BEFORE THE OFFICE OF THE SECRETARY U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. In the Matter of ENHANCING AIRLINE PASSENGER PROTECTIONS DOT-OST-2010-0140 JOINT RESPONSE OF AMERICAN AIRLINES, CONTINENTAL AIRLINES, DELTA AIR LINES, UNITED AIR LINES, AND US AIRWAYS TO REPLY COMMENTS OF INTERACTIVE TRAVEL SERVICES ASSOCIATION Communications with respect to this document should be addressed to: R. BRUCE WARK Associate General Counsel American Airlines, Inc. P.O. Box 619616, MD 5675 DFW Airport, TX 75261 (817 967-3812 bruce.wark@aa.com CARL B. NELSON Associate General Counsel American Airlines, Inc. 1101 17 th Street, N.W. Washington, D.C. 20036 carl.nelson@aa.com ANDREA FISCHER NEWMAN Senior Vice President Government Affairs Delta Air Lines, Inc. 1212 New York Avenue, N.W. Washington, D.C. 20005 ALEXANDER VAN DER BELLEN Managing Director Government Affairs & Associate General Counsel Delta Air Lines, Inc. 1212 New York Avenue, N.W. Washington, D.C. 20005 (202 842-4184 sascha.vanderbellen@delta.com HERSHEL KAMEN Vice President International, Regulatory and Policy United Air Lines, Inc. Continental Airlines, Inc. 1350 I Street, N.W. Washington, D.C. 20005 (202 289-6060 hershel.kamen@coair.com THOMAS NEWTON BOLLING Managing Attorney, Regulatory Affairs Continental Airlines, Inc. 1600 Smith Street, 15th Floor HQSLG Houston, TX 77002 (713 324-5606 thomas.bolling@coair.com HOWARD KASS Vice President - Legal Affairs US Airways, Inc. 1401 H Street, N.W. Washington, D.C. 20005 (202 326-5153 howard.kass@usairways.com November 17, 2010
BEFORE THE OFFICE OF THE SECRETARY U.S. DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. In the Matter of ENHANCING AIRLINE PASSENGER PROTECTIONS DOT-OST-2010-0140 JOINT RESPONSE OF AMERICAN AIRLINES, CONTINENTAL AIRLINES, DELTA AIR LINES, UNITED AIR LINES, AND US AIRWAYS TO REPLY COMMENTS OF INTERACTIVE TRAVEL SERVICES ASSOCIATION American Airlines, Continental Airlines, Delta Air Lines, United Air Lines, and US Airways hereby jointly respond to the reply comments submitted on October 28, 2010 by the Interactive Travel Services Association ("ITSA". ITSA members include global distribution systems (GDSs used by travel agents (Sabre, Travelport, and Amadeus as well as online travel agent (OTA websites used by consumers (Expedia, Travelocity, Orbitz, and others. 1 ITSA s reply comments seek government intervention on the side of GDSs against carriers, purportedly in the interest of protecting consumers who allegedly suffer from a lack of information on optional fees such as charges for checked baggage, meals and snacks, seat selection, and other products that carriers make available to their customers. ITSA s premise is untrue. As discussed in the comments of the Air Transport Association previously filed in this docket, and in our own prior comments, carriers support transparency of fees and provide robust disclosure of optional fee information to consumers outside of GDS channels. ITSA is not interested in consumer welfare, but in preserving the bargaining power of its GDS members by taking away any leverage that carriers might have in 1 ITSA s reply comments were filed more than a month after the close of the comment period; if ITSA s reply comments are accepted, the carriers joint response should also be accepted in the interest of a complete record.
