BEFORE THE UNITED STATES DEPARTMENT OF TRANSPORTAION WASHINGTON, D.C. Notice of Proposed Rulemaking 14 CFR Parts 234, 244, 250, 253, 259 and 399 Docket No. DOT-OST-2010-0140 Enhancing Airline Passenger Protections RIN No. 2105-AD92 COMMENTS OF FARELOGIX, INC. Communications with respect to this document should be addressed to: James K. Davidson President & CEO Farelogix, Inc. 760 NW 107 Avenue, Suite 300 Miami, FL 33172 jdavidson@farelogix.com 305 222-5401 Dated September 23, 2010 Comments of Farelogix Inc. Page 1
COMMENTS OF FARELOGIX, INC. Farelogix, Inc., provider of distribution and management technology solutions to travel suppliers and travel agencies, submits the following comments to the specific text quoted below: The Department is also considering requiring that carriers make all the information that must be made directly available to consumers via proposed section 399.85 available to global distribution systems (GDS) in which they participate in an up-to-date fashion and useful format. This would ensure that the information is readily available to both Internet and brick and mortar travel agencies and ticket agents so that it can be passed on to the many consumers who use their services to compare air transportation offers and make purchases. We invite comments on this proposal, including the present ability of carriers to meet this requirement, the potential costs of the requirement, including costs of developing new software or systems to deliver such information to GDS s, if necessary, and the benefits of this requirement. Notice of Proposed Rulemaking dated June 2, 2010, page 43. I. OVERVIEW The proposed rule under section 399.85 is designed to foster full product and pricing transparency for the burgeoning variety of airline products and services. Farelogix agrees with the disclosure and transparency goal contained in the proposed rule, but opposes the additional requirement mandating distribution through the GDS unless this language also addresses (a) the pricing process, to allow for individual traveler customization, and (b) the time constraints imposed by adding features through the GDS channel. Specifically, Farelogix proposes: 1. That additional language be inserted by the Department to clarify that useful encompasses the notion of: i) the ability for the GDS, or any distribution system, to provide the airline with traveler authentication as part of, either prior to, or integrated with, the pricing process; ii) the ability by the airlines to submit this data in formats similar to the formats and methodology already invested in and utilized by the airline in support their various airline direct channels; iii) the option for the airlines to manage and control their own internal or third party pricing system and, at the option of the airline, the GDS to connect directly with the airline pricing system for airline pricing options and related documentation; and (iv) the requirement for the GDS to accept airline pricing detail in a format determined by the airline, without mandating that the airline utilize any one particular pricing submission methodology; and 2. A requirement that (i) allows the airlines to proceed in offering new and flexible functionality directly to consumers through airline websites and travel agencies, even if the same functionality is not available through the GDS channel until a later date, or (ii) requires that GDSs utilize available existing third-party tools, practical airline requested pricing workflows, and alternative airline connectivity technology if they are otherwise unable to meet the deadlines designated by the Department. Comments of Farelogix Inc. Page 2
Farelogix respectfully requests the Department to take note of the following points: 1. Airline distribution technology and processes already exist, and are in use today, that allow airlines to provide the type of consistent and desired level of disclosure and transparency needed for consumers to make informed shopping, comparison, and buying decisions about airline products and services across both the airline direct (airline.com) and indirect (travel agency) channels. The technology that is already available to the travel agency channel can be accessed in two ways: (1) via a connection directly between the travel agency and the airline, or (2) via third-party workflows that are available to the GDS from third party technology providers (including Farelogix) for free. The third-party workflows available today to the GDSs have been rejected by those same GDSs, presumably because the implementation of those workflows begins to erode the power of the GDS over the pricing of airline products. This issue lies at the crux of the current lack of distribution of the variety of value-added options through the GDS channel and will be further discussed below. 2. In addition to readily available third-party products, the GDSs themselves have publicly announced that they have already made required investment in new travel agency selling systems (Amadeus One, Sabre RED, Travelport Universal Desktop) to accommodate the selling of airline bundled and optional services. However, the most important airline requirement - - the provision of traveler authentication details to the airline before an airline offer/price is presented to the customer in order to allow the airline to provide the appropriate pricing back to the GDS for display, sale, and documentation - - is the one that the GDSs have failed to incorporate into their functionality. Although developing this feature is relatively simple from a technology perspective, this so-called traveler authentication issue appears to represent a threat to the current GDS commercial model. A new mandate that does not attempt to address this issue will only serve to stifle innovation, consumer choice and lowest-cost alternatives. 