FROM THE TRANSCRIPT OF THE HEARING OF APRIL 23, 2012 BEFORE THE BANKRUPTCY COURT IN THE AMERICAN AIRLINES CHAPTER 11 CASE Page 24, lines Statement by American Airlines Counsel Jack Gallagher: Apart from the rise of the low cost carriers prices are now 100 percent transparent with the spread of the internet. Anyone in the world with access to the internet can now find the lowest airfare available between any two points very easily, and fare wars have become common. Page 133, lines 1-22 Testimony by American Airlines expert Daniel Kasper: What "price transparency" refers to is the fact that with the advent of the internet and internet search engines, suddenly any -- anybody with a couple of key strokes could search fares quickly and inexpensively and find out what the lowest fair available was. This was a huge boom for low cost carriers because they could avoid -- for people who were really price sensitive and could use the internet, they didn't have to spend a lot of advertising. People would find them. And what this did was -- previously with the legacy carriers, they had fairly complicated fare structures. To -- to get comparison shopping you either had to go on the phone to a travel agent or call the airlines individually and it was a -- the search costs were fairly burdensome. And so it made it easier and possible for legacy carriers to maintain fare structures that were higher than passengers could get from low cost carriers if they could find the low cost carriers. The 4

26 combination of the spread of low cost carriers and the ease of finding low fares had a dramatic effect on prices; that is to say, brought down prices pretty dramatically. IV. WRITTEN TESTIMONY OF DOUG STEENLAND, THEN CEO OF NORTHWEST AIRLINES BEFORE THE SENATE ANTITRUST SUBCOMMITTEE ON APRIL 23, 2008 TO DEFEND THE THEN PENDING DELTA/NORTHWEST AIRLINES MERGER In written testimony to the US Senate Antitrust Subcommittee of April 23, 2008, Doug Steenland, then CEO of Northwest Airlines, described the exact same effect of fare transparency on airline prices under the heading Transparency Revolution as part of his efforts to defuse objections that the then-pending merger of Delta Air Lines and Northwest Air Lines would result in higher prices for consumers: Over the past several years, online sites such as Orbitz, Expedia, and Travelocity have been created to enable customers to compare airline offerings directly. These tools have provided enormous benefits to consumers and have increased the price-competitiveness of the airline industry. In fact, there are few businesses in which there is as much pricing transparency. A consumer can log on to the Internet and, at the push of a button, review choices available across a wide variety of carriers. That same customer easily can sort those choices to find the lowest available fare and view extraordinarily competitive prices for both non-stop and connecting flights. **** Over the last several years, online travel sites have developed advanced search functions such as flexible-date airfare searching and route-specific fare alerts. Furthermore, sites such as Expedia, Orbitz, Travelocity, and numerous others provide their advanced pricing information and functionality to customers free of charge. Even business travelers now seek discount fares and travel sites such as Expedia Corporate Travel and Travelocity Business have evolved to target business customers. V. LUFTHANSA AIRLINES 2011 ANNUAL REPORT In its 2011 Annual Report, p. 45, Lufthansa pointed at price transparency as a driving force for competition among airlines: The internet also provides price transparency and therefore increases the influence of the consumer. For Lufthansa this means continuing to reinforce our market position as a quality provider with tailored products and excellent service for different customer groups. VI. BRITISH AIRWAYS 2011 ANNUAL REPORT At p. 7, British Airways 2011 Annual Report indicates that public discounting exercises pressure on airlines to set competitive prices: The markets in which the Group operates are highly competitive. Direct competition is faced from other airlines on 5

27 routes, as well as from indirect flights, charter services and from other modes of transport. Some competitors have cost structures that are lower than BA or have other competitive advantages such as being supported by government intervention or benefiting from insolvency protection. Fare discounting by some competitors has historically had a negative effect on the Group s results because a response is generally required to competitors fares to maintain passenger traffic. The Group s strong global market positioning, leadership in strategic markets, alliances and diverse customer base continues to address this risk. VII. NPR REPORT ON AUGUST 8, 2008 ON ATA INTERVIEW On August 8, 2008, and interview with the Air Transport Association (now called A4A) spokesperson was reported as follows on NPR: Dave Castelveter, of the Air Transport Association, says consumers share in the responsibility for the airline crisis. He says airlines have to keep airfares below their market price in order to remain competitive online. When consumers visit a travel Web site like Expedia or Travelocity, they often view flights by clicking on a button that says "list flights by lowest fare. While airline executives would like to make a profit, they're busy trying to stay on the first page of those search results and they can't do that if they hike their fares. This is part of the reason they've begun adding "hidden" costs for checked luggage and aisle seats, for example. Those ancillary fees do not affect a flight's price position on Travelocity and Expedia. VIII. JULY 24, 2012 INTERVIEW OF MR. TONY TYLER, THE HEAD OF IATA, CONCERNING NDC There is no better proof that the prime objective of NDC is to destroy the current transparent pricing model -- because of the intensive competitive pressure it places on airline pricing - and how NDC has been tailored to attain that goal than the comments made by Tony Tyler, the Director General of IATA, in an interview on or about July 24, 2012 with Flight Global, where he explained his objections to the current distribution model: We ve done a great job of improving efficiency and bringing down costs, but we ve handed that benefit straight to our customers, Tyler says. As soon as someone s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight 6

28 to passengers or cargo shippers and you ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditise ourselves. 1 IX. STUDY BY N. GRANADOS, A. GUPTA AND R. J. KAUFFMAN, APRIL 2004, TRANSPARENCY STRATEGY IN INTERNET-BASED SELLING Page 22: More generally, Stigler (1961) showed that a lower price may result if search costs are reduced and a lower market price is discovered. The economic rationale for this can also be understood in terms of the direct and indirect effects. Regarding the direct effect, in interviews with airline executives, we have received consistent signals that the direct effect of price transparency lower search costs for cheaper alternatives is reducing the prices of tickets when consumers purchase online compared to other channels. Regarding the indirect effect, in a transaction-making environment with asymmetric information, buyers are uncertain about sellers opportunity costs. But now, as Zhu (2004) recognized for B2B e-markets, consumers can better estimate of the sellers opportunity cost with higher price transparency. In addition, the market microstructure literature suggests that dynamic market mechanisms have the capacity to provide higher price transparency. Interpreting what we see more broadly, it appears that more dynamic market mechanisms will tend to lower willingness-to-pay compared to static markets with posted prices. This is in line with ebay s June 2003 report that customers are more informed about prices, which has resulted in a more efficient marketplace but compressed margins (Hansell, 2003). Therefore, the direct and indirect effects of price transparency create simultaneous downward pressure on willingness- to-pay. Page 28: Second, based on the assumption that an increase in price transparency has a higher negative effect on consumers willingness-to-pay than a similar increase in product transparency, there is downward pressure on air travel fares as smarter consumers are able to find lower fares and to ascertain the airline s opportunity costs. Our interviews with airline executives point in that direction. X. STUDY BY G. ELLISON AND S. ELLISON, JUNE 2004, SEARCH, OBFUSCATION, AND PRICE ELASTICITIES ON THE INTERNET 1 The fact that NDC is meant to stop what IATA views as excess competition on price is further proven by the questions and answers describing NDC posted on the IATA web site. The first such question and answer states the following: Q1 How will NDC be different from the service Global Distribution Systems (GDSs) offer today? A: NDC will enable airline products to be displayed in a differentiated and personalized way on the travel agent screens, as opposed to a commoditized low fare search display today. 7

29 Abstract: We examine the competition between a group of Internet retailers that operate in an environment where a price search engine plays a dominant role. We show that for some products in this environment, the easy price search makes demand tremendously price-sensitive. Retailers, though, engage in obfuscation---practices that frustrate consumer search or make it less damaging to firms--- resulting in much less price sensitivity on other products. Page 1: Our most basic messages is that economists should think about obfuscation as well as search: as search technologies improve firms will have an incentive to put some friction back in the market by creating an environment in which price search is more difficult or at least less of a threat to profitability. Page 2: We use a simple reduced-form model to illustrate why search engines will often want to create a perfectly frictionless environment. This conflicts with the wishes of retailers, who earn zero profits in frictionless environments. We argue that it is therefore useful to think of search frictions as being determined in a balance-of-power game in which search engines efforts to reduce frictions are counteracted by retailers efforts to obfuscate. How technological improvements affect the equilibrium level of search frictions in such a model is clearly ambiguous. The theory section concludes with a sketch of two specific models illustrating ways in which one can formalize the idea of obfuscating actions raising equilibrium profits. One of these uses standard search theory ideas. It is a theory in which obfuscation makes search more difficult and thereby reduces consumer learning. The other, detailed in Ellison (2003), is a competitive price discrimination model. It is a theory in which obfuscation doesn t actually reduce consumer learning in equilibrium, but instead reduces the degree to which consumer learning hurts firm profitability. Firms have, of course, always tried to thwart price search. We feel that the Internet may, however, make obfuscation more important for two reasons. First, improved search tools make firms worse off iff they do not engage in obfuscation. Second, the Internet may make obfuscation cheaper and easier in a number of ways. One is traditional retailers must hire a substantial number of articulate salespeople if they want to offer nonstandard sales contracts, to use legal bait-and-switch techniques, or to offer personalized prices, whereas Internet retailers can easily create automated sales pitches which cheaply implement all of these strategies. Another is that e-retail purchases are naturally bundled with shipping, which allows products to be offered at many different prices. Another is that it is easier for e- retailers to gather information about consumers and personalize prices. Each of these practices can frustrate consumer price search. Page 4: 8

