FR Doc 02-28645[Federal Register: November 15, 2002 (Volume 67, Number 221)]
[Proposed Rules]               
[Page 69365-69428]
[[Page 69365]]

-----------------------------------------------------------------------

Part III
Department of Transportation


-----------------------------------------------------------------------



14 CFR Parts 255 and 399

Computer Reservations System (CRS) Regulations; Statements of General 
Policy; Proposed Rule

[[Page 69366]]


-----------------------------------------------------------------------

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Parts 255 and 399

[Dockets Nos. OST-97-2881, OST-97-3014, OST-98-4775, and OST-99-5888]
RIN 2105-AC65

 
Computer Reservations System (CRS) Regulations; Statements of 
General Policy

AGENCY: Office of the Secretary, Department of Transportation.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Department's rules governing airline computer reservations 
systems (``CRSs'' or ``systems'') obligate the Department to revisit 
the need for CRS rules. The Department initiated this proceeding to 
examine whether its existing CRS rules were still necessary and, if so, 
whether they should be modified. The Department believes that it may be 
possible to eliminate some of the rules in ways that may promote 
competition in the CRS business and that rules regulating the sale of 
airline service over the Internet appear unnecessary. The Department 
thus is asking for comments on proposals to reduce its regulations in 
ways that could give airlines more flexibility in bargaining with the 
systems. The Department tentatively is proposing to maintain some but 
not all of the existing rules. The Department is also proposing to 
review its Statements of General Policy to clarify the requirements for 
the disclosure of service fees by travel agencies.

DATES: Comments must be submitted by January 14, 2003. Reply comments 
must be submitted by February 13, 2003.

ADDRESSES: To make sure your comments and related material are not 
entered more than once in the docket, please submit them (marked with 
docket numbers OST-97-2881, OST-97-3014, and OST-98-4775) by only one 
of the following means:
    (1) By mail to the Docket Management Facility, U.S. Department of 
Transportation, room PL-401, 400 Seventh Street SW., Washington, DC 
20590-0001.
    (2) By hand delivery to room PL-401 on the Plaza level of the 
Nassif Building, 400 Seventh Street SW., Washington, DC, between 9 a.m. 
and 5 p.m., Monday through Friday, except Federal holidays. The 
telephone number is 202-366-9329.
    (3) Electronically through the Web Site for the Docket Management 
System at http://dms.dot.gov. Comments must be filed in Dockets OST-97-
2881, OST-97-3014, and OST-98-4775, U.S. Department of Transportation, 
400 7th St. SW., Washington, DC 20590. Late filed comments will be 
considered to the extent possible.
    Due to security procedures in effect since October 2001 on mail 
deliveries, mail received through the Postal Service may be subject to 
delays. Commenters should consider using an express mail firm to ensure 
the timely filing of any comments not submitted electronically or by 
hand.

Electronic Access

    You can view and download this document by going to the website of 
the Department's Docket Management System (http://dms.dot.gov/). On 
that page, click on ``search.'' On the next page, type in the last four 
digits of the docket number shown on the first page of this document. 
Then click on ``search.'' An electronic copy of this document also may 
be downloaded by using a computer, modem, and suitable communications 
software from the Government Printing Office's Electronic Bulletin 
Board Service at (202) 512-1661. Internet users may reach the Office of 
the Federal Register's home page at: http://www.nara.gov/fedreg and the 
Government Printing Office's database at: http://www.access.gpo.gov/
nara/ index.html.

FOR FURTHER INFORMATION CONTACT: Thomas Ray, Office of the General 
Counsel, 400 Seventh St. SW., Washington, DC 20590, (202) 366-4731.

SUPPLEMENTARY INFORMATION: 

Table of Contents

A. Introduction
B. Summary of Proposed Rules
C. Procedural Issues
D. Background
    1. The CRS Business
    2. The Travel Agency Distribution System
    3. International CRS Operations
    4. Our Readoption of CRS Rules
    5. Major Developments Since the Last Overall Rulemaking
E. Considerations That Support Maintaining CRS Rules
    1. Overview
    2. The Impact of the Internet on the Systems' Role in Airline 
Distribution
    3. The Potential Existence of System Market Power
    4. The Costs Imposed by System Practices
    5. The Potential for Anti-Competitive Conduct
    6. Potential Anti-Competitive Practices in an Unregulated 
Environment
F. The Department's Authority under Section 411 To Adopt CRS Rules
    1. Our Authority To Regulate Non-Airline Systems as Ticket 
Agents
    2. Antitrust Principles Relevant to System Practices
    3. Antitrust Principles Relevant to Airline Practices
    4. The Continuation of Rules on Display Bias
G. Considerations Favoring Fewer Regulations
H. The Specific Rule Proposals
    1. The Scope of the Rules
    2. Definitions
    3. Third-Party Hardware and Software
    4. Contract Clauses Restricting Airline Choices on System Usage
    5. The Mandatory Participation Rule
    6. Rules Barring Display Bias
    7. Equal Functionality
    8. Booking Fees
    9. Marketing and Booking Data
    10. Travel Agency Contracts
    11. Productivity Pricing
    12. The Tying of Marketing Benefits with System Subscriptions
    13. Regulation of the Internet-Based Airline Distribution 
Systems
    14. Prohibit Tying of Internet Participation
    15. Harmonization with Foreign Rules
    16. Retaliation against Discrimination by Foreign Airlines and 
Systems
    17. Enforcement Mechanisms
    18. Sunset Date for the Rules
    19. Effective Date of the Rules
    20. Proposed Revisions to the Department's Policy on Fare 
Advertising

Regulatory Process Matters

Regulatory Assessment and Unfunded Mandates Reform Act Assessment
    1. Unfunded Mandates Reform Act Assessment
    2. Introduction to Regulatory Assessment
    3. The Systems' Market Power
    4. Proposed Rules
    5. Preliminary Summary of the Rules' Costs and Benefits
Initial Regulatory Flexibility Analysis
Paperwork Reduction Act
Federalism Implications
Taking of Private Property
Civil Justice Reform
Protection of Children
Consultation and Coordination with Tribal Governments
Energy Effects
Environment

Glossary

ACAA Air Carrier Association of America, a low-fare airline trade 
association
Airline system A system owned or controlled by one or more airlines
ASTA American Society of Travel Agents
Board The Civil Aeronautics Board
Booking fees Fees paid by airlines and other travel suppliers when a 
travel agent makes or changes a booking in a system
CRS Computer reservations system
E-fares (or webfares) Discount fares offered by an airline usually only 
either on its website or on the airline's website and through one or 
more on-line travel agencies
IATA International Air Transport Association

[[Page 69367]]

ITSA Interactive Travel Services Association
National Commission National Commission to Ensure Consumer Information 
and Choice in the Airline Industry
Network airlines The large airlines that operate hub-and-spoke route 
systems
Non-airline system A system that is neither owned nor controlled by any 
airline
OMB Office of Management and Budget
Participate To make the services of an airline or other travel supplier 
available for sale through a system under a contract with that system
Parity clauses Clauses in participating airline contracts that required 
a participating airline to buy at least as high a level of service from 
the system as it did from any other system
Productivity pricing Pricing formula used in subscriber contracts that 
enables the subscriber to obtain lower CRS fees or other financial 
benefits from a system if the travel agency meets minimum monthly 
booking quotas established by the contract
Screen padding Excessive listings of the same flight under different 
airline codes
Section 411 49 U.S.C. 41712, recodifying section 411 of the Federal 
Aviation Act
Subscriber A travel agency that obtains CRS services under a contract 
with the system
System Computer reservations system