Page 2 negotiating lower booking fees in exchange for direct access to optional fee information. It is crucial to uphold the purposes of the Department s deregulation of GDSs in 2004 by allowing airlines to retain a measure of bargaining power in negotiating with GDSs, resulting in substantial benefits that will be realized by consumers. While the airlines fully support disclosure of optional fee information to consumers, there is no need for the Department to further enhance GDS market power in order to accomplish this objective. Intervening in the commercial relationship between airlines and GDSs would undermine DOT's goals in deregulating GDSs, harming rather than advancing the interests of both consumers and competition. The supra-competitive GDS booking fees paid by the major network carriers add billions of dollars to the industry s costs. Since this cost must ultimately be reflected in the price of a ticket, reducing these burdens on carriers and consumers should be a matter of great concern to the Department. I. CARRIERS SUPPORT FULL AND TRANSPARENT DISCLOSURE OF ANCILLARY FEE INFORMATION TO CONSUMERS ITSA s accusation that carriers are hiding their fees is simply not true. The issue here is not transparency. Airlines agree that they should provide full information on optional fees directly to consumers, and they are all doing so through their websites. Carriers are in the business of selling air transportation, as well as optional products and services, and have every motivation to make information on these options readily accessible to consumers. Airline websites provide an excellent, cost-free way to provide information and booking capability on optional services and fees. Disclosure will be further enhanced through other aspects of the NPRM, such as requirements that e-ticket receipts list ancillary fees and that website home pages provide a link directly to complete information on such fees. In addition, carriers are developing Direct Connect systems that will enable travel agents to bypass GDS channels, reducing carrier costs and creating new efficiencies that
Page 3 will benefit consumers. Ancillary fee schedules are widely and readily available through multiple channels. 2 Masquerading as a consumer advocate, ITSA argues that customers who use travel agents to book tickets deserve "the same robust and bookable fee information as is provided on airline websites." While acknowledging that "robust" fee information is available on carrier websites, ITSA nonetheless accuses carriers of engaging in "a nondisclosure strategy" by "withholding" information from customers, "keeping fees hidden," and "depriving" consumers of the ability to comparison shop. Such claims are entirely without merit. Airline fees are not hidden. Competition for optional services is intense, as illustrated by Southwest Airlines bags fly free advertising campaign. Affinity card programs offer customers savings on checked baggage charges, and frequent flyers are rewarded through well-publicized loyalty programs with waivers of checked baggage fees and other benefits. Carriers do not want any of their customers to be surprised by charges for optional services, and many carriers offer discounts to customers who purchase these extra services, such as checked baggage, from their websites in advance. The airlines policies of consumer education, widespread publication, and advance discounting for optional services are all contrary to ITSA s unfounded accusations of hidden fees. There are a host of other optional products that customers might want to purchase to enhance their travel experience, including a day pass to a club lounge, a gourmet lunch box, a choice seat, onboard Wi Fi, and premium video and games. These represent important new revenue sources for carriers, and they have a strong incentive to present and promote these products (including prices to their customers. This unbundling of products is exactly 2 In addition to the efforts of the airlines to ensure that customers understand all the possible costs for their travel, the Department has worked to ensure transparency and full disclosure through the use of industry meetings and guidance letters to ensure that airlines fully understand the importance the Department places on transparency of cost for air travel to consumers.
Page 4 what customers have pushed for in a variety of industries and allows customers the option of purchasing those products of most value to them. The airline industry and the market for optional products is evolving toward the sales model pioneered by Dell Computer and other technology companies. The basic computer is available for a certain fixed price. But if the customer wants options and extras such as more memory, a larger display, or a faster processor, those can be purchased as add-ons. Today, carriers choose to make their basic product available through GDSs. If GDSs want to play a role in the emerging market for optional fee products, they will need to negotiate with carriers and lower their booking fees in return. Carriers are entitled to decide how to market their services and optional products and reward distributors that are fair and efficient. GDSs are neither. Compelling airlines to provide their optional fee content to GDSs would harm - not help - consumers by raising airline distribution costs, and would directly contradict the Department s longstanding public policy affirmatively allow[ing] each airline to decide how to distribute its tickets (Dismissal of ASTA Complaint, Order 2002-9-2, DOT-OST-1999-6410, September 4, 2002, p. 24. The Department should reject ITSA s demand for government intervention in contract negotiations to require carriers to provide their ancillary fee schedules and bookable capability to GDSs without concessions from GDSs on supra-competitive booking fees. A. Travel Agents, Including Online Travel Agents, Have Access to Carrier Fee Information Online travel agents (and ITSA members Expedia, Orbitz and Travelocity are not GDSs, but they are beholden to ITSA s GDS members because kickbacks from high-cost GDS booking fees are used to subsidize OTA operations and profitability. Moreover, GDSs own Travelocity, Orbitz and CheapTickets. Carriers can provide the same content to OTAs through direct connect technology and bypass GDSs. However, because GDSs give rich incentive payments to OTAs for using their systems (or benefit directly through GDS
Page 5 ownership of OTAs, OTAs have no incentive to use lower cost options. Carriers want to provide optional fee information to travel agents, but should not be compelled to do so through high cost GDS channels. Whether or not OTAs are accorded bookable functionality for products now sold exclusively through carrier websites or at the airport is an appropriate matter for commercial negotiation and will depend on whether OTAs are willing to use more efficient and lower cost technology provided by the carriers. In any event, there is no confusion today about the existence of optional fees for services sold through OTAs. Expedia discloses at the outset of the booking process that "prices do not include baggage fees and other fees charged directly by the airline." This clickable link calls up a detailed "airline fee chart" which invites customers "to find out who's charging what. From baggage handling to seat selection to food and beverages -- know additional flight costs before you book." The chart compares the cost of first checked bag, second checked bag, preferred seat selection, beverage/snack, oversize/overweight bag, and travel with pet and unaccompanied minor. The information is provided for 15 U.S. domestic carriers and 14 international carriers. In addition, a view policy link is provided for each carrier which takes the customer directly to that carrier's website. Orbitz has a prominent link at the beginning of the booking process disclosing that additional baggage charges may apply. This link, when clicked, calls up a chart with information on domestic and international baggage fees (checked and carry-on and snacks/meals for some 70 airlines. Travelocity discloses that airline bag fees and fees for other optional services may apply. This clickable link leads to a table of "airline fees" inviting customers to "compare fees before you buy. Planning to check your luggage? Here's a helpful chart showing the fees many airlines charge for the first and second checked bags. Be sure to factor in these extra costs when comparing flight prices." Travelocity s chart provides information on first and second checked bag fees for domestic and international itineraries as well as view policy links that connect customers directly to the websites of some 36 airlines.