30 Our third main set of empirical results examine how it is that obfuscation affects profitability. Specifically, we explore predictions of the two specific obfuscation mechanisms discussed in our theory section. In the search theoretic model, obfuscation raises profits by making consumers less informed. In the competitive pricediscrimination model, obfuscation raises profits by creating an adverse-selection effect makes firms less interested attracting consumers via price cuts. We find evidence of the importance of both mechanisms: we find that many consumers appear to have ended up with limited information; and we find that there is an important adverse selection problem that firms would want to consider when contemplating a price cut. XI. STUDY BY L. GARROD, MARCH 2007, PRICE TRANSPARENCY AND CONSUMER NAIVETY IN A COMPETITIVE MARKET Page 21: Firms obfuscate product information in several markets despite intense price competition. This paper has considered whether profit-maximising firms have an incentive to obfuscate a component of their prices if there are a proportion of naïve consumers within the market. It has shown that the ability to make prices nontransparent but still attract naïve consumers limits price competition and allows firms to set prices above marginal cost. A model suggests there is the potential for two forms of obfuscation occurring. Firstly, some firms deliberately hide their prices to fool naïve consumers; secondly, transparent firms may have an incentive to increase the difficultly of naïve consumers switching to them. The model also suggests that the European Commission was correct to force airlines to set prices inclusive of TFCs. An alternative policy of educating naïve consumers could be detrimental to consumers depending upon the timing of firms ability to change transparency. [ ] The European Commission s intervention into the European short-haul market provides a natural experiment to analyze whether airlines were benefiting from less intense price competition due to firms obfuscation strategies. The model suggests prices would be higher in the period before the intervention compared to prices after the intervention. This analysis may provide evidence that consumers were being exploited as the AUC feared and provide justification for the European Commission s intervention. Conclusion Both the statements of airlines and analyses by academic experts establish beyond serious dispute that in the airline industry the present distribution model of having publicly available posted prices that any and all consumers can view and compare anonymously and then purchase on a non-discriminatory basis has been a powerful force that has sharpened airline competition and thereby constrained the ability of airlines to raise or stabilize fare levels. The inexorable corollary must be that if large carriers were to succeed in ending that model of transparent pricing and in replacing it 9

31 with one that obfuscates the market prices, then consumers would be forced to pay more for air travel than would otherwise be the case. Critically, while it might be acceptable for carriers to unilaterally seek to cloak fares, raise search costs and thereby gain the power to extract higher prices from consumers, NDC is an express agreement among horizontal competitors in fact most of the airlines of the world - with the purpose and effect of raising or stabilizing prices. It therefore is likely illegal under antitrust laws. 10

32 BTC Supplemental Brief #3 IATA NDC New Business Model March 5, 2013 Airlines Adopting NDC Would No Longer Publicly Post Prices That Any and All Consumers Could View and Buy on a Non-discriminatory Basis The New Distribution Capability or NDC business model was adopted by all 240 IATA member airlines on October 19, 2012 in an agreement that IATA and the airlines have labeled Resolution 787. This new business model, openly agreed to by horizontal competitors, is meant to terminate the long-standing fare transparency that has served consumers well. Today, any consumer can shop anonymously for the best price on any airline by checking with the several on-line travel agencies (or calling a brick-and-mortar agency) and comparing publicly posted prices to find what he or she thinks is the best deal. Only if the consumer has decided to purchase an airline ticket is he/she required to provide personal information. The airlines own public statements confirm that the offering of publicly available fares that any consumer can easily view, compare and buy on a non-discriminatory basis has been a potent competitive force that has checked price increases for the traveling public. The terms of Resolution 787 are clear in establishing that for markets where an airline has adopted NDC each fare is instead to be customized at the time of a specific request for prices based on the personal details of exactly who is asking 1 and that having publicly available prices anyone can purchase is not the NDC model but the current model. Despite this clarity, IATA is now asserting to regulators that carriers adopting NDC will nonetheless also continue to have publicly available prices anyone can view and buy -- with NDC supposedly being a system that would simply augment these published prices. An examination of the official documentation that IATA has prepared and disseminated in connection with the NDC project shows this recent claim by IATA to be demonstrably false. This paper will highlight various IATA-prepared materials confirming that the prime objective of NDC is to destroy the current transparent pricing model and how NDC has!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 The intrusive nature of the personal information that airlines have agreed among themselves they have the right to demand before any airline adopting NDC might make fare offers to particular travelers is plain from the face of the Resolution. At section 3.1.1, we see that on an including but not limited to basis, the elements of personal data that the airlines have all agreed must be broadcast to all NDC carriers that might offer services as a condition for making a consumer any price offers are: name, age, marital status, contact information [i.e. phone or address], frequent flyer number [on all and any carriers], nationality, shopping, purchase and travel history, and whether the purpose of the particular trip is business or leisure.!

33 been tailored to attain that goal. However, there is no better proof that this is the mission for NDC than the comments made by Tony Tyler, the Director General of IATA, in an interview on or about July 24, 2012 with Flight Global, where he explained his objections to the current distribution model and the supposed benefits of NDC: We ve done a great job of improving efficiency and bringing down costs, but we ve handed that benefit straight to our customers, Tyler says. As soon as someone s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers and you ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditize ourselves. (Emphasis added.) 2 Given the complaint about the effects on airlines of the current transparent pricing model by the leader of IATA, there is no doubt that IATA and the airline proponents of NDC have jointly constructed a new opaque pricing model in order to cure that problem -- with the overriding object of thwarting that harmful excess competition on price through a different model that will enable airlines to stabilize or raise fare levels. Relevant Passages From IATA-Prepared Documents We first turn to the text of Resolution 787 itself. 3 Neither the diagram at page 2 of Resolution 787 nor the text explaining how the new model would work (also at page 2) provide any continued role for published fares and schedules that a consumer or 3 rd party acting on his/her behalf such as travel agencies or the global distribution systems, also called GDSs, that provide computing power for most travel agencies (3 rd parties are subsumed under the label B2D Distribution Channel Provider in the diagram) might access, load in advance and comparison shop in the case of carriers that had implemented NDC for particular markets. Instead, as shown on the face of the Resolution at page 2, consumers and 3 rd parties acting on their behalf would access fares and schedules on NDC airlines only through something called the DAS API, with the carrier then providing its offers based on knowing who is making the request.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2!The!fact!that!NDC!is!meant!to!stop!what!IATA!views!as!excess!competition!on!price!is!further!proven!by!the! questions!and!answers!describing!ndc!posted!on!the!iata!web!site.!!the!first!such!question!and!answer!states!the! following:! Q1!How$will$NDC$be$different$from$the$service$Global$Distribution$Systems$(GDSs)$offer$today?$! A:$NDC!will!enable!airline!products!to!be!displayed!in!a!differentiated!and!personalized!way!on!the!travel! agent!screens,!as!opposed!to!a!commoditized!low!fare!search!display!today.!!(emphasis!added.)! 3!Provided!as!the!second!document!in!this!set!of!briefing!materials.!!! 2

34 Since NDC has been specifically architected so that in each case a carrier would offer a fare that depends on exactly who is requesting it, continuing to publish reasonable rates available to just any consumer on a non-discriminatory basis would be fatal to the proposed new business model. Why would any consumer allow this highly personal information much of which can be used to pinpoint him or her as someone from whom the airlines can extract higher prices -- to be broadcast to all carriers worldwide that might provide service if he/she could get a decent fare without sacrificing his or her privacy? Further, Mr. Tyler s stated objection that the current distribution model - that is, that it causes airlines to hand straight to our customers the benefits of increased efficiency and lower costs -- would hardly be appeased if airlines continued to publish fares and schedules at reasonable levels that could be compared and purchased by any consumer. If that were to happen, airlines would still be tempted to undercut their competitors on price to gain sales, a result Mr. Tyler decries. Importantly, other IATA prepared materials regarding NDC and the Resolution establish beyond doubt that that NDC would mean the demise of published fares. The key passages are discussed below in chronological order. The IATA materials we quote from are voluminous. BTC would be happy to make all or any of those IATA documents available on request. Minutes Dated August 3, 2012 from July 9-13, 2012 Meeting These minutes were prepared by IATA and distributed on August 3, 2012 and record selected statements from meetings held in Geneva from July 9 to July 13, The minutes also incorporate several presentations. At the kickoff of the meetings, it was stated by IATA that the airlines had been working on NDC for many months, and had formed a group called Passenger Distribution Group or PDG. They had already produced a draft of the Resolution 787 that was to be put to a vote in October (Page 6 of 31.) Prior to this meeting, only airlines had any involvement in the NDC project. For confirmation that NDC first and foremost is designed to work a fundamental change in the current transparent business model for the distribution and pricing of airline tickets, and the manner in which NDC is to operate, we find the following discussion at page 2 of 31: Representatives of the PDG explained the vision of the new distribution model, where requests come to airlines who respond with an offer for their product. This is a considerable difference compared to the current model where an airline product is created remote from the airline and thereby, reduces the possibility for an airline to interact with the customer (end-user of the product) and limits the choices customers have when using the indirect channel.!! 3

35 (Emphasis added.) For clarity, the reference above to the product being created remote from the airline is a description of the current transparent business model for pricing airline tickets where 3 rd party aggregators, such as GDSs and OTAs, apply their sophisticated pricing algorithms and systems to the airlines publicly available fares and schedules to find the best prices for the consumer. At pages 6-7 of 31, we find the following critical passage demonstrating that continuing the present practice of publicly available fares any consumer could purchase would be anathema to carriers adopting this new business model: Key principles of the new distribution model [executive (name available on request)] (BA) explained the new distribution model as envisaged by the PDG, comparing the current and the new distribution landscape (slide 8 in the Error! Reference source not found.) and explained the associated principles (slides 9-21). In the current distribution model, the airline provides fares, fare rules, availability and schedule data all separately to the GDSs and the GDSs assemble those elements to create the airline product. The fact that an airline product is created remote from the airline causes a number of problems and reduces the possibility for an airline to interact with the customer as airlines do in direct distribution channels. The new messaging standard managed on behalf of the airlines by IATA is expected to provide the possibility for the customer behind the intermediary and the airline to interact as they do in the direct channel. DDX WG was established to help the airlines determine what that new standard looks like. In the new distribution model, the request will come to the airline and the airline will respond with an offer. The role of the GDS and OTA [on-line travel agency} changes in that they do not have to assemble the offer any more but will have the opportunity to show much richer data carried by the API and show it in a way they can compare airline product. The offer is about the attributes of the product not just about price anymore. Interaction with the customer is to the benefit of the customer. (Emphasis added.) While this new model was described euphemistically as one where GDSs and OTAs would not have to assemble the offer any more, the truth is that GDSs and OTAs would be unable to do so as they would have no underlying fare and schedule data with which to assemble attractive offers for consumers. If that were not the case in an NDC world, the airlines would not have solved the problem the proponents of NDC posited of the airline product being created remote from the airline. At page 8 of 31, the Air Canada representative elaborated in unmistakable terms how the new model would work:!! 4