A. Introduction

    The Department's existing rules governing computer reservations 
systems (the ``CRSs'' or ``systems'') obligate it to reexamine the need 
for those rules. Such a reexamination is particularly appropriate at 
this time due to two developments that may enable us to reduce our 
regulation of the CRS business. Those developments are the growing role 
of the Internet in airline distribution and the diminishing airline 
ownership of the systems.
    Historically travel agencies have primarily relied on the systems 
to investigate what airline services are available, to make bookings, 
and to issue tickets (although the systems now are also commonly called 
global distribution systems, or GDSs, we will continue to refer to them 
as CRSs). Each system was originally developed by an airline for the 
travel agencies' use. Since travel agencies traditionally have sold 
most airline tickets, the airlines that controlled the systems had the 
incentive and ability to use them to prejudice the competitive position 
of non-owner airlines and to provide information to travel agents that 
gave an undue preference to the services operated by the owner 
airlines.
    The Civil Aeronautics Board (``the Board'') therefore adopted rules 
governing the systems operated in the United States. 49 FR 32540 
(August 15, 1984). After we took over the Board's responsibility for 
economic regulation in the airline industry, we reexamined the rules 
and readopted them with changes in 1992 based on the industry 
circumstances at that time. 14 CFR Part 255 adopted by 57 FR 43780 
(September 22, 1992). Our rules contained a sunset date, originally 
December 31, 1997, to ensure that we would reexamine the need for the 
rules and their effectiveness. We are carrying out that task in this 
proceeding. Our staff has also been informally studying CRS issues and 
other developments in airline distribution, including the Internet's 
impact during the past few years. See 65 FR 45551, 45555 (July 24, 
2000).
    We began this proceeding by issuing an Advance Notice of Proposed 
Rulemaking on those issues. 62 FR 47606 (September 10, 1997). We later 
issued a Supplemental Advance Notice of Proposed Rulemaking asking 
interested persons to update their comments, to comment on the impact, 
if any, of the recent changes in the systems' ownership and control, 
and to comment on whether any of the rules should be applied to the 
distribution of airline services over the Internet. 65 FR 45551 (July 
24, 2000). We have extended the rules' sunset date, most recently to 
March 31, 2003, to ensure that they would remain in effect until we 
complete our reexamination. 67 FR 14846 (March 28, 2002).
    In this proceeding we have received comments from the four systems, 
most of the U.S. airlines using large jet aircraft, a number of foreign 
airlines, many travel agency parties, and other persons interested in 
the issues, including the Consumers Union and the European Union (in 
referring to the commenters, we will use their common names, for 
example, Alaska, United and American Express, rather than Alaska 
Airlines, United Airlines, and American Express Travel Related Services 
Company).
    On the first major issue--whether the rules should be maintained--a 
number of parties, primarily smaller airlines and travel agencies, 
contend that the rules remain necessary to protect airline competition 
and consumers. These commenters disagree over which rules, if any, 
should be strengthened or revised.
    In their written comments or in meetings with OMB, Orbitz and the 
major airlines--American, United, Delta, Northwest, and Continental--
have contended that the rules are no longer necessary, especially with 
regard to those rules requiring airlines with system ownership 
interests to participate in all systems and prohibiting discriminatory 
booking fees.
    The second issue--whether the rules should govern airline 
distribution through the Internet--generated more disagreement among 
the parties. A number of parties urge us to prevent on-line travel 
agencies from providing biased information, and many contend that rules 
preventing websites operated by two or more airlines from engaging in 
anticompetitive conduct are necessary. Other parties argue that any 
rules governing Internet operations would be unjustified.
    After we began this proceeding, some parties asked us to resolve 
specific issues in separate proceedings that would be completed before 
we made a final decision in this rulemaking. America West Airlines 
filed a petition for rulemaking on booking fee issues, Docket OST-97-
3014, and the Association of Retail Travel Agents filed a rulemaking 
petition on certain travel agency contract issues, Docket OST-98-4775. 
Amadeus Global Travel Distribution filed a petition asking that we 
interpret the existing rules as prohibiting the tying of a travel 
agency's access to an airline's corporate discount fares to the travel 
agency's choice of the CRS affiliated with that airline, Docket OST-99-
5888. We have included the issues raised by these three petitions in 
this proceeding. The discussion in this notice also relies on the 
comments submitted in response to our last proposal to extend the 
current rules' sunset date, 67 FR 71000 (February 15, 2002), in Docket 
OST-2002-11577 and discusses ASTA's request in the proceeding for 
emergency relief on two issues, the systems' use of a pricing structure 
in their travel agency contracts that keeps travel agents from using 
the Internet for bookings and the systems' sale to airlines of detailed 
data on bookings made by individual travel agencies.
    The creation of Orbitz, the on-line travel agency owned by the five 
largest U.S. airlines, generated proposals in this proceeding for rule 
amendments that would regulate Orbitz' operations. We also received 
requests to investigate Orbitz and force it and its owner airlines to 
abandon practices that assertedly would reduce competition in the 
airline

[[Page 69368]]

and airline distribution industries. The controversy over Orbitz led us 
to investigate it informally before it began operations to see whether 
its business plans would reduce competition in the airline and airline 
distribution businesses. We decided then that we did not have a basis 
for preventing Orbitz from launching its service or requiring it to 
change its business plans. See Letter dated April 13, 2001, from 
McDermott and Podberesky to Katz. We began a further investigation of 
Orbitz earlier this year and submitted a report to Congress on our 
monitoring of Orbitz thus far. The report did not reach any definitive 
conclusions, in part because of the continuing changes in the on-line 
distribution business, and in part because the Department of Justice 
has not concluded its own investigation into Orbitz. ``Report to 
Congress: Efforts to Monitor Orbitz,'' Office of Aviation & 
International Affairs (June 27, 2002).
    In addition, Orbitz' plans for giving consumers notice of its $5 
fee for buying airline tickets required us to reexamine our rules on 
travel agency advertisements of airfares. We allowed Orbitz to carry 
out its plans, subject to several conditions, but stated that we would 
reexamine our standards for the disclosure of such travel agency fees. 
Order 2001-12-7 (December 7, 2001). We are considering that issue in 
this proceeding.

B. Summary of Proposed Rules

    In this rulemaking we must decide whether CRS practices still 
require regulation and, if so, which regulations are necessary, in 
light of the substantial changes in airline distribution and system 
ownership since our last reexamination of the rules. We seek comments 
on whether some of the rules could be eliminated or modified to create 
more scope for competitive market forces. We are in particular asking 
for comments on proposals to reduce regulations in ways that could give 
airlines more flexibility in bargaining with the systems. We are 
proposing not to adopt regulations covering the sale of airline 
services through the Internet.
    We fully recognize the importance of the on-going changes in 
airline distribution, particularly the growing importance of the 
Internet as a vehicle for selling airline tickets. These developments 
may make these rules unnecessary in the future. It may be that the 
continuing developments in airline distribution have already given 
airlines additional bargaining leverage with the systems. Several 
airlines have argued that the elimination of our mandatory 
participation rule and the rule barring systems from charging airlines 
discriminatory fees could enable airlines to bargain for better terms 
for system participation. While the record appears to suggest that the 
systems continue to have market power, it may be that the airlines 
would have some ability to obtain better participation terms through 
bargaining. We are therefore seeking comments on proposals to eliminate 
the mandatory participation rule and to end the rule against 
discriminatory booking fees.
    At this time, it seems necessary to maintain at least some rules to 
prevent practices by firms with apparent market power that would reduce 
competition and the adoption of alternatives to the systems. We are 
therefore seeking comment on a tentative proposal to maintain some of 
the CRS rules and to apply them to all systems, whether or not owned or 
controlled by airlines. Despite important changes in the industry, 
there is evidence that each of the systems continues to have market 
power against most airlines that could be used to distort airline 
competition and competition in the business of electronically providing 
airline information and booking capabilities to travel agents. The 
systems also still appear to have the ability to engage in practices 
that would mislead travel agents and their customers about the 
availability, price, and quality of airline service options.
    Nevertheless, given that there may be costs associated with 
maintaining the rules and that the rules may not be effective enough in 
promoting competition to warrant these costs, we seek comment on the 
possible benefits versus costs of sunset in March 2003. Specific 
discussion about the feasibility and costs of transition associated 
with full and immediate sunset in March 2003 would be helpful. We also 
seek views on whether this potential for bias and possible prejudicial 
conduct are sufficient to justify maintaining rules as proposed in this 
notice.
    As was true in our last rulemaking, we are additionally concerned 
about system practices that seem unreasonably to keep airlines and 
travel agencies from using alternatives to the systems. These kinds of 
practices would drive up airline costs, keep travel agencies from using 
the most efficient means of obtaining information and making bookings, 
and discourage other firms from developing new technology that could 
replace the systems' services. We also believe that the large airlines' 
access to detailed data on each travel agency's route-by-route bookings 
on individual airlines could reduce competition in the airline 
industry, particularly by prejudicing the competitive position of the 
low-fare new entrant airlines. We are therefore proposing rules which 
would prevent all such practices. In developing our proposals we sought 
ways to enable market forces to work more effectively in the CRS 
business, to avoid potentially burdensome regulations, and to allow 
airline distribution practices to develop in ways that may eliminate 
the need for the rules.
    As stated above, we are convinced that continuing changes in the 
airline and CRS businesses will likely require another examination of 
the need for the rules and their effectiveness in several years, if we 
ultimately decide in this proceeding to readopt the rules, with or 
without revisions. We will monitor industry developments closely and 
conduct further proceedings as necessary.
    In addition, it may be that the continuing developments in airline 
distribution have given airlines more bargaining leverage with the 
systems than has been thought. Several airlines have argued that the 
elimination of our mandatory participation rule and the rule barring 
systems from charging airlines discriminatory fees could enable 
airlines to bargain for better terms for system participation. While 
the record suggests that the systems may continue to have substantial 
market power, it may be that the airlines would have some ability to 
obtain better participation terms through bargaining. We are therefore 
seeking comments on proposals to eliminate the mandatory participation 
rule and to ending the rule against discriminatory booking fees.
    We have tentatively determined at this time that the rules should 
not be extended to cover distribution practices by airlines and travel 
agencies on the Internet. Such regulation seems unnecessary at this 
time. If on-line agencies engage in deceptive practices that harm 
consumers, we will consider taking action under our enforcement 
authority. As stated above, we have been informally investigating 
allegations that Orbitz and its owner airlines are engaged in 
anticompetitive conduct and if necessary will take action against them 
under our enforcement authority.
    The findings and conclusions set forth in this notice are 
tentative. We have not made a final decision on any of the proposals, 
including the question of whether CRS regulations remain necessary. We 
ask the parties to submit comments that thoroughly discuss the factual 
and policy issues raised by our proposals. As to all proposals the 
parties should provide detailed information on whether the rule would 
be necessary

[[Page 69369]]

and beneficial and estimates quantifying its likely benefits and costs.
    Comments will be due sixty days after publication of this notice, 
and reply comments will be due thirty days thereafter. After 
considering the comments, we will issue a final rule.