3. There is a very real commercial benefit to consumers that can be gained by addressing the issues posed here. The fees charged by GDSs for booking traveler reservations, which do not provide the personalization or consumer choice which is the subject matter of these rules, are significantly higher than the cost of providing a more customized reservation through the airlines own websites or to travel agencies through alternative distribution technologies, including the fees charged by third-party technology providers. A simple mandate to provide these optional services through the GDS, as the Department currently contemplates, will reinforce the market power of the GDSs and further limit the ability of other technology players in the market to compete, thereby helping to ensure that the higher cost structure remains in place. Alternatively, the Department can add to its mandate certain clarifying conditions, such as the ones set forth above, that can preserve competition, foster innovation, and drive down prices for the consumer. The Department should embrace this timely opportunity to inject competition in the marketplace for the benefit of consumers by eroding the barriers to entry that Comments of Farelogix Inc. Page 3
have historically protected the GDS market power and have discouraged product innovation. II. BACKGROUND The unbundling of services and associated fees that the Department is attempting to address by means of this NPRM results from the ongoing efforts of the airlines to differentiate themselves to consumers by rewarding customer loyalty, improving customer service, providing low-cost options, and maximizing revenue opportunities from value-added items. This differentiation of their products and services is critical for them to remain competitive and viable while providing consumers with greater choice in their travel decision-making. Allowing consumers to pick and choose from a broad array of travel amenities enables them to make decisions on which of those items, if any, provide real value to them and gives them a greater degree of influence over the price they are willing to pay for travel. These options, which are based upon the optimal requirements of the individual traveler (such as airline departure schedule, airline loyalty program status, seat selection options, checked or no checked bags, etc.), provide the consumer with the ability to select and pay for only those services that add value to his or her trip experience. This differentiation became possible with the advent of consumer-direct channels, i.e. the airline websites. Prior to this phenomenon, airlines distributed their products primarily through GDSs or through their own reservation centers. The extent of this shift of distribution is extraordinary: Twenty-plus years ago, approximately eighty percent (80%) of all point-of-sale U.S. airline ticket purchases were made through the indirect or travel agency distribution channel, with the remaining percentage through airline call centers. 1 Today, after nearly a decade of airline investment in new lower-cost and more efficient and flexible airline distribution technology systems, the airline direct channel and the travel agency GDS-powered channel in the U.S. each represents about fifty percent (50%) of the total airline ticket distribution. This huge shift in buying patterns demonstrates a desire by consumers to seek the optimal airline product that is specifically tailored to their needs, a choice that they increasingly viewed as unattainable through the traditional GDS-powered travel agency channel. Initially, both the airline and the GDS pricing systems were developed using what today is viewed as a relatively simplistic algorithm where the only product differentiators were schedule (frequency and time of departure/arrival) and the actual price of the ticket. 1 The airlines indirect distribution channel travel agencies almost exclusively utilized distribution technology systems provided to travel agencies from one of the then-four Global Distribution Systems (GDSs) System One, Sabre, Worldspan, and Apollo. (Today there are only three GDSs, as Worldspan and Apollo have merged and Amadeus purchased SystemOne. The global market share of the GDSs is basically evenly split at one-third each.) Comments of Farelogix Inc. Page 4
While this schedule and price differentiation allowed for efficient shopping and comparison, it also created a general airline product commoditization situation, forcing the airlines to continually compete on price alone. History has clearly shown that the airline industry, and generally speaking any industry, that must compete on price alone perpetuates, at best, a marginal business model. Combined with the high volatility and unpredictability of airline fuel prices, airline profitability and sustainability has been a constant challenge. As technology improved, the airlines realized they needed more sophisticated and flexible pricing and distribution systems and began heavily investing in their own direct distribution channel: the airline.com websites. Over time, the airlines have been able to forge successful airline-consumer commercial relationships through the customer buying experience on the airline websites. As a result, they have seen the need to develop these relationships via the travel agency GDS-powered channel and have attempted to have the GDSs adapt to their new requirements with limited success to date. The reason for this lack of success is less about with technological ability and is more an issue of control. With the