36 [executive (name available on request)] (Air Canada) explained the expected message flow in the new distribution landscape (slide 22). In the subsequent discussion it was noted that Airlines are looking for standardization of the complete cycle with authentication information passed all the way through to the carrier. Airline responds to a request with product offer. The standard needs to cope with the creation of the order, the payment, fulfillment, and the change of the order. A question was raised about push message flows whereby an aggregator would receive data from the airline in advance. Airline representatives noted that pushing is the current method and with pushing airlines lose the ability to respond. Airlines could still push schedules to reduce the load of requests that will be received. (Emphasis added.) This excerpt shows that while the carriers were still debating in July 2012 whether they could still push schedules there was no such debate about continuing the practice of an aggregator receiving any fares in advance. Pushing fares to aggregators in advance was instead labeled the current method with the perceived inherent problem that pushing airlines lose the ability to respond. A description at page 11 of 31 of the operation of the new model in the case of a leisure traveler booking online establishes that the carriers had decided as early as July 2012 that for markets where a carrier had adopted NDC there would be no publicly available fares that just any member of the traveling public could view, compare and buy with the possible exception of purchases made via an on-line travel agency or OTA (with OTAs getting less than fully desirable pricing if they got anything at all):! Scenario 4 Leisure traveler booking online The scenario assumes a group of students using meta search engine to start their search. The team highlighted many questions about the initial information provided to the customer Presentation of the offer may differ site by site, the methods used to sort the results may differ Where is the information displayed by OTAs and meta search engines coming from? The first search is the most complex. How can the standard help with the first search to be as consistent for the customer as it can be? How to deal with the expected volumes of queries? Noted that a scenario with various packages proposed by OTAs and travel agents is missing. OTAs may need vanilla flavor pricing to show before more detailed information about the customer is known.! 5

37 (Emphasis added.) If there were to be publicly available fares under NDC that any travel agency, including an OTA, could access and compare for any consumer, there would have been no need to flag the special point that OTAs may need vanilla pricing to show before the customer is known. It is important to note that vanilla flavor pricing for consumers to shop without providing more detailed information was not even on the list of possibilities for non-ota travel agents. The rest of this long IATA package (and the other materials we reference in this paper) shows no consideration was given elsewhere to possible vanilla flavor pricing for any group of agents but OTAs. Nor are the details of what vanilla pricing would mean discussed. Given the enormous attention in the NDC project to determining exactly who the consumer requesting the information is, one can expect that consumers would be penalized heavily for not handing over the personal information that NDC is being manufactured to extract. Attachment 3A to Minutes Dated August 3, 2012 Attachment 3A of the minutes of the July 9-13 meeting contains the slides referred to at page 6-8 of minutes discussed above. Slide 8 of 57 shows a graph that contrasts Today s Distribution Model: airlines push content to 3 rd parties to the New Distribution Model: Interactive Exchange based on Who is requesting. Under the new model, inquiries from distributors are routed to each airline s interactive pricing and availability Engine. As was the case elsewhere, there is no provision or allowance for NDC airlines, in markets where they have adopted NDC, to push even some residual fare or schedule content to aggregators. Slide 13 of 57 shows the critical point that the airline proponents of NDC have no interest in NDC being a business model that will work in conjunction with the current push model for fares and schedules: Key principle 5 While developing the new standards and business processes, there should be no constraints driven by any backwards compatibility. Specifically, the new standards must be designed to first accommodate the target business scenario and then a roadmap for migration may be defined showing the migration strategy if there is a justification for compatibility. (Emphasis added.) As will be obvious, if the same airlines implementing NDC for a market would also be distributing publicly available fares and schedules that GDSs and other distributors received in advance and sold in those same markets, the carriers would have been focused intently on assuring that the NDC pull model and the current push model were fully compatible. Instead, they categorically reject any need to develop in connection with!! 6

38 NDC new standards and business practices that would work with the current push model. IATA Package Distributed At November 27-30, 2012 Meetings After Resolution 787 was agreed by IATA member airlines on October 19, 2012, IATA convened meetings in Montreal from November 27 to November 30, IATA distributed a package the first day of those meetings. It is dated November 27, 2012 and entitled, DDXWG Strategic, Impact Assessment & Tactical Workstream update. At page 8 of 28, we find the following description of how shopping will work under the new model: Customer provides an itinerary & requests a quote. He may provide personal information (such as frequent flyer details). Itinerary could be in the form of a specific route/date or as vague as a sunny weekend (affinity shopping). The request could also be authenticated, e.g. a Corporate Traveller. Aggregator checks which airlines support that itinerary and which carriers are NDC and sends off the request(s) to airline(s). Airline(s) builds offer(s) and sends back to aggregator. Aggregator aggregates all offers (NDC and non-ndc) and presents back to the customer (via the Seller). (Emphasis added.) This slide shows that for carriers adopting NDC in a market the aggregator must send off the requests to the airline as opposed to blending with the NDC offers for that carrier other offers it might have assembled from published fares and schedules for that same carrier. At page 10 of 28 under a slide entitled, Transitional State, there is a diagram of how NDC will operate in this transitional state and then the following narrative to the right of the diagram that discusses the old model and the new model. Aggregators will provide Agencies with comparative displays that integrate both non NDC & NDC product responses. Agencies may also establish NDC direct connects.! Aggregators must identify airlines that are NDC through their profile in order to know how to source their product. Airlines will be either old model or in a transitional state supporting both models. (Emphasis added.)!! 7

39 Several observations are important. First, the statement about airlines being either in the old model or a transitional state supporting both models only refers to this Transitional State and not to the final state after NDC has been fully implemented. Second, even in a transitional state, the aggregators must identify those airlines that are NDC in order to know how to source their product. Third, there is no allowance for aggregators to source content for NDC carriers via publicly filed fares and schedules loaded into their systems in advance for markets in which the carrier has adopted NDC. That is the old model. We understand that for a variety of reasons, including the need to ramp up the transaction volumes, carriers adopting NDC would likely activate it for selected geographic markets at first, expanding it over time. Thus, the fact that an NDC carrier might be in a transitional state does not mean that for those markets where it has adopted NDC there would be any alternative public source of fares and schedules to its DAS API, which would offer only unique options customized for each traveler. That airlines envision rolling out NDC market-by-market (and thus might have publicly available fares in non-ndc locales or routes) is established by the following statement at slide 12 of 28: Content: Schedules & fares continue to be distributed for interline. An airline profile will indicate in which markets an airline wants to receive NDC requests. (Emphasis added.) (The import of the first sentence which says fares and schedules continue to be distributed for interline is that the distribution of fares and schedules for interlining is to other airlines, not to aggregators such as GDSs and is discussed further below.) At slide 13 of 28, there are a number of comments in a slide entitled Airline Content Creation, which confirm that when a carrier has identified itself as NDC for particular markets, an aggregator must get its fares and schedules from the carrier directly and not from data it will have received in advance and loaded into the aggregator s own system: Schedules still need to be distributed to drive airline PSS [that is, the internal systems of airlines], non NDC partner interlining, airport FIDS Fares & airline taxes still need to be distributed for Non NDC Interline partners Aggregators need to know from the Airline Profile whether an airline is NDC or not in a market in order to switch between the aggregator & the airline to source the product. The Airline Profile will determine what NDC requests an airline receives. The request originator will need to be authenticated by the airline. (Emphasis added.)!! 8

40 Thus, the fact that NDC carriers might file fares and schedules for non-ndc markets should not be misinterpreted to mean they will do so for NDC markets. In NDC markets this slide makes clear aggregators will need to switch to the airline to source the product. At page 17 of 28 of this document, the following statement appears -- which establishes that interline connections will have to be created by the carriers themselves (the consequence of the GDSs no longer receiving fares and schedules in advance from NDC carriers):! Interline assembly moves from GDSs to Airlines It is noteworthy that at this same page, the airlines observe that: An Airline has relatively few preferred interline partners on a particular O&D This last passage confirms that in the case of NDC carriers the length and breadth of interline options offered consumers, many of which are much cheaper than same carrier connections, would be greatly diminished from those offered by the GDSs today. Minutes of November 27-30, 2013 Meeting Though IATA s legal staff had the full opportunity to review the final minutes reporting what was said during the course of this discussion, those minutes confirm with clarity that once NDC has been fully implemented, NDC carriers will no longer file publically fares available to just any consumer on a non-discriminatory basis. At page 10 of 30 of the minutes that IATA distributed in mid-december 2012, we find the following: A question was raised on fare filing, and whether it will still exist under the NDC model. It was clarified that it is rather unlikely that any airline will be in a position to cut over to the NDC model completely from one day to the next, and the hybrid model will exist. As was identified in the presentation, under the hybrid model, the traditional integration will continue. Hence while fare filing is not in the direct scope of NDC, it will need to be supported in terms of the non-ndc component in the hybrid model. (Emphasis added.) The inexorable corollary is that once an airline has cut over completely to NDC for a given market, then fare filings for that carrier would cease to exist. Conclusion IATA s own statements and documents eliminate any doubt about the real purpose and effect of this proposed new distribution capability. The central mission of NDC is to enable airlines -- acting jointly - to terminate the present transparent model of publicly available fares that just any consumer can efficiently compare and purchase. The motivation is that IATA and some big airlines object vehemently to the transparency available via the current model because the present model of published (that is pushed )! 9

41 and thus easily comparable, public prices prompts airlines to undercut their competitors on price, as IATA s Director General notes. The new opaque model embodied in NDC for the pricing an sale of airline tickets, while touted under the slogan of customization, is designed to fix the perceived problem for airlines of unwanted price competition that flows from having publicly posted prices. In addition, the passages in IATA s documents highlighted above further demonstrate that for those markets where carriers will have implemented NDC they will no longer file publicly available fares that could be easily and conveniently compared and purchased by just any consumer anonymously. The airline comments in the documents establish that such a dual system is decidedly not under consideration. In fact, those statements demonstrate that having publicly available reasonable rates any consumer could buy without surrendering his/her personal details would not solve the problems the airlines say exists in the current model of offers being created remote from the airline. And a dual system would also defeat the purpose of NDC, which is to end the practice of airlines undercutting each other on price because their prices are publicly available. Finally, the intrusive personal information that the carriers have expressly agreed among themselves must be broadcast by aggregators to all airlines that might offer service -- as a condition for quoting any prices for specific consumers -- would work an unprecedented invasion of privacy and also enable carriers to surgically spot those travelers from whom they could extract higher prices.!! 10!