C. Procedural Issues

    As we have done in all of our CRS rulemakings, we are following the 
notice-and-comment procedures established by the Administrative 
Procedure Act for informal rulemakings. 57 FR 43792; 62 FR 59799-59800. 
These informal rulemaking procedures will give the parties a fair 
opportunity to present their evidence and policy and legal arguments 
and will enable us to resolve the issues rationally and efficiently.
    We have largely based our proposals on the comments and the 
published sources cited in this notice. We have also relied on our 
informal investigations of airline distribution and the CRS business, 
as we planned to do. See 65 FR 45555. This notice reflects the staff's 
findings in its informal studies to the extent that we are using them. 
The parties now have the opportunity to comment on those findings as 
well as present any factual information and analysis of their own.
    Some parties have filed motions for leave to file their comments or 
reply comments. We will grant all such motions.
    As noted above, several parties have urged us to resolve some CRS 
issues before our completion of this proceeding. We have determined 
that it would be more efficient for us to consider all issues in this 
proceeding rather than decide issues piecemeal.
    During the period since we issued our supplemental advance notice 
of proposed rulemaking, Department officials and members of the staff 
have met with a number of parties--Orbitz, Sabre and Travelocity, 
Expedia, Amadeus, Southwest, the Interactive Travel Services 
Association (``ITSA''), ASTA, and American Express--on the competitive 
and fairness questions presented by Orbitz that we have been informally 
investigating. These discussions focused on our informal investigation 
but also touched on issues involved in this proceeding. Before we 
issued the supplemental advance notice, Department officials and staff 
members met with ITSA, which asserted that the airlines were 
discriminating against on-line travel agencies. ITSA presented a 
written document on these issues, which it had filed in another docket, 
OST-97-3713, and Department officials agreed to have the document 
treated as a comment in this proceeding and to consider here the 
concerns expressed by ITSA.
    Department officials and staff members also held discussions with 
other interested parties on airline distribution and CRS issues, 
including issues related to this rulemaking.
    The staff met with the Air Carrier Association of America 
(``ACAA'') and several of its member airlines to discuss their concerns 
with the systems' sale of marketing and booking data, which the larger 
airlines allegedly use to deter travel agencies from booking customers 
on low-fare airline competitors. The ACAA group was particularly 
concerned with the availability of data on bookings made by individual 
travel agencies. The ACAA group contended that airlines do not need the 
marketing and booking data for route planning purposes and legitimate 
marketing needs in domestic markets, since their own booking data and 
data available from the Department provide adequate information for 
those purposes. The ACAA members assert that large airlines to use the 
domestic data to find out which travel agencies are selling significant 
amounts of travel on smaller airlines and that they put pressure on 
those agencies to discourage them from booking those airlines. The ACAA 
representatives viewed the marketing and booking data as probably 
useful for planning international routes and marketing strategies, 
since comparable information may not be readily available from other 
sources. They suggested that the rules be amended to allow systems to 
sell data only on airlines willing to have their data be made available 
for this purpose.
    Staff members have also met with Lawton Roberts of Uniglobe Country 
Place Travel, a travel agency, to discuss the widespread concern among 
travel agencies about the airlines' refusal to allow all travel 
agencies to sell fares offered by airline websites and Orbitz.
    While our draft notice of proposed rulemaking was under 
consideration by the Office of Management and Budget (``OMB'') pursuant 
to Executive Order 12866, Sabre, Cendant (Galileo), Worldspan, Amadeus, 
Orbitz, American, United, and Continental, among others, asked to meet 
with that agency. OMB met or held conference calls with the named 
parties. While we did not attend those meetings, OMB provided to us the 
written material presented at these meetings for inclusion in the 
docket for this proceeding. We are inviting commenters to address 
several of the ideas presented by the parties at those meetings.

D. Background

1. The CRS Business

    Four systems are operating in the United States: Sabre, originally 
developed by American; Galileo, the product of a merger between 
United's Apollo system and a European system; Worldspan, the product of 
a merger between the PARS system owned by Northwest and TWA and Delta's 
DATAS II system; and Amadeus, a European firm that entered the United 
States by buying Continental's System One CRS. In 1999 the number of 
travel agency locations in the United States using each system was as 
follows: Sabre, 14, 961; Galileo, 11,840; Worldspan, 8,300; and 
Amadeus, 6,168. On a worldwide basis in 2001, Sabre was the largest, 
with about 65,000 locations, while Amadeus had 57,000, Galileo 45,000, 
and Worldspan 20,000. Travel Distribution Report (February 25, 2002) at 
26; Travel Distribution Report (January 11, 2001) at 4. These figures 
do not precisely reflect market share, however, because one system may 
obtain substantially more bookings from its locations than other 
systems obtain from theirs. Sabre, for example, has claimed that it has 
a 48 percent share of CRS bookings in North America. Travel 
Distribution Report (May 31, 2001) at 2.
    The systems have provided tremendous benefits for airlines, travel 
agencies, and consumers due to their efficiency. Transportation 
Research Board, Entry and Competition in the U.S. Airline Industry 
(1999) at 126. See also 57 FR 43781. Among other things, when an 
airline participating in a system enters a new city, the travel agents 
in that city that use that system will immediately learn of the 
airline's new service whenever they are checking service options for 
customers planning to travel on the route.
    The practices followed by these systems have been important to 
airline competition and consumer welfare because of the travel 
agencies' dominant role in airline distribution and their reliance on 
CRSs to meet their customers' needs for advice and bookings. In 1999 
travel agencies sold almost three-quarters of all airline tickets. 
Bear, Stearns & Co., ``Point, Click, Trip: An Introduction to the On-
Line Travel Agency'' (April 2000) at 17. Almost every travel agent uses 
a system to investigate airline service options and make bookings for 
the agency's customers (a travel agency using a system is called a 
``subscriber''). One survey reported that travel agencies made 93 
percent of their domestic airline bookings and 81 percent of their 
international airline bookings through a

[[Page 69370]]

system in 1999. ``U.S. Travel Agency Survey 2000,'' Travel Weekly 
(August 24, 2000) at 133. Travel agencies also use the systems to carry 
out back office functions like bookkeeping and recordkeeping. Both 
``brick and mortar'' and on-line travel agencies depend on the systems, 
although Orbitz is planning to create direct connections between itself 
and many of its airline participants.
    Travel agents have relied so much on the systems because they 
efficiently provide comprehensive information and booking capabilities 
on airlines and other travel suppliers. A CRS presents displays that 
integrate almost all services offered in a market. Each system shows 
the schedules and fares offered by airlines in each market that are 
available for sale through travel agents using that system and whether 
seats are available on specific flights at specific fares. A travel 
agent can compare the schedules and fares offered by different airlines 
and determine which would best meet a customer's needs. The agent can 
reserve a seat and issue a paper ticket or an E-ticket. While the 
systems formerly offered almost complete information on airline 
services, airlines now offer some low fares through their websites (and 
some on-line travel agencies) that they do not sell through any system. 
Airline transportation is the most important service sold through a 
system, but the systems also provide information and booking 
capabilities for rental cars, hotels, and other travel services. Travel 
agents usually access a system through computer terminals linked with 
the system's database.
    Each system provides information and booking capabilities on the 
airlines and other travel suppliers that ``participate'' in the system, 
that is, agree to make their services saleable through the system. The 
system obtains its availability information from the airlines' internal 
reservations systems, and it makes bookings in those systems, which are 
used by the airlines' own reservations agents and other staff members. 
Airlines typically either operate their internal systems themselves or 
arrange for another firm, often one of the systems, to operate it under 
contract.
    Participation requires the airline to pay fees for each booking 
transaction (the fees paid by participating airlines and other travel 
suppliers are usually called ``booking fees''). Airlines can 
participate at different levels. At higher levels the information 
provided travel agencies will be more timely and so more reliable, and 
travel agents can carry out tasks like reserving specific seats for 
their customers. An airline participating at a higher level of 
participation must pay higher booking fees. 62 FR 59784, 59785 
(November 5, 1997).
    In 2000 the average airline booking fee for the highest level of 
system service, the level used by the network airlines, was $3.54 per 
segment. Testimony of Inspector General Kenneth Mead before the Senate 
Commerce Committee, July 20, 2000, at 17. Sabre estimates that the 
network airlines' total booking fee costs equal about two percent of 
the revenue obtained through CRS bookings. Sabre Supp. Reply Comments 
at 36. Northwest has estimated that its booking fee costs in 2000 
equaled 2.1 percent of its system passenger revenues. Travel 
Distribution Report (June 14, 2001) at 4. The systems usually increase 
their booking fees annually; Sabre, for example, raised its fees by 
about nine percent in 2001 and three percent in 2002. Travel 
Distribution Report (January 11, 2001) at 6; Travel Distribution Report 
(December 13, 2001) at 1.
    The systems display information on computer screens. Since each 
screen can display only a limited number of flights, a system must use 
criteria for ranking the available flights. Display position is 
important, since travel agents are more likely to book the flights that 
are displayed first. 61 FR 42208, 42209 (August 14, 1996). The number 
of flight options available in most markets also requires the systems 
to edit their displays, since many options will be unattractive to 
travelers (Los Angeles-San Francisco travelers, for example, will not 
choose connecting services over Denver or Salt Lake City). Systems 
display airline services in several different ways. The display 
traditionally used by travel agencies ranks flights in a market on the 
basis of the criteria developed by the system and shows whether seats 
are available on the listed flights. Some systems have ranked flights 
in this type of display by listing all nonstop flights first, then 
listing one-stop flights and other direct flights, and ending with 
connecting services. Others have ranked flights on the basis of 
relative quality, such as each flight's elapsed time or its 
displacement time (the time difference between the departure time 
requested by the traveler and the time of each flight). 61 FR 42210-
42211.
    Every system also has a display that ranks flights on the basis of 
price, with the lowest being listed first. Travel agents commonly use 
that display for customers whose major concern is finding the cheapest 
fare.
    Corporate travel departments and consumers, not just travel agents, 
use the systems. A corporate travel department, which books travel for 
its company's employees, benefits from the systems' efficiencies and 
information. Corporate users can access a system through the Internet 
or by Intranet. See, e.g., Sabre Comments at 4. Consumers using an on-
line travel agency to obtain schedule and fare information and make 
bookings are indirectly accessing one of the systems; Travelocity uses 
Sabre as its booking engine, while Expedia uses Worldspan, for example.
    The fees charged airlines were not effectively disciplined by 
competition and may have exceeded system costs by a significant amount. 
56 FR 12586, 12595 (March 26, 1991).
    In past years the fees paid by airlines and other travel suppliers 
accounted for about ninety percent of total system revenues, while the 
fees paid by travel agencies made up only ten percent of the total. 62 
FR 59784, 59788 (November 5, 1997); Sabre Holdings 10-K reports for the 
years 1999 and 2000. The CRS business has economies of scale, so a 
system's profitability increases when travel agents use it for more 
bookings. Study of Airline Computer Reservation Systems, U.S. Dept. of 
Transportation (May 1988) at 24-25.
    The systems have been able to maintain high booking fees, because 
most airlines have concluded that participation in each system is 
necessary. The systems accordingly have had little need to compete for 
airline participants. Almost every U.S. airline, including most of the 
low-fare airlines, participates in each of the systems.
    Although four systems operate in the United States, each travel 
agency office has typically relied either exclusively or predominantly 
on one system. A 1996 survey reported that less than four percent of 
travel agency offices had more than one system. ASTA Comments at 19. 
Other commenters allege that few travel agency offices use more than 
one system. Alaska Supp. Reply at 6; Southwest Supp. Reply at 16. While 
the services offered by each system are comparable, using multiple 
systems could improve a travel agency's ability to serve its customers. 
Travel agents then could acquire more accurate and complete information 
on available airline flights, and the agencies' ability to use multiple 
systems would encourage the systems to compete more on the quality and 
range of their services. 57 FR 43797. Offsetting that factor, a travel 
agency's use of multiple systems can create some inefficiencies,