Page 6 ITSA should not be heard to complain that carriers are "withholding" information. Indeed, the real interest of ITSA s GDS members (and ITSA s OTA members which benefit from GDS incentive payment kickbacks is not in the information itself, but in a government directive that ancillary services be bookable through GDSs. That would be directly at odds with the core principle that the Department recognized in the 2004 final rule deregulating CRSs that "airlines should be free to choose to offer their webfares, or other types of fares, only through their own websites, without being obligated by system contracts to make them available through other distribution channels. Airlines can use their control over webfares to win better terms for CRS participation." (69 Fed. Reg. 976, 1006, January 7, 2004. Unfortunately, the only meaningful relief that carriers have achieved from excessive GDS booking fees was in the 2004 round of negotiations when carriers traded GDS access to webfares for an approximate 30% reduction in GDS fees. GDSs (and their captive agents are now pulling out all the stops to avoid a further negotiation over content which could lower GDS booking fees extracted from carriers (and ultimately consumers. As noted above, ITSA s reply comments state that customers using travel agents (and thus GDSs "deserve the same robust and bookable fee information as is available on carrier websites." But rather than bargaining with carriers on ancillary fees, GDSs want the government to tip the scales on their behalf. That would be a very bad outcome for consumers. If GDSs are required to engage in contract negotiations, carriers will have a measure of leverage in seeking lower GDS booking fees in exchange for information on optional fees. B. Commercial Incentives of GDSs Are Not Aligned with the Interests of Consumers ITSA has sought to portray itself as a friend of consumers. The Department should not be fooled by ITSA s posture. ITSA represents GDSs that act as intermediaries between airlines and their customers. Unlike airlines or travel agents (including OTAs such as Expedia, Orbitz, and Travelocity, GDSs do not sell airline tickets. So when GDSs claim
Page 7 they are looking out for consumers, the reality is they have no vested stake in consumer welfare. Customers of GDSs are not consumers looking for an inexpensive ticket to go on vacation or to visit family. Rather, the primary customers of GDSs are large, sophisticated travel agencies that generate billions of dollars in travel sales through corporate travel accounts. The 10 largest travel agencies account for approximately 75% of GDS usage. Sophisticated corporate customers booking through large agencies are well informed of airline policies and fees. Infrequent travelers hunting for bargain fares can readily find robust fee information on the web, both from the airlines themselves and from travel agents to whom the airlines are willing to provide fee information directly. II. HIGH GDS BOOKING FEES ARE HARMING CONSUMERS AND AIRLINE COMPETITION Because of their market power, GDSs have continued to raise booking fees despite deep reductions in computing costs. In 1980, one gigabyte of memory cost about $700. Today one gigabyte costs 10 cents. Yet instead of going down, booking fees have continued to go up. While ITSA claims that the carriers' position on ancillary fees is adverse to consumers, what is really harmful to consumers are the supra-competitive booking fees exacted from carriers (and ultimately from consumers by GDSs. Carriers pay supracompetitive booking fees to GDSs because they have limited leverage to achieve lower booking fees. At $3.10 per segment booked (an approximation of current industry costs, a roundtrip itinerary with two segments in each direction costs $12.40 in GDS booking fees. This results in a substantial portion of ticket revenue being diverted from the transaction between carriers and their customers to GDSs. And because GDSs are paid for each segment booked, as opposed to flown, their take is even greater. Excessive GDS fees distort airline competition because some LCCs most notably Southwest, the largest U.S. domestic carrier have opted out of GDS distribution.