42 BTC Supplemental Brief #4 IATA NDC New Business Model March 6, 2013 Four Major Points On Which IATA Should Be Pressed Regarding NDC With Supporting Background and Citations Point One: Under NDC, carriers agreeing to participate would no longer offer publicly available prices that any on-line or brick-and-mortar travel agency could compare for his/her client without first telling the airlines exactly who wanted to know? From Resolution 787, Section 1.1 at page 2: The diagram above represents the Distribution Capability landscape that will provide an interactive exchange based on knowing who is making the request irrespective of the distribution channel being used. This may involve, but not be limited to requests from passengers, agents, interline partners, and other distribution channel providers who may provide solutions to their own subscribers. Requests shall be sent using industry standard messages from the distribution channel provider to the airline s dynamic shopping engine. Airlines will determine what product offer to return in the response based on attributes that have been sent in the request. Other sections of Resolution 787 leave no doubt that the airlines participating in NDC will only make their prices available in response to a specific request from an identified potential traveler. o Enhanced Airline Distribution shall: o allow individual carriers to determine its own prices and the nature of those products offered, depending on whom the requestor is and what they are requesting. This will require authentication and the provision of historical data based on previous transactions. Further confirmation that those airline competitors adopting this agreed model would no longer offer publically available and easily comparable prices is provided by the Minutes of the Geneva Meeting July 9-13, where at page 11, we find the statement that, OTAs [on-line travel agencies as distinct from other travel agencies] may need vanilla flavor pricing to

43 show before more detailed information about the customer is known. o Of course, NDC may be architected by airlines so that even OTAs did not get rates anyone could shop and compare, or alternatively, airlines might only provide OTAs with only exorbitant rack rates so that any comparison shopping OTAs might offer for consumers would be useless and in name only. Either path forward would equip airlines with a potent weapon to drive consumers to abandon neutral OTAs in favor of highly biased airline websites. It might be appropriate for each airline to unilaterally attempt to push such an opaque pricing model on consumers. But can you identify any other industry in which competitors have been allowed by competition authorities to agree upon a model that, for all competitors following it, would result in them no longer offering publicly available prices that any consumer, even and usually an anonymous consumer, could compare? Given the competitive pressure on pricing levels that the present fare transparency has created, as American Airlines and Northwest Airlines in its justification of its then pending merger with Delta Air Lines (see below), have publicly testified, it would be logical to conclude, would it not, that the disappearance under NDC of publically available and easily comparable fares that any consumer can buy would cause that competitive pressure on airline pricing to be reduced? If IATA says that carriers adopting NDC would still be free to file publicly available fares that GDSs and agents could shop without identifying the traveler, the follow-on questions are: o But isn t that fundamentally at odds with the core premise of NDC that the airline responds with a price based on who the requestor is? (See Article ) o If just any consumer could still get reasonable prices anonymously from carriers adopting NDC, then have you not defeated the very purpose of NDC which is to make prices available only after authentication of specifically who is asking? o Since NDC has been engineered to provide airlines both the technical capability and right to refuse to provide any offer to any passenger, a customer not surrendering his/her personal information on a route where all carriers participated in NDC might be afforded no prices to compare, right?! And isn t that the polar opposite of how the distribution model has long worked, with all potential flyers able to easily! 2

44 and anonymously compare the rates of all carriers offering service on a route?! So any passenger not wanting to have broadcast to multiple airlines information that many consumers might consider highly personal and sensitive (such as name, age, marital status, address, frequent flyer numbers [on all carriers], nationality, whether the trip is for leisure or business purposes, and his/her travel shopping and travel purchase history) could well be far worse off in an NDC world than that passenger is today? Note: the full set of minutes and working documents prepared by IATA for NDC meetings leave no doubt on the point that in those markets where airlines participate in NDC, publicly available fares that any consumer can comparison shop and purchase on a non-discriminatory basis would disappear. We can provide those materials if they are of interest. Point Two: Consumers have long benefitted from the transparency and the ready comparison-shopping transparency brings because the public transparency of airline fares is in and of itself a potent competitive spur that keeps fares low. SUPPORTING EXCERPTS FROM WRITTEN TESTIMONY BY AMERICAN AIRLINES EXPERT MR. D. KASPER OF MARCH 12, 2012 TO THE BANKRUPTCY COURT IN THE AMERICAN AIRLINES CHAPTER 11 CASE Pages 12 to 13 of 309: Among the key factors that have contributed to American s declining fortunes are: 1. Increasingly intense-and transparent- price and service competition across American s markets that has prevented and will continue to prevent the Company from earning revenues sufficient to cover its current costs. [...] 3. [...] The combination of strong downward pressure on prices from heightened competition coupled with margin pressures caused by high unit costs has made it increasingly difficult for American to fund the investments required to keep up with its competition.! 3

45 Page 14 of 309: Since its deregulation in 1978, the U.S. airline industry has undergone a dramatic structural transformation that has impacted virtually every aspect of the industry. The combined effect of these changes including the transition from regulated to market-based airfares, the proliferation and widespread customer acceptance of LCCs, the opening of international markets to increased competition through Open Skies Agreements, and the increased price transparency resulting from Internet-based search and distribution channels has been a long term, secular decline in airline prices. Page 21 of 309: In addition, other factors such as Internet-based airline search and booking tools have also put downward pressure on airfares by increasing price transparency for both business and leisure passengers. The combined effect of LCCs increasing geographic breadth and the ability of passengers to easily compare fares across all carriers and thus find the lowest available price has been a long term secular decline in airfares. Page 67 of 309: d. New Technologies Have Made It Far Easier For Passengers To Find Low Fare All of this increased competition has combined with an unprecedented level of price transparency resulting from online distribution channels to exert further downward pressure on fares over the past decade. Approximately 54% of travel (the largest component of which is airline tickets) was purchased online in 2010, up from only 20% in The rapid spread of Internet-based airfare search engines has greatly reduced (indeed, almost eliminated) the costs of searching for the lowest possible fares and thus greatly increased consumers ability to find and purchase the lowest available fares. Pages 68 of 309: Since Internet travel sites allow passengers to quickly compare fares across most carriers with a few strokes of the keyboard, these websites have contributed to the increased commoditization of airline travel, especially for price sensitive passengers. For example, as early as 2002 a New York Times article quoted a Vice President of the travel search website Farechase.com, as saying, There is almost no loyalty left.once the Internet took hold the airlines assumptions about the viability of their existing fare structures and customer bases went to hell in a hand basket.! 4

46 WRITTEN TESTIMONY BY AMERICAN AIRLINES CHIEF RESTRUCTURING OFFICER MR. B. K. GOULET OF MARCH 27, 2012 TO THE BANKRUPTCY COURT IN THE AMERICAN AIRLINES CHAPTER 11 CASE Page 13 of 152: 12. However, starting in 2001 and throughout the ensuing decade, AMR s financial fortunes reversed and deteriorated, as American faced a competitive landscape transformed by the rise of new lower cost competitors and transparency in pricing, as well as numerous exogenous shocks that affected passenger demand and costs across the industry. Pages 16 to 17 of 152: 15. The rise of the LCCs in American s domestic network coincided with a new transparency in pricing brought about by the advent of on-line fare displays and powerful Internet search engines that enable passengers an unprecedented ability to obtain comparative fare pricing on any route at the click of a button. In light of this transparency and the availability of lower-cost alternatives, American has learned from bitter experience that if it fails to match fares on a route with lower cost competition, it loses traffic and the route becomes less profitable or more unprofitable; and if American does match fares, it may sustain or stimulate its share of passenger demand on the route, but it does so at lower yields (revenue per passenger mile), with a similar negative impact on profitability. Pages 60 to 61 of 152: 17. There are a number of reasons for AMR s weakened financial condition. The Airline Deregulation Act of 1978 was intended to, and did, transform the U.S. airline industry from an era of economic regulation to an era of intense competition. The intensity of that competition has increased markedly since the advent of Internet-based marketing and reservations systems that resulted in complete price transparency to the consumer making comparison shopping for the lowest fare extremely easy. EXCERPTS FROM THE TRANSCRIPT OF THE HEARING OF APRIL 23, 2012 BEFORE THE BANKRUPTCY COURT IN THE AMERICAN AIRLINES CHAPTER 11 CASE Page 24, lines Statement by American Airlines Counsel Jack Gallagher: Apart from the rise of the low cost carriers prices are now 100 percent transparent with the spread of the internet. Anyone in the world with access to the internet can now find the lowest airfare available between any two points very easily, and fare wars have become common.! 5