[[Page 69371]]

due to additional training needs and potential difficulties in keeping 
track of customer records. 56 FR 12607. Each system also offers 
inducements to travel agency customers to make most or all of their 
bookings on that system.
    Travel agencies, unlike airlines, can usually choose which system 
to use. The systems' competition for travel agency customers has caused 
them to continuously improve the range and quality of services offered 
travel agencies. In addition, many large travel agencies obtain CRS 
services at little or no cost. Sabre has stated that competition among 
the systems for travel agency customers ``is particularly intense'' and 
that some systems ``aggressively pay economic incentives to travel 
agencies to obtain business.'' In addition, ``certain [Sabre] service 
contracts with significant subscribers contain booking fee productivity 
clauses and other provisions which allow subscribers to receive cash 
payments, and/or various amounts of additional equipment and other 
services from [Sabre] at no cost.'' Sabre Holdings 10-K Report for 
FiscalYear 2000 at 24, 37. Galileo has similarly stated that 
competition for travel agency customers is intense, that fees are often 
waived for travel agency customers, and that some obtain incentive 
payments. Galileo International 10-K Report for Fiscal Year 2000 at 5, 
17. AAA and Apollo reportedly signed a five-year term contract that 
assumed that all AAA member clubs would use Apollo as their only 
system; AAA expected to earn $75 million from Apollo under the 
contract. Travel Weekly (September 25, 1997) at 46.
    A system is willing to pay bonuses to capture a large agency's 
business in the expectation that it will capture all or almost all of 
the agency's business for a period of several years and thereby obtain 
a large and steady stream of airline booking fees. The large agencies 
have become more dependent on such payments due to the airlines' 
commission cuts. Sabre Holdings 10-K Report for Fiscal Year 2001 at 31. 
On the other hand, smaller travel agencies complain that they are 
overcharged for system services and forced to accept unreasonable 
contract terms. See, e.g., ASTA Comments at 2-3, 10; ARTA Comments at 
4-8; ARTA Emergency Petition. Furthermore, travel agencies located in 
cities dominated by one airline may feel compelled to use a system 
affiliated with that airline. These agencies depend on obtaining 
marketing benefits and access to corporate discount fares from the 
dominant airline to meet the needs and preferences of their customers. 
Large Agency Coalition Comments at 9-10.

2. The Travel Agency Distribution System

    In the past the systems have been important because most airlines 
have depended on travel agencies for their distribution. Travel 
agencies have acted as agents for virtually all airlines and generally 
held themselves out to the public as sources of impartial advice on 
airline services and other travel services. 56 FR 12587. The travel 
agency system has traditionally provided an efficient means of 
distribution for most airlines. 57 FR 43782. As noted, in 1999 almost 
three-quarters of all airline tickets were sold by travel agencies, 
while only one-fourth of all bookings were made directly with an 
airline. Bear, Stearns & Co., ``Point, Click, Trip'' at 17. Even many 
low-fare airlines, the airlines that have tried hardest to distribute 
their tickets directly to consumers, have relied on travel agencies for 
a large share of their bookings. In the fourth quarter of 2001, 
AirTran, for example, obtained 33 percent of its bookings from travel 
agencies using a system. AirTran 10-K Report for fiscal year 2001 at 8.
    Travel agencies historically derived most of their revenue from the 
commissions paid by airlines and other travel suppliers. Due to the 
airlines' reductions in commissions in recent years, travel agencies 
began charging fees to their customers. Almost ninety percent of all 
travel agencies charge some fees. Travel Distribution Report (May 31, 
2001); Travel Weekly (February 25, 2002) at 27. The fees average $13.21 
per ticket. ``Web air fares unlevel the playing field,'' Chicago 
Tribune (February 16, 2002); ``Travel Agents Cry Foul over Internet 
Fare Deals,'' Los Angeles Times (February 16, 2002).
    Travel agencies do not operate as franchisees of one or a few 
airlines. Transportation Research Board, Entry and Competition in the 
U.S. Airline Industry at 125. Individual airlines, however, encourage 
travel agencies to sell their services rather than their competitors' 
services. An airline will often offer travel agencies override 
commissions, a type of incentive commission, that give a travel agency 
a larger commission on all of its bookings on the airline if the 
airline's share of the agency's total bookings (or total bookings in 
specific markets) exceeds a specified percentage, which is often 
related to the airline's share of all travel agency bookings in the 
agency's area. Since override commissions enable the agency to obtain a 
higher commission rate on all its bookings with an airline, the airline 
dominating a metropolitan area can use override commissions more 
effectively than can its competitors. Secretary's Task Force on 
Competition in the U.S. Domestic Airline Industry, U.S. Department of 
Transportation, Airline Marketing Practices (February 1990) at 28.
    Beginning in March 2002, the major airlines stopped paying base 
commissions to travel agencies in the United States and switched 
entirely to the use of incentive commissions. The incentive commission 
programs developed by these airlines, and the lack of any alternative 
pay from those carriers, will likely strengthen the travel agencies' 
interest in meeting the performance standards set by the airlines.
    As discussed below in connection with proposals to bar travel 
agencies from creating biased CRS displays, some industry commentators 
and the Department's Inspector General have expressed a concern that 
override commissions can induce travel agencies to recommend airline 
services that will increase their commission payments rather than the 
services that best meet the needs of their customers. Office of the 
Inspector General, U.S. Dept. of Transportation, ``Report on Travel 
Agent Commission Overrides'' (March 2, 1999). The airlines' efforts to 
encourage travel agencies to give each airline a larger share of their 
business affect our analysis of several issues, including the systems' 
sale of marketing and booking data, but we are not addressing the 
override commission issue in this proceeding.
    Not all travel agencies obtain override commission arrangements. In 
other respects as well, airlines have traditionally not treated all 
travel agencies the same since deregulation. A travel agency with a 
preferred supplier relationship with an airline can obtain marketing 
benefits, such as the ability to waive advance purchase restrictions 
and to book important clients on oversold flights, that are not 
available to other agencies. Airline Marketing Practices at 26.

3. International CRS Operations

    Although U.S. airlines developed the first systems, the CRS 
business soon became international. European airlines, for example, 
created Amadeus, and Galileo is the product of the merger between 
United's Apollo system and the Galileo system developed by several 
European airlines. Sabre and Worldspan have no foreign airline owners 
but both compete for travel agency customers overseas.

[[Page 69372]]

    The importance of CRS operations overseas has led other 
governmental entities like the European Union and Canada to adopt rules 
regulating the CRS business. See, e.g., European Commission Comments. A 
number of the parties in this proceeding, primarily the European Union 
and several foreign airlines, have urged us to harmonize our rules with 
the rules applicable in the European Union.
    CRS operations abroad concern the United States, since foreign 
systems and their owners could engage in practices that would prejudice 
the competitive position of U.S. airlines in international markets or 
the ability of U.S. systems to obtain travel agency customers in 
foreign countries. The United States accordingly has entered into a 
number of international air services agreements that require each party 
to ensure that the systems operating in its country and their owners do 
not subject airlines and systems from the other country to 
discriminatory treatment.
    In addition, the United States has taken action in some cases to 
ensure that U.S. systems are not denied access to foreign markets by 
discriminatory conduct by foreign airlines and other travel suppliers 
that own or market a competing system. See, e.g., Orders 88-7-11 (July 
8, 1988) (American complaint against British Airways) and 90-6-21 (June 
8, 1990) (American complaint against Iberia).
    Congress has stated its interest in preventing discriminatory 
practices by systems and affiliated airlines that would distort 
international competition. The Wendell H. Ford Aviation Investment and 
Reform Act for the 21st Century, Public Law 106-181 (April 5, 2000), 
includes a provision, section 741, that expanded our authority under 49 
U.S.C. 41310 to take countermeasures against an unjustifiably 
discriminatory or anticompetitive practice against a U.S. CRS or the 
imposition of unjustifiable restrictions on access by a U.S. system to 
a foreign market.