advent of frequent-flyer programs and the development of optional products and services (such as one-day airline club admission), the airline product has evolved from a very limited fixed-price bundled product to a collection of fares and services that can be mixed and matched according to the needs of the individual customer, the available inventory of options at any point in time, and the overall status identification of the traveler. These traveler identification features include his/her airline frequent-flyer status, corporation identity, and travel agency identity. Under the current GDS distribution model, the GDS controls the price and product that is generated and offered to the consumer in what is often referred to as an anonymous traveler sale, where the airline is unaware of who the traveler is before the airline product is offered and sold. Indeed, the GDSs can and do control what airline product features they offer in any market. 2 The reluctance to give up this pricing control is what severely limits the options that can be presented to consumers via the travel agency GDS-powered channel. GDSs view this control as key to preserving their market power over agencies and airlines, even though the anonymous selling process is a dated model and is no longer relevant to either the airlines or the consumers. Since the GDSs were not either able or willing to accommodate the distribution needs of the airlines or the consumers due to technology limitations and/or the desire to protect an existing commercial distribution and control model, airlines had little alternative but to begin to invest in alternative distribution technologies offered by third parties such as Farelogix, ITA Software, Datalex, Open Jaw, PASS Consulting, and others. It was quickly determined that these third-party technology companies could deliver lower-cost distribution technology that met the needs of the airlines, consumers, and travel agencies, 2 In 2008, Air Canada made the commercial decision to remove some selected AC airline content from the Sabre GDS, all within the apparent contractual rights of both parties. Sabre immediately responded by restricting the display and sale of all Air Canada business class and full fare economy fares in the US market resulting in a significant loss of revenue for Air Canada. Comments of Farelogix Inc. Page 5
both brick-and-mortar and online. Some even offered these distribution technology products as open source and for no cost. GDSs, however, are unwilling to work with these third-party technology providers in adding the functionality required by the airlines. In addition to rejecting the implementation of traveler authentication features, the GDSs engage in alleged anticompetitive practices that limit or block the adoption of these low-cost distribution technologies by travel agencies through onerous contract terms, new convenience fees, or reduced travel agency incentives paid by the GDSs to the travel agency if the travel agency decides to invest in and utilize this new technology to better meet the needs of their customers. 3 III. COST DIFFERENTIAL CAN SIGNIFICANTLY IMPACT CONSUMERS While the proposed rulemaking focuses primarily on transparency and disclosure, it is important to understand that there is a significant cost differential between a reservation booked through a GDS and a reservation booked in an airline website. Historically, airlines pay the GDS a distribution transaction fee, normally called a segment fee, defined as a leg of travel, such as a one-way flight from Chicago to Miami. A round-trip from Chicago to Miami utilizing two direct flights would represent 2 segments. Today, on average, the GDSs charge the airlines anywhere from $4 to $5 per segment for distribution services. Using a national average of 2.5 segments per trip, the cost charged to airlines by the GDSs runs from $10 to $12.50 per ticket. Alternatively, the per ticket cost to airlines when using their own websites, including the cost of third-party distribution technology, is, on average, $2 to $3, representing a savings of 70% or more. With approximately 200 million tickets generated through the GDS channel in the US, this represents a cost of over $2 billion in segment fees paid by airlines to GDSs in the US alone. The cost of generating those same tickets through the airline websites or travel agencies utilizing lower-cost distribution alternatives would be less than $600 million, representing a savings of over $1.4 billion. The ability to achieve even a portion of these savings can provide significant cost advantages to the airlines that can easily translate into potential cost savings to consumers. It is evident to even a casual observer that protecting those significantly higher revenues is of paramount importance to the GDSs, and is the driving force behind their refusal to implement many of the changes requested by the airlines. In fact, there is compelling evidence of marketplace conduct by the GDSs to support the conclusion that they utilize their GDS system connectivity as a bottleneck to exclude competition and preserve their market dominance. More importantly, the difference in costs should serve to demonstrate clearly to the Department that the proposal it is contemplating has serious implications beyond the issues of transparency and choice and can lead to unintended and negative consequences on consumers 3. 3 Perpetuating this market power of the GDSs would appear to contravene the relevant antitrust statutes (Sections 1 and 2 of the Sherman Act which deal with restraint of trade and monopolization). Comments of Farelogix Inc. Page 6