47 Page 133, lines 1-22 Testimony by American Airlines expert Dan Kasper: What "price transparency" refers to is the fact that with the advent of the internet and internet search engines, suddenly any -- anybody with a couple of key strokes could search fares quickly and inexpensively and find out what the lowest fair available was. This was a huge boom for low cost carriers because they could avoid -- for people who were really price sensitive and could use the internet, they didn't have to spend a lot of advertising. People would find them. And what this did was -- previously with the legacy carriers, they had fairly complicated fare structures. To -- to get comparison shopping you either had to go on the phone to a travel agent or call the airlines individually and it was a -- the search costs were fairly burdensome. And so it made it easier and possible for legacy carriers to maintain fare structures that were higher than passengers could get from low cost carriers if they could find the low cost carriers. The combination of the spread of low cost carriers and the ease of finding low fares had a dramatic effect on prices; that is to say, brought down prices pretty dramatically. TESTIMONY BY THE THEN CEO OF NORTHWEST AIRLINES BEFORE THE SENATE ANTITRUST SUBCOMMITTEE ON APRIL 23, 2008 In written testimony to the US Senate Antitrust Subcommittee of April 23, 2008, Doug Steenland, then CEO of Northwest Airlines, described at pages in a section entitled, Technology Has Created a Transparency Revolution, the exact same effect of fare transparency on airline prices as part of his efforts to defuse objections that the thenpending merger of Delta Air Lines and Northwest Air Lines would result in higher prices for consumers: Over the past several years, online sites such as Orbitz, Expedia, and Travelocity have been created to enable customers to compare airline offerings directly. [ ] These tools have provided enormous benefits to consumers and have increased the price-competitiveness of the airline industry. In fact, there are few businesses in which there is as much pricing transparency. Is IATA saying that AA s expert was factually wrong when he represented to the bankruptcy court that price transparency has put downward pressure on domestic fares? Is IATA saying AA s expert was factually wrong when he told the bankruptcy court that the current ease of finding low fares had a dramatic effect on prices; that is to say, brought down prices pretty dramatically.! 6

48 Does IATA dispute Mr. Steenland s testimony to the US Senate that pricing transparency has brought enormous benefits to consumers and increased the price competitiveness of the airline industry? So, you would have to agree that any decline in airline pricing transparency would inevitably hurt consumers? And with all pricing by airlines using NDC being opaque by definition and under the radar until a specific request was made for a particular traveler, the strength of pricing competitiveness that flows from the transparency Mr. Steenland described would of necessity have to be weakened? o Put differently, for any routes where all carriers adopted the NDC model there would no longer exist publicly ascertainable fare benchmarks the competing airlines could not exceed without the risk of losing business to lower-priced airlines? I direct your attention to the following statement of July 24, 2012 about the effects of this fare transparency and the benefits the current transparent distribution model offers consumers, by Mr. Tony Tyler, the Director General of IATA, just after the NDC project had been officially launched. He said: o We ve done a great job of improving efficiency and bringing down costs, but we ve handed that benefit straight to our customers, Tyler says. As soon as someone s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers and you ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditise ourselves.! So, would you agree with me that one of the objectives of NDC is to end the current distribution model of published fares that can be easily viewed and compared because it causes airlines to undercut their competitors and hand the value [of lower costs/efficiencies] straight to passengers? Point Three: The personal information that carriers have agreed all airlines adopting NDC can demand from any consumer as a condition for providing a price would enable airlines to pinpoint less price-elastic travelers whom they could charge more. Is it true that under NDC an airline can insist on knowing before it responds with a price if the traveler is a business or leisure traveler?! 7

49 o The answer is absolutely. See Article below, which says so in the underlined text: 3.1. The Business Process Description comprises the following: Authenticate and Shop Process Description The authentication and shopping process is a dialogue that is generated from a direct or indirect distribution channel to an airline rules engine via a DAS API to request a product offer from a carrier and will allow such carrier to respond with the offer based on the information received in the request. The request shall include but not be limited to; data to identify who is making the request where an intermediary is present. Data may include, but not be limited to; specific IATA number (generic numbers shall not be sent), agents pseudo city code, electronic reservations service provider number, corporate or group identification, type of trip (e.g. leisure or business). And you would agree with me that business travelers are less likely to be price sensitive than leisure travelers? And isn t it also true that under NDC an airline can insist it get very detailed information about the specific traveler and that person s shopping and purchase history before it provides any offer? o Again, the answer is absolutely. See of Resolution 787, which provides: data to identify on whose behalf the request is being made. Data may include, but not be limited to; Name/Age/Marital Status, Contact Details, Frequent Flyer Number or Profile number, Customer Type (e.g. adult/child), Travel History, Nationality, Shopping History, Previously Purchased Services By knowing the traveler s travel, shopping and purchase history, an airline could get a good idea about the extent to which a particular traveler prefers non-stops over connections and whether he/she considers connections as alternatives when both are offered on a market? o And thus an airline that operated the only non-stop service on a route can know if the prices of its offers had to take account of! 8

50 prices on connecting routings for this particular traveler or could ignore them, wouldn t it? And with both shopping and purchase history, an airline would be in a very good position to identify travelers who are very time sensitive and hence are unlikely to move to a different flight time than the requested time because the fare of other flight times is lower? Similarly, with shopping and purchase history of specific consumers, each airline would be able to identify travelers who are unlikely to fly to alternative, nearby airports even if fares to those alternative airports were cheaper? And under this Article , there is nothing that restricts carriers from demanding to know the frequent flyer number or even tier on other carriers? And if an airline knows that the traveler is only in its frequent traveler program or is an upper tier member only in its program, then it might also decide the passenger would pay at least some level of premium to earn miles on its services or enjoy special perks, like early boarding for free, right? So in each of these four scenarios, an airline would be in a good position based on this information to judge if its offer to the specific consumer could be higher (and how much higher) than alternative offers of other carriers without an inordinate risk of losing the sale? Point Four: Many of the items of personal information airlines have agreed among themselves they have the right to demand from consumers as part of the shopping process if they adopt the NDC model are not only offensively intrusive but cannot be justified by any legitimate business justification. Recall that under the data the airline has the right to demand in order to identify on whose behalf the request is being made, may include, but is not limited to the following: Name/Age/Marital Status, Contact Details, Frequent Flyer Number or Profile number, Customer Type (e.g. adult/child), Travel History, Nationality, Shopping History, Previously Purchased Services We have already covered the effects of the airlines knowing a traveler s shopping, purchase and travel history. Let s talk next about age. We will grant that some airlines offer senior citizens or youth fares for persons above or below certain specified! 9

51 ages, such as over 60 or under 21. But are you telling us that an airline might offer someone who is 40 a higher or lower fare than someone who is 45 or 30? o If IATA says yes, Can you identify a single airline that makes that sort of age distinction today in setting its fares and with respect to what fares? o And would you agree that wealth is often associated with peak earning years like the late 40s and early to late 50s? And thus, this piece of intelligence can help airlines pinpoint consumers who are able to pay more to travel? Let s move on to marital status. Can you name even one airline worldwide that charges married persons more than single persons or vice versa? o And if the defense of this demand is that airlines will want to know if they should offer some form of companion ticket, the questions are:! Are the airlines saying that it would be legitimate to offer discounted companion tickets only to legally married persons? What about heterosexual or same-sex couples? Are the airlines saying those sorts of unmarried couples are not deserving of the same sorts of special discounted offers? And next, let s move to the right of airlines to know as part of the shopping process the consumer s nationality. o Let s say that a travel agency is shopping for flights from Brussels to Miami. Does IATA or the airlines take the view that airlines have a business justification for charging more or less to a Belgium national than to a German citizen for the same trip? o Or if the shopping is being done by a US-based agency for a flight from Miami to Rio de Janeiro for a Miami resident, does IATA or the airlines have a legitimate business reason to vary the fare depending upon whether the request is being made by a US citizen or by Brazilian national residing in Miami? Moving on to frequent flyer number, would you agree with me there is nothing in that would forbid an airline from demanding to know the consumer s frequent flyer number on other airlines and thus each airline would know if the consumer belonged only to its frequent flyer program? And, in fact, the data that an airline can demand as part of the shopping process is expressly said to be included but not limited to the enumerated items, rights?! 10!

52 Under NDC, there is no right provided for consumers to opt-out of having this detailed personal information provided to all carriers who might offer services, is there? Where in the Resolution? o In fact, if all carriers on a particular routing participated in NDC, the consumer s only option might be to decide not to fly if he/she does not want this personal information shared with all those airlines? o Again, since carriers have created the right to refuse to provide an offer in response to a particular request, there is no way IATA can guarantee consumers who do not want to hand over highly personal information that they will be given any fare offers on routes where all carriers participate in NDC?! 11!

53 BTC Supplemental Brief #5 IATA NDC New Business Model March 11, 2013 Why NDC Is Not In Compliance With EU Data Protection Law This analysis explains why the new air ticket distribution system agreed upon by airlines that are members of the International Air Transport Association (IATA), referred to as the New Distribution Capability (NDC), does not comply with the EU Data Protection Directive 95/46 /EC (the Directive ). Adopted by IATA member airlines as Resolution 787 on October 19, 2012 ( Resolution 787 ) 1, NDC will likely and unlawfully affect both end-consumers and participants at the different levels of the air services distribution industry. Such negative effects can be expected as from early 2013, when IATA has indicated it will begin testing NDC. At present, working groups of airlines are actively sorting out the details of the NDC in order to implement testing by that target date. Under NDC, IATA members (airlines) will process personal data of customers, including their age, marital status, and shopping, travel and purchase history, whether the purpose of a particular trip is business or leisure and will therefore be considered a Data Controller under the Directive. Their data processing will have to comply with the Directive and the national implementing laws. However, given the nature and scope of the data being collected and its purpose (indefensible price discrimination between customers), NDC raises concerns regarding the compliance of such data processing with the Directive s requirements regarding data quality and legitimate grounds of processing and transferring data abroad. I. FACTUAL BACKGROUND The current airline ticket-purchasing model is based on uniform and transparent fares that are being made available through the Global Distribution Systems (GDS). The predecessors of the GDSs, previously referred to as a Computer Reservation Systems (CRS), were developed by the airlines in the 1970s to allow travel agents to comparison shop efficiently across multiple airlines and manage the resulting reservations. 2 Originally, because GDSs were owned by airlines, they operated under government regulations in many jurisdictions requiring them to provide objective information on all airlines to enable efficient comparison-shopping. During 1 IATA Resolution 787 is included in Annex 1. 2 Operators of GDSs and CRSs are often referred to as aggregators, as they aggregate the information received from the numerous airlines. [BRUSSELS _1]