4. Our Readoption of CRS Rules

    The CRS rules adopted by the Civil Aeronautics Board (``the 
Board'') in 1984 included an expiration date to ensure that we would 
reexamine the rules after they had been in force for several years. We 
conducted such a reexamination and, on the basis of the systems' 
continuing ownership by airlines and the airlines' continuing reliance 
on travel agencies for distribution, determined in 1992 that CRS rules 
remained necessary to safeguard airline competition and to help ensure 
that consumers did not receive inaccurate or misleading information on 
airline services. We based our decision on the systems' control by 
airlines and airline affiliates, which could still use their control of 
the systems to prejudice airline competition if there were no rules. 57 
FR 43783-43787, 43794. We reasoned as well that airlines had no 
practical ability to induce travel agencies to use systems charging 
lower fees, and we noted that travel agencies did not choose systems on 
the basis of their treatment of airlines. 57 FR 43831; 56 FR 12586, 
12594-12595.
    Our revised rules governed the operations of systems owned or 
marketed by an airline or airline affiliate insofar as the system was 
providing services to travel agencies. In adopting these rules, we 
relied on our authority under section 411 of the Federal Aviation Act, 
later recodified as 49 U.S.C. 41712, to prohibit unfair and deceptive 
practices and unfair methods of competition in air transportation and 
the sale of air transportation (we will refer to the statue by its 
traditional name, section 411). 57 FR 43789-43791.
    One of the principal provisions that we readopted barred each 
system from using carrier identity as a factor for editing and ranking 
services. We did not, however, prescribe a display algorithm (the set 
of criteria for constructing displays), so each system was free to 
choose its own criteria for editing and ranking airline services. 
Secondly, the rules prohibited systems from charging discriminatory 
booking fees but did not set limits on the level of fees. Thirdly, each 
system had to make available to any participating airline the booking 
and marketing data generated by it from bookings for domestic travel 
made through the system. Finally, the rules proscribed certain types of 
restrictive contract provisions that unreasonably limited the travel 
agencies' ability to switch systems or use more than one system. For 
example, the rules limited the maximum length of subscriber contracts.
    We modified the rules in several respects to strengthen them. Among 
other things, our revised rules required each system to provide non-
owner airlines with information and booking capabilities as accurate 
and reliable as those provided the owner airline. We gave each travel 
agency the right to use its own equipment in conjunction with a system 
and to access other systems and databases from the same terminals used 
to access its primary system, unless the agency used terminals provided 
by that system; we adopted this rule in part to spur the development of 
alternative ways of providing airline information and booking 
capabilities to travel agencies. We also required each airline with a 
significant CRS ownership interest to participate in other systems at 
as high a level of functionality as it does in its own system, if the 
terms for participation are commercially reasonable (this is the 
mandatory participation rule). We sought to prevent U.S. airlines from 
attempting to discourage travel agencies from choosing a competing 
system by limiting their participation in systems owned by other 
airlines.
    We hoped that our revisions would enable airlines to develop 
alternative means of access to travel agencies and thereby begin to 
bring market forces to bear on the systems' terms for airline 
participation. We avoided rules that involved detailed management of 
system operations. 57 FR 43781.
    We later adopted two additional rules to prevent system practices 
that distorted competition in the airline and CRS businesses. One rule 
prohibited systems from enforcing ``parity clauses'' against airlines 
that did not own or market a competing system. 62 FR 59784 (November 5, 
1997). The parity clauses imposed by most systems on airline 
participants required each airline to buy at least as high a level of 
service from the system as it did from any other system. The parity 
clauses made it unnecessary for systems to compete for airline 
participation at higher levels of service. While almost all airlines 
must participate in each system for economic reasons, many airlines do 
not need to participate at the more expensive higher levels.
    The second rule strengthened the rules prohibiting display bias by 
requiring each system (i) to offer at least one display that does not 
give on-line connections a preference over interline connections and 
(ii) to either list one-stop and other direct flights before connecting 
services or use elapsed time as a significant factor in selecting 
flight options from the database. 62 FR 63837 (December 3, 1997). We 
acted in large part because of concerns that United had caused Galileo 
to create displays that prejudiced United's competitors. 62 FR 63840-
63841.

5. Major Developments Since the Last Overall Rulemaking

    As we stated in our supplemental advance notice of proposed 
rulemaking, our decision in this proceeding must take into account two 
major developments in the CRS business and airline distribution that 
have occurred in recent years, the airlines' shrinking ownership of the 
systems and the

[[Page 69373]]

growth of Internet usage. 65 FR 45556-45557.
    As noted above, when we last reexamined the rules, one or more 
airlines or airline affiliates owned each of the systems. That is no 
longer true, although the systems without airline ownership still have 
ties to their former owners.
    Sabre, the largest system, which American developed, is now a 
publicly-owned company. Most of Galileo's airline owners sold their 
stock to the public by the end of 2000, although United continued to 
own eighteen percent of Galileo's stock, Swissair eight percent, and 
five other airlines 1.5 percent. Galileo Supp. Comments at 2. Cendant, 
a firm that owns Avis and several hotel franchises, bought Galileo in 
exchange for stock and cash in early October 2001. United received 
Cendant stock in exchange for its Galileo stock but has sold all of 
those shares. United April 19, 2002, and February 1, 2002, Press 
Releases.
    Amadeus, a European system, entered the U.S. market by acquiring 
System One, the system owned by Continental. Continental thereafter 
sold its Amadeus shares. Amadeus is now controlled by three foreign 
airlines, Lufthansa, Air France, and Iberia. The public, however, now 
holds a significant portion of Amadeus' stock.
    Worldspan is still owned entirely by airlines and airline 
affiliates. Its U.S. airline owners are Delta, Northwest, and American, 
since American acquired TWA's Worldspan stock when it bought TWA's 
assets.
    Although some systems are no longer owned by airlines, every system 
still has marketing ties with one or more airlines. American and 
Southwest market Sabre, and United provides some marketing support for 
Galileo. Amadeus Supp. Comments at 4-5. Since our rules by their terms 
apply to systems owned or marketed by airlines, 14 CFR 255.2, Sabre and 
Galileo as well as Amadeus and Worldspan are subject to the rules.
    The other major development is the growing use of the Internet for 
airline distribution. The Internet has given airlines and other travel 
suppliers new ways to obtain bookings and inform consumers of their 
services and to do so at significantly lower cost. See, e.g., Statement 
of A. Bradley Mims, Deputy Assistant Secretary for Aviation and 
International Affairs, U.S. Department of Transportation, before the 
Senate Commerce Committee (July 20, 2000); General Accounting Office, 
``Effects of Changes in How Airline Tickets Are Sold'' (July 1999) at 
13. A consulting firm estimated that Internet bookings would account 
for fourteen percent of all airline revenues in calendar year 2001. 
``Web Sales of Airline Tickets Are Making Hefty Advances,'' New York 
Times (July 5, 2001).
    Most U.S. airlines have websites, and many offer special discount 
fares (E-fares or webfares) and other benefits to travelers who book 
seats through the airline's website instead of another distribution 
channel. For most airlines, their own individual websites have become 
their cheapest available distribution channel. GAO, ``Effects of 
Changes in How Airline Tickets Are Sold'' at 17-18.
    While airlines initially offered their E-fares exclusively through 
their own websites, Delta allows travel agents to book its E-fares 
through its website for travel agencies, although such bookings are 
non-commissionable. Travel Distribution Report (March 22, 2001) at 9; 
Delta Comments on Proposed Extension at 6-7. Other airlines have also 
created websites where travel agents may book their discount fares. 
Many airlines have agreed to give Orbitz the ability to sell their E-
fares in exchange for a rebate of part of the CRS booking fees paid on 
all of the airline's bookings made through Orbitz.
    Travel agents can book Internet fares for their customers even if 
they are not offered through the system used by the travel agency or an 
airline website dedicated to travel agents. Some do so. ``Travel agents 
charting other routes to profit,'' Philadelphia Inquirer (March 27, 
2002). When travel agents book such fares through an airline website 
created for consumers or Orbitz, they usually receive no commission and 
earn no credits towards the minimum monthly booking quota set by the 
systems' subscriber contracts that use productivity pricing. ``Web air 
fares unlevel the playing field,'' Chicago Tribune (February 16, 2002); 
``Travel Agents Cry Foul over Internet Fare Deals,'' Los Angeles Times 
(February 16, 2002). In addition, searching several websites for E-
fares is less efficient for travel agents, complicates a travel 
agency's task of preparing reports for corporate customers, and makes 
it harder for corporate travel managers to manage travel programs. 
Susan Parr Travel Comments; NBTA Comments on Proposed Extension at 2. 
Several firms and the systems themselves are developing software that 
will enable travel agents to quickly search for fares on multiple 
websites and systems, however. ``Fare game: ``Beat the agent''', Travel 
Weekly (March 4, 2002) at 6. Orbitz'' agreement with Aqua should enable 
travel agents to use a program allowing them to simultaneously see the 
display of fares offered by a system and the fares available through 
Orbitz, including E-fares. May 16, 2002, Orbitz press release.
    The share of airline bookings produced by airline websites has been 
growing rapidly. Delta's on-line revenues in the March 2002 quarter 
were 64 percent higher than in the March 2001 quarter, and Delta 
expected to obtain fifteen percent of its tickets from its own website 
in 2002. Delta April 24, 2002, Press Release. The percentage of 
Alaska's bookings obtained from its website grew from 10 percent in 
2000 to 16 percent in 2001. Alaska 10-K Report for the year 2001. 
Continental reportedly expects forty to fifty percent of its bookings 
to come from Internet sites, including its own, Orbitz, and Hotwire, by 
2005 or 2006. Travel Distribution Report (June 14, 2001) at 4. Most of 
the network airlines, however, have been obtaining a smaller share of 
their bookings from their websites. Thus, while consumer use of 
American's website is growing rapidly, the website produced only an 
estimated three percent of the airline's revenues in the first quarter 
of 2001. Aviation Daily (July 2, 2001).
    Some low-fare airlines already obtain a large share of their 
bookings from their websites. JetBlue obtained 44 percent of its sales 
from its website in 2001. JetBlue Registration Statement on Form S-1 
(filed April 10, 2002) at 41-42. Southwest's website produced forty 
percent of the airline's revenues in 2001. Southwest Airlines 10-K 
Report for the year 2001. AirTran was obtaining over half of its 
bookings through the Internet by the end of 2001. January 29, 2002, 
AirTran Press Release. Frontier obtained 28 percent of its bookings in 
the quarter ended December 31, 2001, from its website, and Internet 
bookings from all sources made up 39 percent of its revenue in that 
quarter (the comparable figures for the December 31, 2000 quarter were 
six percent and fifteen percent). February 5, 2002, Frontier Press 
Release. The two major European low-fare airlines obtain a much larger 
share of their total sales from on-line bookings. Ryanair obtained 91 
percent of its bookings from its website in January 2002, while EasyJet 
sells tickets only through its own reservations center and website, not 
through travel agencies. Ryanair February 4, 2002, Press Release; 
``About Our Fares'' at www.easyjet.com.
    Airlines have created Internet sites for use by travel agencies and 
corporate customers as well. Delta has websites for travel agencies and 
corporate customers. Employees of businesses that have corporate sales 
agreements with Delta can book the negotiated discount