Page 8 Southwest evolved as a low cost carrier but now, because of its sheer size and presence, corporate customers demand that travel agents provide access to Southwest s fares. Travel agents can view Southwest s fares in GDSs, and use GDS peripheral services for accounting, but all bookings must be made through Southwest.com. Southwest thus avoids GDS booking fees and pays only a token GDS processing fee of approximately $1 for the entire transaction (with no segment booking fees. It is no wonder that Southwest supports mandatory provision of carrier content to GDSs when, under the example above, the result is a 12--fold cost burden exported onto legacy carriers that compete with Southwest. III. THE GDS MARKETPLACE IS STRUCTURALLY FLAWED AND NON-COMPETITIVE From 1985 to 2004, GDSs were highly regulated by DOT. Although these regulations served policy objectives at the time, they also had significant unintended consequences and created a market defined by GDS market power and supra-competitive booking fees. In deregulating the GDS industry, both the Department and DOJ expressed significant concerns about the state of GDS markets. A. DOT And DOJ Found That GDSs Exercised Market Power Over Airlines Leading To Booking Fees At Supra-Competitive Levels DOT Final Rule on CRS deregulation (69 Fed. Reg. 976, 990, January 7, 2004: We continue to believe that the systems fees exceed competitive levels.... We have not seen evidence that the systems fees generally respond to market forces, although two of the four have made modest concessions in exchange for access to airline webfares. We find that the systems continue to have market power over airlines, as argued by the Justice Department; that there is some potential for conduct by the systems that could prejudice airline competition (most notably the sale of display bias; and that systems could engage in practices that could unreasonably preserve their market power. (Id. at 986. DOJ Comments (DOT-OST-1997-2881, June 9, 2003: The airlines CRS divestitures leave unaffected the incentive and ability of CRSs to fully exercise their market power in nonstrategic ways (p. 21 Although airline bargaining power has not in the past been sufficient to produce competitive booking fees, bargaining power could increase if their ability to shift sales
Page 9 to the Internet and other alternative channels continues to increase. DOT should assess, after some reasonable period, whether the alternative distribution channels have continued to dissipate CRS market power. (Id. at 21-22. B. DOJ And DOT Identified Misaligned Incentives As A Fundamental Problem In The Market DOT Final Rule: Airlines have generally been unable to persuade travel agencies to use one system rather than another. If they could, they would have some bargaining leverage against the systems. Airlines could then shift business to systems offering better terms for airline participants and away from systems offering poorer terms. Because travel agencies do not pay booking fees, they have no direct incentive to use the system charging the lowest fees. The record suggests, in fact, that the incentive payment programs used by the systems encourage travel agencies to choose the system that is the most expensive for participating airlines. The systems then obtain subscribers typically by offering to give them bonus payments. The revenues used for those incentive payments come from the fees paid by participating airlines (and to a smaller extent by other travel suppliers. (69 Fed. Reg. at 989 DOJ Comments: DOT has not proposed a rule to remedy non-strategic supracompetitive pricing by CRSs. In the past, DOJ advocated a zero price to constrain both the strategic and nonstrategic exercise of CRS market power over price. We pointed out the advantage of a structural rule, which relies on properly-aligned incentives (supra, p. 3. Travel agents and CRSs both benefit from the supra-competitive booking fees generated under the current structure of the market. (supra, p. 29 C. DOJ And DOT Concluded That Mandatory Participation Requirements Had Eliminated Competition Among GDSs For Airline Content And Further Enhanced GDS Market Power DOJ Comments: Practices prohibited by the mandatory participation rule are potentially efficiency-enhancing. If an airline dealing at arms-length with its CRS suppliers were free to reduce its level of participation in some systems, or to induce agents to use a low-cost system, the airline s bargaining power would be enhanced. The airline would therefore be in a better position to negotiate lower booking fees or drive booking toward lower cost outlets (supra, p. 23 A low-cost distribution channel on the Internet may not offer the same level of functionality as a CRS, but may nonetheless be able to attract usage by travel agents if it has preferred access to desirable fares and inventory from a significant number of airlines (supra, p. 26 DOT Final Rule: Our notice of proposed rulemaking predicted that the airlines control over access to their webfares could enable them to obtain better terms for system participation (69 Fed. Reg. at 989.