54 the 1980s, the electronic filing and dissemination of airlines fares and fare rules through ATPCO enabled the GDSs to make comparison shopping even more efficient by applying sophisticated algorithms to the airlines electronically filed and disseminated fare rules, stored within GDS systems, to generate the best flight options for any given search with extremely low latency. In particular, the storage of fares and fare rules within the GDSs enables the quick return of results even for the smallest of airlines that might otherwise be unable to afford the IT systems necessary for rapid and comprehensive responses. When GDSs were spun off from the airlines at the turn of the century they gained an independent incentive to continue the innovation in providing travel agents with efficient access to objective, unbiased information about all airlines. And as the air travel market and available technology have changed, the GDSs have continued to make comparison shopping among available travel options even more efficient for travel agents. This highly efficient model of air ticket distribution is often referred to as the push model, in reference to the airlines pushing their fares and fare rules to ATPCO and then to the GDSs, which store them for quick and efficient processing. Under the guise of creating a standard for offering personalized offers to consumers, NDC aims to move away from a commodity based pricing model. 3 Under NDC, airlines fares and schedules will no longer be publicly available. Practically all the airlines attending the July 2012 IATA meeting in Geneva indicated that they would stop distributing any fares via ATPCO. 4 Instead, airlines will subjectively determine which product offer to submit in response to a specific request by or on behalf of a specific consumer (also referred to as the pull model ), based on the detailed information that must be sent in the request ( authenticated shopping ) (Resolution 787 paragraph 1.1). Airlines will respond with a targeted offer based on the consumer s private or personal data (e.g., nationality, age, marital status, travel history, shopping history, previously purchased services, participation in frequent flyer programs, business or leisure character of the intended trip), which will include an air ticket at a rate determined by the airlines without any transparency, and any applicable ancillary services (e.g., seat reservation, additional luggage, and meals) that were routinely included in the ticket price, but that are increasingly sold unbundled at a separate price. All the large EU-based network airlines (British Airways, Lufthansa, and Air France- KLM) and all the large North American airlines (American Airlines, Delta Airlines, United Airlines, US Airways, and Air Canada) have been active proponents of NDC. IATA Resolution 787 further provides that IATA Member Airlines shall apply the [NDC] procedures when distributing enhanced content through multiple channels of distribution with their many partners. IATA Resolutions are binding obligations for all 3 Page 8 of the Minutes of the July 9 13, 2012 IATA meeting at Geneva ( IATA Geneva Meeting ), included in Annex 2. 4 The end of fare distribution via ATPCO is also indicated in IATA s chart depicting in a structured way the current push model and the NDC pull model. As this chart makes clear, Fares/Ancillary management & Rules is no longer taken care of by ATPCO, but by the airline (p. 11 of IATA s Distribution Data Exchange Working Group, 9-13 July 2012, Geneva Information pack and participant instructions; included in Annex 3). 2

55 240 IATA Member Airlines, representing 84% of total air traffic. 5 Consequently, this provision of Resolution 787 should be understood as requiring all IATA airline members that choose to implement a pull model to follow the NDC. According to Resolution 787, the personal data required from the customers, in order to receive any price offer, will include at least the customer s nationality, age, marital status, shopping history, previously purchased services, travel history, participation in frequent flyer programs, the business or leisure character of the trip, etc. 6 Once provided by the customer, the data will be broadcasted to countless airlines, no matter where the airlines are located. The NDC would therefore involve the exportation of such data outside of the EU, including to countries not offering a similar level of protection with regard to data protection, and without the consumer being able to review individual airlines data-privacy policies. II. AIRLINES IMPLEMENTING THE NDC WILL BE DATA CONTROLLERS The obligations of the Directive apply to a Data Controller, i.e. a company determining the means and purpose of the data processing. A party that only processes data on behalf of and under the instruction of a Data Controller is known as a Data Processor, and is not directly liable under the Directive. Given that the airlines would determine the type of information that customers would have to provide to them, through the local travel agent and the GDSs, and would process the information they receive from the clients to determine the individualized fare, the airlines would qualify as Data Controllers and their processing would have to comply with the Directive. 7 III. OBLIGATIONS UNDER THE DATA PROTECTION DIRECTIVE The Directive requires Data Controllers to comply with, in particular, (i) the duty to ensure the data quality and (ii) the duty to ensure that the data processing and any transfer of the data outside of the EEA is based on a legitimate ground. Compliance of the NDC with these two obligations is further analyzed below. 5 See IATA Programme Strategy, p. 5 listing IATA s instruments (included in Annex 4): IATA Resolutions, binding on all members; IATA Recommended Practices, non-binding on members; IATA Technical standards in support of both resolutions and recommended practices; Implementation Guides to assist in consistency of product and service delivery by publishing best practice. Note that IATA is merely a trade association of airlines, and that Resolutions like Resolution 787 are despite the lofty label nothing but agreements among competitors, with no privileged status under competition or other laws. 6 Resolution In addition, the GDS is also considered a data controller for the purpose of the data processing it performs, see Article 11.1 of Regulation (EC) No 80/2009 of January 14, 2009 on a Code of Conduct for computerized reservation systems underlines the importance of the neutrality of the information provided by GDSs to customers ( Regulation 80/2009 ), 3

56 A. DATA QUALITY The Directive provides that any data processing must be undertaken for a legitimate purpose and must not be excessive to achieve that purpose. 8 First, as indicated above, the personal data requested from prospective customers under the NDC will include his or her age, marital status, nationality, whether the travel is business or leisure, and the person s shopping, travel and purchase history. 9 Whereas certain personal information is necessary to complete the contract of carriage, such information is not needed at the preliminary stage, i.e. prior to making a price offer, and in fact has never before been demanded by airlines. The data processing will be excessive, because the type of information being requested, e.g., a person s age, marital status or prior shopping and travel history is not relevant at the time of making an offer, except to allow discriminatory pricing by the airlines. In addition, the data processing could not be considered to serve a legitimate purpose. 10 The required data will facilitate price discrimination by airlines on the basis of their knowledge of customers price sensitivity or identity, and could lead at discrimination by the airlines on the basis of nationality. First, the combination of the data requested through the authentication process will allow the airline to assess the price sensitivity of a customer and set a price according to a level the airline considers appropriate for such customer. This would result in direct discriminatory treatment of customers, because customers would be treated differently based on criteria that are not objectively justified. Direct discrimination on the basis of marital status, wealth, nationality and/or age with regard to the sale of publically available goods or services, is prohibited under the national law of several member states.11 Examples of such direct discrimination include, for instance, knowledge of a person s specific age, would not aim at providing a lower price to students or seniors, but rather to request higher prices from customers in the age group 40 to 55, who are assumed to be wealthier. Similarly, as business travellers tend to be less price sensitive, the airlines could use the information on the business or leisure character of the intended trip to systematically charge higher prices to business travellers. Moreover, the requested 8 Article 6 of the Directive. 9 Resolution Recitals (4) and (9) of Regulation 80/2009 and Regulation (EC) No 1008/2008 of September 24, 2008 on the common rules for the operation for air services in the Community provides that air carriers must publish their fares, inclusive of all taxes, and charges, surcharges and fees ( Regulation 1008/2008 ), 11 The Belgian Antidiscrimination Law of May 10, 2007 (Wet ter bestrijding van bepaalde vormen van discriminatie, B.S. May 30, 2007, p , see ); the German General Equal Treatment Act of August 14, 2006 (Allgemeines Gleichbehandlungsgesetz, BGBl I S. 1897, see ); the French Criminal Act of July 22, 1992 (Code pénal, loi , Article 225-2, see _2?idSectionTA=LEGISCTA &cidTexte=LEGITEXT &dateTexte= ). For a proposal for a legal instrument at EU-level, see the Proposal for a directive of July 2, 2008 against discrimination based on age, disability, sexual orientation and religion or belief beyond the workplace. 4

57 personal data could lead to price discrimination among customers not only on the basis of customers price sensitivity, but also on the basis of customers personal identity. For example, knowledge of a customer s marital status before quoting a price, would allow airlines to e.g. arbitrarily charge married persons more or less than unmarried persons, or to arbitrarily offer discounted companion tickets only in the case of legally married persons. Secondly, the NDC will also breach Regulation 1008/2008, which explicitly prohibits discriminatory pricing on the basis of nationality in the air service sector. 12 Thus, any related data processing could not, by definition, serve a legitimate purpose. B. LEGITIMATE GROUNDS FOR PROCESSING AND TRANSFERRING DATA OUTSIDE OF THE EU Any type of data processing must be based on one of the legitimate grounds of processing set out in the Directive. 13 In addition, any transfer of data to a third country not offering adequate protection as determined by the European Commission (e.g., including the US), must also be based on a legitimate ground for processing. 14 The airlines are most likely to invoke one of the three following grounds for processing: (i) customer consent, (ii) necessity for the performance of a contract or (iii) that the processing is proportionate. However, these legal grounds have been interpreted restrictively by the Working Party and are therefore unlikely to apply to the NDC. First, the Working Party has indicated that, in order to be valid, consent must be any freely given specific and informed indication of his wishes by which the data subject signifies his agreement to personal data relating to him being processed. 15 Whether the consent eventually requested by the airlines from its customers will be clear, unambiguous, specific and informed, will require a review of the form and content of such consent. In any event, as consent must be obtained prior to any data processing, the inclusion of specific terms and conditions in the contract of carriage would be insufficient. Secondly, it is unlikely that a customer s prior consent can be considered freely given, regardless of the form or timing of such consumer consent. The Working Party has underlined in various opinions that consent cannot be used as a legitimate basis under all circumstances, and that it is especially ill-suited to serve as a ground for processing where the consequences of consenting undermine individuals' freedom of choice. 16 For instance, the Working Party has issued opinions addressing the consent provided by patients regarding the processing of their Article 23.2 Regulation 1008/2008. Article 7 of the Directive. Article 25 and 26 of the Directive. Art. 2(h) Directive. WP opinion 187, p