[[Page 69374]]

fares through that website, and corporate travel managers can track the 
bookings made through the website. Aviation Daily (July 2, 2001).
    Internet bookings made directly with an airline are less costly. 
Delta recently stated that the cost of bookings made through its own 
website is only one-fourth the cost of bookings made through a travel 
agency using a system. Statement of Scott Yohe before the National 
Commission to Ensure Consumer Information and Choice in the Airline 
Industry (the ``National Commission'') at 11. Similarly, according to a 
1999 study, each booking made through traditional travel agencies cost 
America West $23, a booking made through an electronic travel agency 
cost $20, a booking made through the airline's reservations agents cost 
$13, and a booking made through the airline's website cost $6. GAO, 
``Effects of Changes in How Airline Tickets Are Sold'' at 17. Southwest 
states that a booking costs Southwest $10 when made through a travel 
agency, $5 when made through a Southwest reservations agent, and $1 
when made through Southwest's website. Southwest Supp. Reply at 20.
    Airlines have taken other steps to reduce their costs. Airlines 
encourage passengers to use E-tickets--electronic tickets--instead of 
paper tickets since E-tickets involve no printing costs and lower 
handling and processing costs than paper tickets, which are negotiable 
documents. GAO, ``Effects of Changes in How Airline Tickets Are Sold'' 
at 8. Beginning in 1995 airlines also cut the travel agencies' base 
commissions several times, which led to a decline in the number of 
travel agencies; forced travel agencies to focus on other travel 
activities, such as cruise bookings, which are more remunerative; and 
caused most travel agencies to charge consumers fees for their 
services. GAO, ``Effects of Changes in How Airline Tickets Are Sold'' 
at 6, 9-11. In March 2002 the major airlines eliminated base 
commissions entirely and began paying travel agencies only incentive 
commissions.
    These developments have significantly reduced airline costs. Delta 
has stated that its customers' use of the Internet saved Delta $45 
million in commissions and booking fees in 2000, when thirteen percent 
of its tickets were sold through the Internet. ``Web Sales of Airline 
Tickets Are Making Hefty Advances,'' New York Times (July 5, 2001). 
Similarly, while Alaska's passenger revenue increased by 6.9 percent 
from the first quarter of 2000 to the first quarter of 2001, its 
commission expense increased by only 1.9 percent since a smaller share 
of its bookings were being made by travel agents, 61.6 percent in the 
first quarter of 2001 compared to 65.9 percent in the first quarter of 
2000. Alaska 10-Q Report for the quarter ended March 31, 2001. The GAO 
has estimated that the cuts in commissions lowered airline commission 
costs by about $4 billion between 1995 and 1998. GAO, ``Effects of 
Changes in How Airline Tickets Are Sold'' at 6-8.
    Travel agencies also now provide information and make bookings over 
the Internet. Many traditional travel agencies-- ``brick and mortar'' 
agencies--have established websites for use by consumers. Other firms 
started business as on-line agencies. The two largest on-line travel 
agencies are Travelocity, owned by Sabre, and Expedia, developed by 
Microsoft. In addition to selling airline tickets as agents for the 
airlines, some on-line agencies also buy blocks of airline seats and 
hotel rooms at negotiated prices substantially below the supplier's 
published rates. Bear, Stearns, ``Point, Click, Trip,'' at 48, 49.
    In addition, five major airlines--United, American, Delta, 
Northwest, and Continental--created Orbitz to compete in the on-line 
agency business. Orbitz is initially using Worldspan as its booking 
engine but will create direct links with many of the airlines 
participating in Orbitz. ``Et tu, Orbitz?'' Travel Weekly (March 4, 
2002) at 6; Orbitz Supp. Comments at 35. Orbitz is offering airlines 
rebates on their booking fees if they agree, among other things, to 
give Orbitz access to all of their publicly-available fares, including 
their Internet fares. Orbitz Supp. Reply at 24-25. Orbitz'' plans for 
gaining access to these fares, which airlines initially at least did 
not allow other travel agencies to sell, and Orbitz'' control by five 
major airlines have generated substantial controversy.
    If an airline refuses to allow Orbitz to sell all of its publicly-
available fares, consumers can still book the airline if the airline 
participates in Worldspan, but the airline will not get a rebate on the 
CRS fees. Orbitz is unable to make bookings on those airlines, such as 
Southwest, that neither participate in Worldspan nor provide fare and 
availability information and booking capabilities to Orbitz through 
another channel.
    Orbitz is currently operating as an on-line travel agency. Orbitz 
could make its services available to travel agencies for use in making 
airline bookings. Since it charges participating airlines a fee for 
such bookings, it would become a system subject to all of the rules 
applicable to the existing four systems if it offered its services to 
travel agencies. As noted, under Orbitz'' agreement with Aqua, the 
latter firm will develop a program that would enable travel agencies to 
access Orbitz'' displays and booking capabilities.
    Other firms selling travel on-line have created new marketing 
strategies. Priceline operates a site that allows consumers to ``name 
their own price'' for airline seats; a consumer using Priceline, 
however, only learns which airline is operating the service and the 
routing and departure time for the trip after the consumer makes a bid 
and the bid is accepted by Priceline. While giving consumers an 
opportunity to bid on a ticket price, Priceline only sells seats 
obtained through negotiated deals with airlines and other suppliers. 
Airlines use Priceline for selling distressed inventory. Bear, Stearns, 
``Point, Click, Trip,'' at 53-55. Several major airlines have created 
another website, Hotwire, which offers a service like Priceline. Unlike 
Priceline, Hotwire tells the consumer what the fare will be for the 
trip before the customer decides whether to buy the ticket; like 
Priceline, Hotwire does not disclose the name of the airline, the 
routing, and the departure time until the consumer accepts Hotwire's 
offered fare. In 2001 Priceline and other opaque sites accounted for 
about two percent of all airline bookings. ``Web Sales of Airline 
Tickets Are Making Hefty Advances,'' New York Times (July 5, 2001).
    While the growing use of the Internet and other changes in 
distribution practices will likely make it harder for some ``brick-and-
mortar'' travel agencies to remain in business, the travel agency 
industry will not disappear. A Sabre official has predicted that travel 
agencies will account for 65 percent of all airline bookings in 2005 
(45 percent by traditional travel agencies and 20 percent by travel 
agency websites). ``Sabre: Agents could retain 65% of air sales by 
2005,'' Travel Weekly (April 3, 2000) at 10.
    Travel agents provide services that benefit many consumers. Many 
travelers value the personal service provided by travel agents and 
their expertise with complex itineraries. ``Web Sales of Airline 
Tickets Are Making Hefty Advances,'' New York Times (July 5, 2001). A 
large proportion of the agencies' customers will probably continue to 
rely on ``brick-and-mortar'' agencies because they wish to have 
personal contact with a travel agent and will not use an Internet site 
for buying tickets. Bear, Stearns, ``Point, Click, Trip,'' at 17. Many 
consumers also prefer using a travel agency website

[[Page 69375]]

rather than an airline website since they believe that they are likely 
to get a better price from a travel agency website. April 17, 2000, 
PhoCusWright Press Release. In the past the GAO found that consumers 
were more likely to obtain the lowest available fare from a travel 
agent than from other sources of airline information. GAO, ``Effects of 
Changes in How Airline Tickets Are Sold'' at 13. And travel agents can 
offer expert advice not easily available elsewhere (and use the 
Internet to reach customers interested in taking advantage of an 
agency's special expertise). See, e.g., Travel Distribution Report 
(March 11, 2002) at 39.
    While the recent continuing changes in airline distribution have 
provided substantial benefits for airlines (and consumers, when 
airlines pass on their cost savings), they may not have eliminated the 
need for CRS regulation, as we discuss next.

E. Considerations That Support Maintaining CRS Rules

    In considering whether to readopt the rules with modifications, we 
must determine the extent to which our past findings remain valid, that 
is, whether the systems still have the power to distort airline 
competition and provide inaccurate or misleading information to 
consumers, and whether a system owned or controlled by an airline will 
have an incentive to use that power if not blocked by rules. The 
airlines' growing use of the Internet for distribution and the changes 
in the systems' ownership require us to reassess the validity of these 
past findings. We invite the parties to comment on possible 
alternatives that could reduce the extent of regulation and lead to a 
phase-out of the rules, as discussed below. In particular, we are 
proposing to end the mandatory participation rule and to end the ban 
against discriminatory booking fees. These changes could enable 
airlines to negotiate for better terms for CRS participation.
    When we last reexamined the rules, we thought that a system could 
prejudice the competitive position of disfavored airlines by biasing 
its displays so that their flights were omitted or displayed only after 
the flights of favored airlines, charging some airlines substantially 
higher fees than those paid by their competitors, or imposing 
participation terms that disadvantage some airlines, for example. We 
also found that, without rules, the systems and their owners would be 
likely to engage in practices meant to distort competition in the CRS 
business and to prevent airlines from using alternative electronic 
means of providing information and booking capabilities to travel 
agencies. We ask the parties to address the current validity of those 
concerns, particularly in view of the on-going developments in airline 
distribution.
    When we reexamined the rules ten years ago, all of the systems were 
owned and controlled by one or more airlines or airline affiliates, and 
we relied on that fact in concluding that the CRS rules should be 
readopted. Since two of the systems are no longer owned and controlled 
by airlines, we have considered whether our rules should govern the 
practices of such a system (we will refer to systems that are not owned 
and controlled by airlines as ``non-airline systems'' and systems owned 
or controlled by airlines as ``airline systems''). We tentatively 
believe that non-airline systems may have market power over airlines 
and that rules preventing those systems as well as airline systems from 
engaging in anticompetitive or deceptive practices may be necessary. We 
ask the parties to comment on whether a non-airline system, despite the 
lack of airline control, might use its power to distort airline 
competition or mislead consumers and engage in practices that would 
unreasonably restrict the ability of airlines and travel agencies to 
use alternatives to the systems, thereby increasing airline costs (and 
thus the fares paid by consumers), if we do not regulate such systems.
    In addition, the systems' willingness to sell data on the bookings 
made by individual travel agencies on each airline on a route-by-route 
basis and flight-by-flight basis, and to do so almost as soon as 
bookings are made, may give a large airline that dominates a 
metropolitan area power to take actions undermining the ability of 
competing airlines, particularly low-fare airlines, to continue serving 
that area. Among other things, the large airlines may use the data to 
pressure travel agencies in such a metropolitan area to stop booking 
travelers with competing airlines. Tentatively, therefore, we are 
proposing restrictions on the data that airlines may obtain from the 
systems.