IV. NEW CONDITIONS REQUIRED In light of the foregoing, Farelogix recommends that at least two conditions be placed on the Department s proposal to mandate that the carriers provide the specified information to GDS in an up-to-date and useful format. 1. Process As noted above, any distribution technology that does not allow unique and dynamic airline product differentiation based upon an ever-increasing number of attributes and variables, including traveler authentication before a price/offer is generated, will ultimately commoditize the airline products and threaten the airlines very existence as competitive and viable business entities. Any requirement for disclosure and transparency should not be transformed into a mandate for airlines, travel agencies, and consumers to utilize and propagate the specific distribution technology, commercial model or workflow process currently utilized by the GDS channel. Airlines and travel agencies should have the right to support any number of distribution technology solutions as long as they meet the intended results for disclosure and transparency. The useful format language utilized by the Department would give unnecessary impetus to the GDS to preserve the status quo as useful. Therefore, as noted above, Farelogix proposes that additional language be inserted by the Department to clarify that useful encompasses the notion of: i) the ability for the GDS, or any distribution system, to provide the airline with traveler authentication as part of, either prior to, or integrated with, the pricing process; ii) the ability by the airlines to submit this data in formats similar to the formats and methodology already invested in and utilized by airline in support their various airline direct channels; iii) the option for the airlines to manage and control their own internal or third party pricing system and, at the option of the airline, the GDS to connect directly with the airline pricing system for airline pricing options and related documentation; and (iv) requires the GDS to accept airline pricing detail in a format determined by the airline and does not require the airline to participate in any one particular pricing submission methodology. 2. Timeliness Historically, there has been a significant time lag in the amount of time it takes an airline (whether directly or through third party technology providers) to develop new features for their own websites and the amount of time it takes a GDS to do the same. This can be due to the difficulty in developing enhancements within the GDS technological structure, or it can simply be posturing by the GDSs in order to maintain greater control over competing channels. Innovation in the travel agency channel has already fallen well behind the innovation found in supporting the consumer-buying experience on most airline websites today. This innovation gap is only likely to increase if flexibility and creativity become controlled only by what the GDS systems are capable of doing on a timely basis. Accordingly, Farelogix recommends a requirement that (i) allows the airlines to proceed in offering new and flexible functionality directly to consumers Comments of Farelogix Inc. Page 7
through airline websites and travel agencies, even if the same functionality is not available through the GDS channel until a later date, or (ii) requires that GDSs utilize available existing third-party tools 4, practical airline requested pricing workflows, and alternative airline connectivity technology if they are otherwise unable to meet the deadlines designated by the Department. V. CONCLUSION Airlines, travel agencies, and even consumers (through the use of mobile applications and social websites), are making investments in distribution technologies that will meet the ongoing demand for choice, product options, price transparency, and provide an efficient transaction process for airfare shopping, comparison, purchase and fulfillment throughout the life-cycle of a consumer airline travel experience. Unless the issues of process and timeliness as addressed above are adequately addressed by the Department in this rulemaking procedure, the mandate to distribute these value-added options through the GDS will only serve to eliminate any leverage the airlines may have in providing consumers with innovative, value-added products. If forced to distribute, price, and display their airline products in a way defined solely by the GDS, the impact of the new rule could easily result in providing very limited (or no) selling and buying choices, product and price transparency, or innovation opportunities for airlines, travel agencies, and consumers certainly not the intended results of the proposed rulemaking. Distribution technology competitors to the GDSs are already almost extinct, with no new entrants in sight, leaving innovation and new development in the hands of a very limited number of smaller players. The Department should carefully consider the unintended but likely consequences of promulgating rules that do not result in improved airline product choice and transparency, but rather the strengthened monopolistic market strong-hold by the three GDSs and the perpetuation of a high-cost, and outdated airline distribution system. Respectfully submitted, Farelogix, Inc James K. Davidson President & CEO 4 For examples of how Farelogix and our airline and travel agency customers can and are already easily and cost-effectively supporting transparency, please see www.farelogix.com/full-transparency.php. There is also an airline-developed set of development standards to support this level of product and pricing transparency available for free to any third party, including the GDSs, at the Open Axis Group, www.openaxisgroup.org Comments of Farelogix Inc. Page 8