58 medical records, employees regarding the processing of their employment data, and athletes regarding the processing of their data by the World Anti-Doping Agencies, in which it concluded that consent was not a valid ground for processing. 17 Similarly, customers will not be free to deny their consent, since this would effectively mean that they often couldn t buy airline tickets. 18 In this regard, it should be noted that the Working Party indicated that valid consent requires the absence of significant negative consequences if [the data subject] does not consent. 19 In fact, a traveller that does not want to provide all the personal information but still would like to buy an airplane ticket, does not have an effective alternative without significant negative consequences. Although Resolution 787 does not prohibit publication of generally applicable fares, it is unlikely that any participating airline would have an incentive to provide anything other than exorbitant list prices. 20 A key goal of NDC is to enable enhanced price discrimination, which would be undermined if airlines were to publish anything other than their highest fares. Buying airplane tickets at these arbitrarily high fares cannot be considered as a valid alternative without significant negative consequences for consumers not willing to consent to the divulgence their personal data. Hence, consent could not serve as a legitimate ground for processing the data. 21 Third, the data collected under the NDC is not necessary for the performance of the contract, i.e. the sale of an airline ticket, as the information is not being requested to perform a contract, but rather to determine the offer that will be presented to the customer. In addition, it will be difficult for the airlines to argue that the requested information is necessary to be able to make an offer, as they have been selling tickets to date without requesting the additional information. Finally, according to article 11 of Regulation (EC) No 80/2009 on a Code of Conduct for computerized reservation systems, necessity for the performance of a contract is also the only legitimate ground on which any data processing by a GDS can be based. 22 As this ground fails to apply, no other ground should be considered a sufficient basis for any data processing as part of the NDC. 23 Finally, the Directive also provides that a Data Controller can validly process data when it does so based on a legitimate interest which is not outweighed by the 17 WP opinions 48, 131, 156 and In practice, airlines benefit from a number of monopoly non-stop routes, giving the customer no other option but to consent with the data processing if he or she wants to take such flight. Secondly, most non-stop routes are operated by a limited number of airlines (2-3). If the airlines flying a certain route join the NDC, the only choice to consent would again be to not fly or to fly really inferior service, i.e. not direct. 19 WP opinion 187, p Airlines are unlikely to offer any publicly available prices, as that would be in direct conflict with the NDC model of offering prices based only on the characteristics of the specific traveler. 21 In addition, consent cannot serve as a legitimate basis for data processing that does not adhere to the requirements of data quality, i.e., consent cannot serve as a legal ground for data processing that is considered excessive compared to the purpose of the data processing. See WP opinion Article 11 Regulation 80/ In particular, this ground for processing does not cover the exchange of personal data under the NDC to any airline that could potentially offer a relevant service, but of which only one will enter into a contract of carriage with the customer. 6

59 fundamental rights of the data subject (the balancing test). However, invoking this test will run against the same issues as indicated above regarding the legitimate purpose of the processing, i.e. any benefits realized by the NDC for the airlines would not outweigh the negative consequences suffered by the customer of being treated differently because of his or her personal or economic situation. Furthermore, the personal data will be shared with a considerable number of carriers, inside and outside the EEA, whereas the balancing test cannot be used as a ground to transmit data outside of the EU. 24 Hence, this ground is unlikely to cover IATA s intended data processing. 24 For a list of all IATA members and their country of origin, see the IATA website: 7

60 IATA New Distribution Capability ASTA / BTC March, 2013 Public Policy Discussion Document; Some Slides Are For Illustrative Purposes Only Thursday, March 7, 13

61 Through The Looking-Glass We ve done a great job of improving efficiency and bringing down costs, but we ve handed that benefit straight to our customers, Tyler says. As soon as someone s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers and you ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditise ourselves. Tony Tyler, Director General, IATA - Flightglobal - February Thursday, March 7, 13

62 Agenda Background Consumer Impacts Discussion 3 Thursday, March 7, 13 Paul

63 Background Current market high transparency Airlines complaining for years that transparency led to commoditized prices can t escape competition from low fare competition Airlines 1st move unbundling Airlines 2nd move hide fees from consumers using independent distribution Now comes global airline industry thru IATA Tyler speech as prelude to vote on Resolution 787 culprit continues to be commoditization & low prices (historic price-fixing role) 4 Thursday, March 7, 13 Paul

64 Background Development began in July 2012, Abu Dhabi in Oct. 2012, Montreal in Nov now in pilot stage Purpose of New Distribution Capability (NDC) end commoditization and low prices resulting from ubiquitous transparency New Distribution Capability (NDC) FAQ - November 1, 2012 Q1 How different will NDC be from the service GDSs offer today? A: NDC will enable airline products to be displayed in a differentiated and personalized way on the travel agent screens, as opposed to a commoditized low fare search display today. 5 Thursday, March 7, 13 Paul

65 Background How? Get all carriers of consequence on same platform Adopt a binding resolution and get all influencers to participate Exclude anyone who might make noise Call it a standard setting when it is really a business model 6 Thursday, March 7, 13 Paul

66 Background What is new model? Authenticated shopping based on deep use of personal identifying information about who is seeking service Use data to price discriminate against insensitive travelers Price insensitive Service quality sensitive no connection Increase consumer search costs hard or impossible to efficiently compare prices Eliminate or shroud generic base fares No backward compatibility Both regimes cannot co-exist Fares and schedules no longer available to the consumer 7 Thursday, March 7, 13 Paul

67 Background IATA-Prepared Minutes Of July 2012 Meeting In the new distribution model, the request will come to the airline and the airline will respond with an offer. The role of the GDS and OTA changes in that they do not have to assemble the offer any more but will have the opportunity to show much richer data carried by the API and show it in a way they can compare airline product. 8 Thursday, March 7, 13 Paul

68 Background What is new model? (cont.) Facilitate tacit market division by identifying owned travelers Mutual strategic withholding of offers Eliminate corporate negotiating leverage Benchmarking 9 Thursday, March 7, 13 Paul

69 Privacy Personal data demands are intrusive and include but are expressly not limited to: Name Frequent Flyer status Age Marital status National origin Place of residence Travel shopping history Travel purchase history Whether the purpose of the trip is business or leisure 10 Thursday, March 7, 13 Kevin

70 Example - Business Traveler Today SLC $372 Virtually all content available Anonymous-shopping All options returned to traveler PHL ATL $605 $373 PHX MSP DEN $373 $372 NDC Content heavily restricted Personal information based No anonymous shopping Select options returned PHL Division of Markets $1,000 PHX 12 Kevin Thursday, March 7, 13

71 Total Consumer Impact NDC would cause serious consumer harm due to loss of data privacy, higher prices paid and increased industry costs passed on to the consumer Privacy Consequence of non consent drives significant negative consequences Data broadcast to countless airlines Enables knowledge of price sensitivity Not necessary to enter a contract Requires divulging personal information prior to seeing a privacy policy 17 Thursday, March 7, 13 Kevin

72 Total Consumer Impact NDC would cause serious consumer harm due to loss of data privacy, higher prices paid and increased industry costs passed on to the consumer Higher Prices For Air Travel System-wide fare levels not disciplined by comparison shopping Ancillary fees not disciplined Price discrimination against insensitive travelers Tacit reduced competition among airlines Travel agencies not offering airline pricing / policy discipline Loss of robust interline options ($60 / 15%) Airline new entry frustrated Corporations not price disciplining through benchmarking Higher consumer search costs 26 Thursday, March 7, 13 Kevin

73 Total Consumer Impact NDC would cause serious consumer harm due to loss of data privacy, higher prices paid and increased industry costs passed on to the consumer Higher Transaction Fees New travel agency technologies Airlines paid for content Manually compiled MIS reports Manual travel policy compliance tracking TMC / agency workarounds Corporate travel department workarounds 32 Kevin Thursday, March 7, 13

74 Seems Improbable! As over-the-top offensive as NDC appears, how will it not be utterly rejected by consumers and regulators alike? IATA External Communications Strategy Make NDC as an IATA strategic priority to eliminate commoditized pricing Ensure airlines only, closed-door strategic planning Power forward with world s most influential airlines & alliances behind it Secure a binding resolution - (238 yeas, 2 abstentions) Seek ATI from Transportation Department Call it a technical standard when it s really a new industry-wide business model Spin personal information is on an opt-in basis Be silent on the punitive consumer consequences of not opting in Describe personalization and customization as the ultimate in transparency Stress that comparison shopping among NDC-carrier offers is alive and well Don t mention massive costs that will be ultimately transferred to consumers Emphasize that consumers are demanding personalization 44 Thursday, March 7, 13 Kevin

75 Upshots Don t need global deal to reduce prices to low-end of market that is the problem, not the solution Don t need global deal on new business model to use customer ID data for pricing To personalize offers for best customers you don t need: Horizontal competitor agreement Binding resolution New business model ATI 45 Thursday, March 7, 13 Kevin

76 AA-US Nexus With NDC Merger directly connected to success of NDC Going from 4 to 3 network carriers US Airways long a maverick in distribution issues , 2001 web fares (Orbitz) full content agreement To the extent the maverick gets swallowed by AA chances increase that no one will break rank Chances of NDC success radically increases 45 Thursday, March 7, 13

77 Thursday, March 7, 13 Discussion

78 The End Of Transparency Testimony of Dan Kasper from Transcript of American Airlines Bankruptcy Hearing April 23, 2012 Proof of what would happen if pricing transparency were undermined. What price transparency refers to is the fact that with the advent of the internet and internet search engines, suddenly any -- anybody with a couple of key strokes could search fares quickly and inexpensively and find out what the lowest fair available was. The combination of the spread of low cost carriers and the ease of finding low fares had a dramatic effect on prices; that is to say, brought down prices pretty dramatically. [Mr.%Kasper%then%quan0fied%the%effects%on%fares%of%LCCs%and%price%transparency.] This exhibit shows what airline industry analysts called yield...so the cents in 1979 and the cents here are all calculated on the same 2011dollar. So it's -- it's real apples to apples comparison here cents per revenue passenger mile is basically cut in half over this period between 1979 and the end of Thursday, March 7, 13

79 Frequent Fliers, Prepare to Pay More nytimes.com Frequent Fliers, Prepare to Pay More MARCH 3, 2013 Airlines could soon start offering customized fares to travelers based on how regularly they fly, where they live and the kind of trip they are taking. The world s largest airlines have agreed to adopt a new standard for distributing airfare information that could significantly compromise the privacy of customers and allow carriers to charge travelers different prices for the same trip. Airlines, of course, already charge different fares based on when a ticket is purchased, whether a Saturday stay is included and so on, but they are now looking to go much further by seeking to differentiate among fliers based on personal characteristics. The new standard, which was agreed to at a meeting of the International Air Transport Association in October, will allow airlines to ask customers searching for airfares through travel agents or Web sites to first provide their names, frequent flier numbers, contact details and other information before presenting them with prices. A few airlines are expected to test this approach this year, and it could be widely adopted in a few years, according to the trade group. A majority of the group s 240 members, which include most American airlines though not Southwest, voted for the standard. 1 of 3 3/7/13 6:41 PM