Page 10 We believe that the airlines ability to change their participation levels and their control over access to webfares is reducing the systems market power. Overall, however, we find that the systems currently still have market power over most airlines, although the continuing changes in airline distribution, particularly the growing importance of the Internet for airlines (Id. at 990 Unfortunately, more than six years after CRS deregulation, the GDS market remains neither competitive nor efficient. The marketplace for GDS services continues to be structurally flawed as GDSs still pay kickbacks to travel agents to generate bookings and airlines still pay artificially high booking fees. Each GDS is a monopoly unto itself. Carriers that rely upon travel agencies for the distribution of their product must participate in each system, as for example participation in Sabre is not a substitute for participation in Galileo. The persistent ability of GDSs to charge supra-competitive booking fees is not the outcome that DOT expected when it deregulated the GDS industry in 2004. Prior to deregulation, the U.S. GDS market was divided among four systems, none of which had more than a 50% share, and several emerging GDSs promised to reinvigorate competition. Yet by 2009, the U.S. market had transformed into a duopoly, with Sabre accounting for 60% of U.S. point-of-sale bookings and together with Travelport (which owns both Galileo and Worldspan accounting for over 90%. IV. ACCESS TO CONTENT IS THE BEST TOOL THAT CARRIERS HAVE FOR NEGOTIATING LOWER BOOKING FEES In its 2002 NPRM on CRS deregulation, 67 FR 69365, 69380 (November 15, 2002, the Department found that [t]he growing importance for many travelers of webfares, however, could give airlines some bargaining leverage. Airlines might obtain leverage by selectively giving systems access to their webfares (and perhaps corporate discount fares according to the relative attractiveness of each system's prices and service quality. Just as the Department favored the ability of airlines to gain leverage over GDSs by selectively giving systems access to their webfares, so should the Department recognize the importance of access to ancillary fee content as a matter for negotiation between the
Page 11 parties. DOT s final rule recognized the importance of increasing the bargaining leverage of carriers against GDSs, especially through negotiations over content: DOT Final Rule: We continue to believe that the systems fees exceed competitive levels for the reasons set forth in the notice of proposed rulemaking. We have not seen evidence that the systems fees generally respond to market forces, although two of the four systems have made modest concessions in exchange for access to airline webfares (69 Fed. Reg. at 990 We have found that the systems continue to have some market power over most airlines, as explained above, although we expect that power to be diminished by the on-going developments in airline ticket distribution. Airlines should have some bargaining power against systems if each airline can choose which services and fares will be saleable through each system and the level at which it will participate in each system (Id. at 1005 We saw a risk that systems could try to take away the airlines control over access to their fares, especially webfares, which airlines could otherwise use as leverage to obtain better terms from the systems (Id. at 1006 Airlines should be free to choose to offer their webfares, or other types of fares, only through their own websites, without being obligated by system contracts to make them available through other distribution channels. Airlines can use their control over webfares to win better terms for CRS participation (Id. More importantly, the [mandatory participation] rule limits the ability of owner airlines to bargain for better terms with the systems. If such an airline could credibly threaten to reduce its participation level in a system, it would have some leverage for obtaining lower fees or better service. The rule eliminates that option. As the Justice Department states, if the rule is eliminated, the airline would therefore be in a better
Page 12 position to negotiate lower booking fees or to drive bookings toward lower-cost outlets (Id. at 1009 V. DOT CAN PROMOTE THE DEVELOPMENT OF LOWER COST ALTERNATIVES TO GDS S BY REFRAINING FROM RE-IMPOSING WHAT WOULD AMOUNT TO A MANDATORY PARTICIPATION RULE FOR AIRLINE CONTENT The Department should encourage the development of new, lower cost alternatives and refrain from further empowering GDSs by giving them mandatory access to airline content. Direct Connect and other options that have the potential to provide relief to carriers and consumers could be defeated if GDSs prevail in this proceeding. Rather than welcoming new ways to get information into the hands of consumers, GDSs have denied third party technology companies the preferred provider status GDSs unilaterally require to develop products that they deem compatible with GDS and travel agent systems. GDSs are at the center of most travel agency IT systems, and GDSs have used this position to impede the development of peripheral IT systems, such as user interfaces or customer service or accounting systems. VI. CONCLUSION For the foregoing reasons, the Department should decline to mandate the provision of optional fee information by carriers to GDSs. Access to content is one of the few bargaining chips available to compel GDSs to reduce their unreasonably high fees. By requiring GDSs to negotiate for optional fee data, the Department will be acting in the interests of consumers who stand to benefit from lower fares that would be made possible by lower GDS booking fees.
Page 13 Respectfully submitted, CARL B. NELSON Associate General Counsel American Airlines, Inc. ALEXANDER VAN DER BELLEN Managing Director Government Affairs & Associate General Counsel Delta Air Lines, Inc. THOMAS NEWTON BOLLING Managing Attorney, Regulatory Affairs Continental Airlines, Inc. HOWARD KASS Vice President - Legal Affairs US Airways, Inc. November 17, 2010