1. Overview

    Computer reservations system practices originally presented 
regulatory concerns because of the potential for consumer injury. See 
49 FR 32540 (August 15, 1984). After reexamining the need for CRS rules 
in our last major rulemaking, we decided that the rules remained 
necessary in view of the systems' ownership by airlines and the 
structure of airline distribution at that time. At that time, we 
determined that market forces did not discipline the systems' price and 
terms for the services offered participating airlines. The systems' 
practices were not affected by market forces because the systems did 
not need to compete for airline participants. Airlines relied on travel 
agents for the great majority of their revenues, travel agencies used 
systems to make almost all of their airline bookings, and almost all 
travel agencies relied entirely or predominantly on one system to learn 
what airline services were available and to make bookings for their 
customers. 57 FR 43783-43784. Travel agents relied on the systems 
because they efficiently provide comprehensive information and booking 
capabilities on participating airlines and other travel suppliers. A 
CRS presented displays that integrate all participating airline 
services offered in a market. Each system showed the schedules and 
fares offered by those airlines in each market and whether seats were 
available on specific flights at specific fares. A travel agent could 
compare the schedules and fares offered by different airlines and 
determine which would best meet a customer's needs. 57 FR 43782; 56 FR 
12587.
    If an airline failed to participate in one system, the travel 
agents using that system could neither book its services readily nor 
find its services in the system's displays. The airline as a result 
would lose a substantial portion of its bookings from those travel 
agents.
    The economics of the airline industry are such that the addition or 
loss of a few passengers on a flight will determine whether the flight 
is profitable. The importance of marginal revenues in the airline 
business means that airlines cannot afford to lose access to any 
significant distribution channel. 57 FR 43780, 43783 (September 22, 
1992). As one industry economist, Daniel Kasper, stated, Orbitz Supp. 
Reply, Daniel Kasper Statement at 7:

    Airlines utilize many different distribution channels for the 
simple reason that they must do so in order to ensure that their 
products are easily accessible to the broadest possible array of 
prospective travelers. * * * Because attracting incremental 
passengers is critically important to an airline's profitability, 
each airline strives to match or surpass the visibility to 
purchasers enjoyed by its rivals. That is, airlines must compete for 
``shelf space'' in any channel where consumers prefer to shop.

Cf. Bear, Stearns & Co., ``Point, Click, Trip: An Introduction to the 
On-Line Travel Agency'' (April 2000) at 24-25.
    Virtually every airline therefore was compelled to participate in 
each of the four systems operating in the United

[[Page 69376]]

States. The Justice Department thus stated in an earlier rulemaking, 
quoted at 62 FR 59789,

    Each CRS provides access to a large, discrete group of travel 
agents, and unless a carrier is willing to forego access to those 
travel agents, it must participate in every CRS. Thus, from an 
airline's perspective, each CRS constitutes a separate market and 
each system possesses market power over any carrier that wants 
travel agents subscribing to that CRS to sell its airline tickets.

    As a result, the systems did not need to compete for airline 
participants. They could therefore impose costly and burdensome 
requirements on participating airlines. As American has stated, ``This 
market structure allows CRSs to charge exorbitant fees to airlines.'' 
Statement of George Nicoud before the National Commission at 7.
    When we most recently reviewed the rules, we found that, while the 
roles of the travel agents and the systems in airline distribution gave 
each of the systems market power, the systems also engaged in practices 
that buttressed their market power by reducing the ability of airlines 
and travel agencies to use alternative electronic means for the tasks 
of communicating information and making bookings. Until we revised our 
rules, the systems refused to allow travel agencies to buy third-party 
hardware and software, and each system refused to allow travel agencies 
to use the system equipment to access alternative databases and 
systems. Each system's contracts with travel agencies generally imposed 
substantial penalties on travel agencies that did not use that system 
for a major share of its bookings. The systems additionally required 
travel agencies to accept five-year contracts. 56 FR 12605, 12621.
    It is important to note that substantial changes in the airline 
distribution business have occurred since our last overall 
reexamination of the CRS business. The Internet is an increasingly 
important means of airline distribution, and a number of airlines are 
obtaining a growing share of their total bookings from their own 
websites. The airlines' ability to sell tickets through their own 
websites gives them an inexpensive and efficient alternative to the 
travel agency system (and to their own reservations agents) and a way 
to bypass the systems for a significant number of bookings. In 
addition, two of the four systems operating in the United States are no 
longer owned by airlines. These developments present the question of 
whether CRS rules remain necessary.
    According to a number of commenters, CRS rules may continue to be 
necessary to prevent system practices that could prejudice airline 
competition, although consumer use of the Internet and other on-going 
changes in airline distribution may in the future eliminate the need 
for most or all of the rules. In addition, the systems may continue to 
engage in practices that deter airlines and travel agencies from using 
alternative electronic means for providing information and making 
bookings. The changes in airline distribution and system ownership thus 
far may not have substantially eroded the systems' market power or the 
rationale for our adoption of rules. In considering whether rules 
remain necessary, we must also bear in mind that the air services 
agreements between the United States and many foreign countries 
obligate the United States to ensure that foreign airlines are not 
subject to unreasonably discriminatory treatment in the systems 
operating in this country and that those systems do not bias their 
displays of international services.
    We recognize, however, that on-going developments in the airline 
distribution and CRS businesses are making participation in each system 
less necessary than before. In time these and other developments may 
clearly eliminate the need for many or all of our rules and may already 
have made some of the rules unnecessary. If we readopt rules governing 
the CRS business, we will monitor those developments to see whether the 
rules can be eliminated in whole or in part.
    The following discussion analyzes the potential basis for some 
continued CRS regulation: we first discuss the impact of the Internet, 
then discuss whether the systems may continue to have market power 
against most airlines, consider whether the systems (whether or not 
owned by airlines) would use that power to distort airline competition 
and harm consumers if the rules were not readopted, discuss whether 
airlines have any bargaining leverage against the systems, and end by 
discussing other possible measures that may preclude anti-competitive 
conduct.

2. The Impact of the Internet on the Systems' Role in Airline 
Distribution

    Despite the high cost of distribution through CRSs, most airlines 
continue to sell their services through them because they are still the 
best way to get inventory on travel agent desktops, a distribution 
channel that is still very important. Airlines ``also value the GDSs' 
ability to reach corporate accounts as well as more remote markets, 
from Alabama to Zimbabwe.'' Forrester Research, ``Travel: Direct 
Connect Isn't Enough'' (October 2001) at 5-6. The Internet has not 
changed these two sales objectives. As discussed below, the Internet 
may have increased the systems' importance for most airlines to date. 
Many airlines said in a recent survey that they ``would not even 
consider cutting the cord.'' ``Travel: Direct Connect Isn't Enough'' at 
5-6.
    Although the Internet has the potential to introduce more 
competition with CRS-type services in the future by using new and 
cheaper technologies to replicate some CRS functions, many believe that 
in some ways the Internet thus far may have reinforced the power of the 
CRSs. Indeed, travel became the most successful high-priced product 
sold over the Internet because the CRSs provided a readily available, 
consolidated, and integrated electronic source of price and inventory 
information that could be easily linked to web-based customer user 
interfaces. Like the customers of traditional travel agents, on-line 
consumers seek the integrated comparison-shopping and booking 
functionality that only a CRS can provide. All of the major online 
travel agencies use a CRS for their booking functionality, and many 
also use CRSs to search flights and fares for customer displays. 
Because the CRSs enable online consumers to comparison shop and make 
bookings for a full range of travel services, CRS performance, both 
collectively and individually, is even more critical to an airline's 
success than in the past. Worldspan, for example, serves nearly 20,000 
travel agencies and processes more than 50 percent of all online travel 
agency bookings. Statement of Paul J. Blackney, President and CEO, 
Worldspan, Testimony before the National Commission June 26, 2002.
    PhoCusWright, an Internet research firm, reports that the Internet 
represented 14 percent of all airline sales for U.S. airlines in 2001, 
up from 8 percent in 2000, excluding sales made through corporate on-
line systems. Airline websites now represent 58 percent of airlines' 
total Internet sales, while the remaining 42 percent of Internet sales 
are now made through on-line travel agencies. ``Airline Web Sales Soar 
Despite Sour Year,'' PhoCusWright, Inc. (May 2002) at 1-2. Thus, in 
2001, 42 percent of all U.S. airline Internet sales were made through 
CRSs. As bookings through on-line agencies grow, bookings made through 
CRSs will also continue to grow, as long as on-line agencies, like 
their traditional counterparts, remain dependent on CRSs. Airline 
website sales were up 50 percent in 2001 compared to 2000, but on-line 
agency sales also grew rapidly, up 40 percent. Id. at 1.