80 Frequent Fliers, Prepare to Pay More Industry officials say the standard, which they call new distribution capability, is simply a way for airlines to better tailor their services to the needs of their customers. For instance, an airline might offer a package that includes free checked baggage, an aisle seat and a 10 percent discount to frequent fliers. And customers would be able to compare competing bundles from different airlines. They also say customers will still have the option of shopping anonymously for basic fares if they choose not to provide any information about themselves. It seems clear that the standard, as described by the group, could also be used to present higher fares to, say, a business traveler who airlines determine could pay more because she travels between New York and Dallas every week. Airlines will also have a big incentive to present much higher basic prices when customers shop anonymously to encourage them to provide more information about themselves in order to see special deals. The new pricing model comes at a particularly worrisome time, with mergers among airlines already reducing competition and pushing up fares. On many domestic routes Americans now have only one or two choices for nonstop service. Recently, American Airlines and US Airways announced a merger that would leave more than 70 percent of the passenger business in the hands of just four big airlines, down from five. And by adding fees for particular seats, bags, meals and other services, airlines have made it harder for customers to compare fares. Federal regulators have not yet studied the new standard. But the Department of Transportation has the authority to police unfair and deceptive practices, and it should demand safeguards, like limiting the amount of personal information airlines can require. So should the European Union, which has historically taken a 2 of 3 3/7/13 6:41 PM

81 Frequent Fliers, Prepare to Pay More tougher stand on privacy than the United States, and governments elsewhere. Regulators should also study whether the use of this new approach by most of the world s airlines could result in illegal collusion to raise prices for travelers based on their characteristics. Many airlines have struggled with high fuel costs and aggressive competition from low-fare carriers. They may be counting on the new airfare pricing standard to increase revenue and profits. It is hard to see how this approach could result in more competition or anything but higher costs for many travelers. Original URL: 3 of 3 3/7/13 6:41 PM

82 Report - IATA's New Distribution Capacity Takes Hit travelagentcentral.com Report - IATA's New Distribution Capacity Takes Hit March 4, 2013 By: Newswire Travel Agent The International Air Transport Association's (IATA) controversial New Distribution Capacity (NDC) proposal came under fire from an editorial in The New York Times, entitled "Frequent Fliers, Prepare to Pay More" on March 3. The editorial raised question about IATA's NDC and airline agreed standards, including costs to travelers and the privacy rights of passengers. The editorial urges U.S. and European regulators to study whether the use of this new approach by most of the world s airlines could result in "illegal collusion to raise prices for travelers based on their characteristics." The editorial asks if the NDC "could significantly compromise the privacy of customers and allow carriers to charge travelers different prices for the same trip." They note that NDC would 1 of 2 3/7/13 7:04 PM

83 Report - IATA's New Distribution Capacity Takes Hit differentiate among fliers based on personal characteristics. IATA's NDC has been questioned by industry groups including the Business Travel Coalition (BTC) who urged a Justice Department probe of the NDC policy after Congressional hearing last month. IATA's NDC program will be phased in starting this year. Read The New York Times editorial here. Original URL: 2 of 2 3/7/13 7:04 PM

84 Flight Prices to Get Personal? Airfares Could Vary Depending... business.time.com Flight Prices to Get Personal? Airfares Could Vary Depending on Who Is Traveling by BRAD TUTTLE MARCH 5, 2013 Travelers are annoyed by the very real possibility that they ll sit down on a plane next to someone who paid much less for the same flight. Potential changes to how flights are priced in the future could be even more annoying. Consumers like the idea of an even playing field: Everyone gets the same opportunity to snag a good price on a product or service. Getting a deal is generally a matter of perseverance and timing. The price is the price, and the dollar figure one sees has nothing to do with who you are or your history of purchases. A system that functions otherwise with personalized prices, causing some to pay more and others less for the same item, purchased at the same exact time strikes many as unfair. Consumers have had reactions ranging from outrage to mild they re-screwing-us-again aggravation when news has broken of such personalized or customized pricing. Three recent examples: Delta was apparently overcharging frequent fliers last year; Orbitz showed higher-priced hotels to Mac users; and the Wall Street Journal reported that Staples website varied in-store and online prices based on how close the shopper was to an Office Depot or OfficeMax. Now, according to a New York Times editorial, most of the world s big airlines have OK d a new pricing system, and the result is that passengers could be offered different fares depending on how regularly they fly, where they live and the kind of trip they are taking. Instead of fares rising or falling based on when the ticket is 1 of 3 3/7/13 6:40 PM

85 Flight Prices to Get Personal? Airfares Could Vary Depending... being purchased or whether the seat is in coach or business class, other more personalized factors will be incorporated, so that the results of your flight search could be much different than your business traveler neighbor. Such personalized shopping options are always presented merely as a way to give consumers what they want. The Times notes that industry officials say the system is simply a way for airlines to better tailor their services to the needs of their customers. And yet: It seems clear that the standard, as described by the group, could also be used to present higher fares to, say, a business traveler who airlines determine could pay more because she travels between New York and Dallas every week. Airlines will also have a big incentive to present much higher basic prices when customers shop anonymously to encourage them to provide more information about themselves in order to see special deals. The Business Travel Coalition (BTN), a consumer advocacy group, stated in a release that the new system, called Resolution 787, would negatively and significantly impact airline competition and would drive up airline prices for consumers. It also raises serious privacy concerns; before getting the price of a flight, you might be asked to provide personal info including but not limited to your name, marital status, nationality, and frequent flier status. The airlines will probably also be able to access your travel and purchase history, all of which may be used to justify offering you a higher fare than someone else, according to the BTN: Many of these items of sensitive personal information can be used very effectively to pinpoint, and extract higher prices from, those travelers who are likely to be less price elastic such as business travelers and travelers whose shopping and travel history demonstrate they do not regard connecting services as viable substitutes for non-stop services on particular routes or do not consider alternate airports serving the same area as substitutes for one another. The onslaught of fees has been the dominant story in the airline business over the past several years. Now that carriers are running out of fees to charge passengers, it seems as if they ve come up with a concept that travelers will likely find even more aggravating and unfair a pricing system that s biased by design. 2 of 3 3/7/13 6:40 PM

86 Frequent Fliers Might Pay More Read... inquisitr.com Frequent Fliers Might Pay More FullscreenClose Frequent fliers who don t have much flexibility may be singled out for higher prices, according to a briefing from the Business Travel Coalition (BTC), which examined the consequences of a quiet agreement among airlines to share information about travelers. According to BTC, the International Air Transport Association (IATA) met in October to reach an agreement among its 240 member airlines about how to price and market airfares going forward. According to BTC s reading of the new resolution, the member airlines will now be able to demand a large amount of information about a customer before they quote the price and the price could be adjusted higher if the airline thinks the customer has no choice but to pay it. I have located a copy of the IATA document, called Resolution 787, and the amount of information that the airlines may try to collect before they calculate your airfare could be staggering whether you re traveling for business or tourism, whether you have a travel agent, name, age, if you re married or not, nationality, your contacts, your frequent flyer number, your shopping and travel history, and whether you ve been willing to 1 of 3 3/7/13 6:42 PM

87 Frequent Fliers Might Pay More Read... purchase extras like a clubroom pass. And the list goes on. In other words, it looks suspiciously like the airlines have agreed that they have the right to collect a great deal of information that would allow them to figure out how much spare cash is burning a hole in your pocket. The New York Times shared BTC s concern in an editorial they published yesterday: It seems clear that the standard, as described by the group, could also be used to present higher fares to, say, a business traveler who airlines determine could pay more because she travels between New York and Dallas every week. Are frequent flyers themselves concerned? In an online discussion at Flyer Talk, a gathering place for frequent fliers, some posters claimed that airlines like Delta are already doing it. A poster called DLdweeb said: I start at Google Flights (or Kayak) and after I select my itin[erary] I keep that window open for a while. I then go to DL.com [the Delta airlines website], log in, and see if the same price is offered. If yes, I continue on DL.com. If no, I go back to the Google flights page and it will send me to the DL.com page and I m already logged in, and miraculously the lower fare is suddenly offered. In other words, Delta s site allegedly has figured out from the poster s computer cookies and shopping habits that this person is not going to be willing to pay the higher price. If the airline 2 of 3 3/7/13 6:42 PM

88 Frequent Fliers Might Pay More Read... thought the poster would pay more, the lower price might never be revealed. I might as well admit that someone tipped me off to this concept some while ago. I can t be certain because airfares do vary during the day, sometimes by a great deal, but I believe that I ve observed what DLdweeb described. Like some other frequent fliers, I usually clear the cookies on my computer before I start shopping, in order to give away the least amount of information to the airline. Will frequent fliers actually end up paying more if airlines are able to quote different prices to different people? It probably depends. Some people will continue to figure out small tricks to game the system, and those travelers will find lower prices. Others might not even guess they re being offered a higher price than the next guy and those frequent fliers will almost certainly pay more. Original URL: 3 of 3 3/7/13 6:42 PM

89 Airlines' new pricing plan could take frequent fliers for a ride, s... foxnews.com Airlines' new pricing plan could take frequent fliers for a ride, say critics by FOXNEWS.COM MARCH 8, 2013 Being a frequent flier is supposed to bring rewards, not penalties. But there s a growing concern by some in the travel industry that airlines are planning to offer customers individualized fares based on how regularly they fly and their best customers could end up paying the highest fares. The change in pricing structure is a result of a quiet resolution made in October between the International Air Transport Association (IATA) and its 240 member airlines. Airlines already base fares on factors such as the route, travel date and when the ticket was purchased. But according to a new pricing model, called the new distribution capability, airlines will soon present customized fares based on host 1 of 3 3/8/13 10:46 AM