[[Page 69377]]

    Forrester Research, an Internet research firm, reports that, before 
the advent of the Internet, about eighty percent of an airline's 
business came via travel agencies using CRSs, with the remainder coming 
from direct sales via airline reservation centers or ticket offices. 
Since 1995, airline websites like delta.com have helped airlines raise 
their direct sales and cut CRS sales to 70 percent of passenger 
revenues. Forrester Research, ``Travel: Direct Connect Isn't Enough'' 
(October 2001) at 5-6. Northwest Airlines reports that it obtains 
``nearly 70% of its revenue from traditional travel agents, and nearly 
10% from third party travel agents like Travelocity, Expedia, and 
Orbitz.'' Testimony of Al Lenza, National Commission (June 12, 2002) at 
5. Thus, nearly 80 percent of Northwest's total bookings were made 
through a CRS.
    While the Internet and other new technologies have the potential 
for reducing airline dependence on CRSs, that development is at an 
early stage. Airlines have achieved some success in increasing direct 
sales through better use of the Internet, but an airline's ability to 
reduce its dependence on a CRS still largely depends on its ability to 
encourage more customers to book directly with it. More generally, an 
airline's ability to encourage direct bookings through its own website 
is limited to the subset of air travel consumers who have readily 
available Internet access and are willing to send credit card 
information over the Internet. According to a recent Department of 
Commerce report, 143 million Americans, or about 54 percent of the 
population, were using the Internet. Among those using the Internet, 
only 39 percent are making purchases online. ``A Nation Online: How 
Americans Are Expanding Their Use of the Internet,'' U.S. Department of 
Commerce (February 2002) at 1, 2. While Internet usage is expected to 
continue to grow rapidly as is consumer confidence in using it to make 
purchases, a substantial portion of the U.S. population still does not 
use the Internet at all. Thus, despite the Internet, an airline cannot 
encourage these users to make bookings on its website rather than 
through a traditional travel agent (using a CRS).
    Since many consumers still prefer to use on-line and traditional 
travel agencies, airlines and other travel suppliers also seek to 
reduce their dependence on CRSs further by expanding direct sales into 
``direct connection'' where travel agencies and corporate accounts 
directly access each airline's host central reservations system. In 
short, travel agents would access an airline's inventory via an 
enhanced version of each airline's agents-only website. Forrester 
Research: ``Travel: Direct Connect Isn't Enough'' (October 2001) at 8. 
But direct connect is only a first step in transforming CRS-based 
travel distribution. Forrester Research notes that limited 
interconnectivity and resistance among high-value travel agents who 
have significant influence over corporate travel and complex leisure 
travel are likely to limit the degree to which airline dependence on 
CRSs can be reduced. Ultimately, most industry observers believe that 
integrated direct connect is the form of direct connection that has the 
most promise of reducing airline dependence on CRSs because it would 
allow travel agents to integrate an airline booking with separately 
made hotel or car rental reservations and facilitate the integration of 
various travel elements in a single itinerary in much the same way as 
the CRSs currently do. Id. at 10. Orbitz plans to inaugurate direct 
connections with several carriers this year. Although this will further 
reduce those airlines' dependence on the systems, the process will take 
some time, and substantial additional industry initiatives will be 
required to reach the scale and scope necessary to have a significant 
impact on the current CRS-dependent travel distribution model. Orbitz's 
direct connection program may prompt other on-line agencies to launch 
similar initiatives in an effort to reduce airline distribution costs 
in order to gain access to webfare inventory.
    Integrated direct connect solutions are extremely complex and 
require substantial investment by airlines and other travel suppliers. 
Integrated direct connect on a substantial scale is unlikely for the 
next several years because an alternative to IBM's transaction 
processing facility (TPF), the primary high-volume transaction 
messaging platform, must be developed and is not expected until at 
least 2004. Id. at 13. Because of the significant financial investments 
involved, some airlines, particularly smaller airlines, may choose not 
to direct connect at all. Even after integrated direct connect is 
developed, however, most observers see a continuing need for CRSs to 
complete complicated transactions, particularly interline transactions 
and transactions involving smaller carriers and foreign carriers that 
have not invested in integrated direct connect. Indeed, Forrester 
Research estimates that full industry-wide implementation of integrated 
technologies will not be complete until 2008 or beyond. Id. at 14.
    The fact that major CRS companies have acquired control of on-line 
agencies could maintain their market power. Sabre recently reacquired 
complete ownership of Travelocity, and Cendant/Galileo owns Trip.com 
and Cheaptickets.com. The systems could use these integrated businesses 
to thwart the introduction of alternative technologies that could 
perform core CRS functions at a lower cost and thereby provide more 
competition for CRS services. ``Report to Congress: Efforts to Monitor 
Orbitz'' at 19. These on-line travel agencies are captive to their CRS 
hosts--a relationship which mirrors the central problem in the 
traditional travel agency marketplace where travel agents are bound to 
systems by five year contracts. On-line and ``brick-and-mortar'' travel 
agents alike have high switching costs.
    In sum, it appears possible that several industry characteristics 
that led to the regulation of the CRSs may continue to exist, 
notwithstanding Internet-based technologies and innovation. First, most 
airlines cannot avoid participating in CRSs by creating a new system. 
Even with new technologies, the fixed investments of time and money to 
replicate the systems' integrated complexity are prohibitive. Second, 
because a substantial number of airline Internet sales are made through 
the CRSs, the Internet has not mitigated the risk that the systems 
(whether or not owned by airlines) may use that power to distort 
airline competition. Third, although airlines have increased direct 
sales through their own websites, the Internet may not yet have given 
airlines substantial bargaining leverage against the systems. Fourth, 
on-line and ``brick-and-mortar'' travel agencies alike appear to be 
both dependent on and locked into long-term relationships with their 
CRS providers due to very high switching costs.

3. The Potential Existence of System Market Power

    As explained next, the developments in airline distribution may not 
have eroded the systems' market power as to airlines: travel agents 
sell most airline tickets, travel agents usually use a system to 
investigate airline service options and to make bookings, and each 
travel agency office relies entirely or predominantly on one system. 
Each of the on-line travel agencies also uses a system for making 
bookings, and almost all rely on a system for obtaining fare and 
schedule information as well.
    Our tentative belief that the systems continue to have market power 
is consistent with the comments of a

[[Page 69378]]

number of airlines. While Northwest supports ending the rules, 
Northwest also asserts:

    Sales to consumers made over the Internet, via both airline 
websites and online agents, have provided significant new 
competition to CRSs, but each CRS typically remains the only means 
by which to reach the travel agents who use that system. Each CRS 
therefore continues to have significant market power based on the 
travel agents to which it has exclusive access.

Northwest Comments on Proposed Extension at 5.
(a) The Airlines' Dependence on Travel Agents
    The travel agency network traditionally provided an efficient means 
of distribution for most airlines, and airlines derived most of their 
revenue from sales made by travel agents. 57 FR 43782. Despite the 
changes in airline distribution, travel agents continue to sell the 
majority of tickets for most airlines. In 2000, travel agencies sold 
over $76 billion worth of air travel. Statement of William A. Maloney 
before the National Commission at 9. In 1999 travel agencies sold 
almost three-quarters of all airline tickets. Bear, Stearns & Co., 
``Point, Click, Trip: An Introduction to the On-Line Travel Agency'' 
(April 2000) at 17. Recent remarks from American Airlines indicate that 
travel agencies account for 70 percent of that carrier's bookings 
today. Statement of George A. Nicoud III before the National Commission 
at 3. Northwest states that 70 percent of its revenue comes from 
bookings made through ``traditional'' travel agents with another 10 
percent being derived from sales through ``third party travel agents 
like Travelocity, Expedia, and Orbitz.'' Statement of Al Lenza before 
National Commission at 5.
    Travel agents seem likely to maintain their predominant role in 
airline distribution despite the growing use of the Internet and other 
changes in distribution practices. ``Brick-and-mortar'' travel agents 
provide expertise and services that many consumers find valuable, as 
explained in our earlier discussion of the impact of the Internet.
    A large portion of consumers buying tickets through the Internet 
also use on-line travel agencies, not airline websites, for their 
ticket purchases. In 2001, U.S. airlines sold $11.8 billion worth of 
tickets through the Internet. Online travel agencies accounted for $4.9 
billion, or 42 percent, of those online sales. ``Airline Web Sales Soar 
Despite Sour Year,'' PhoCusWright Snapshot, May 2002 (2-3).
    Travel agents therefore should remain an important part of the 
airline distribution system. A Sabre official has predicted that travel 
agencies will account for 65 percent of all airline bookings in 2005 
(45 percent by traditional travel agencies and 20 percent by travel 
agency websites). ``Sabre: Agents could retain 65% of air sales by 
2005,'' Travel Weekly (April 3, 2000) at 10.
    We recognize that some airlines, especially the low-fare airlines 
and several other airlines that are not among the largest airlines, 
have been successful in encouraging a growing number of customers to 
buy tickets through their own websites, as discussed above. As we 
noted, for example, Alaska obtained sixteen percent of its total 
bookings from its website in 2001, Southwest's website produced forty 
percent of the airline's revenues in 2001, and Frontier obtained 28 
percent of its bookings in the quarter ended December 31, 2001, from 
its website.
    A few of the largest airlines have succeeded in obtaining a 
significant number of bookings through the Internet. Delta expected to 
obtain fifteen percent of its tickets from its own website in 2002. 
Delta April 24, 2002, Press Release. Delta, however, still derives 47 
percent of its tickets and 64 percent of its revenues from traditional 
travel agents. Statement of Scott Yohe before the National Commission 
at 8. And most of the network airlines have been obtaining a smaller 
share of their bookings from their websites. The websites of American 
and United each produce only five percent of the airline's revenues. 
``Executive Flight: The Age of `Wal-Mart' Airlines Crunches the Biggest 
Carriers,'' Wall Street Journal (June 18, 2002). United has stated that 
it still derives more than seventy percent of its revenues from travel 
agency bookings. June 26, 2002, United Press Release.
    The Internet does not seem to have markedly undermined each 
system's market power. Indeed, in some ways the Internet may have 
reinforced the systems' power. First, as noted above, many Internet 
bookings are made through on-line travel agencies (42 percent of all 
on-line bookings in 2001), and those agencies rely on the systems 
(Orbitz is a partial exception, since it does not use a system to 
obtain fare and schedule information). Worldspan alone processes more 
than half of all online agency bookings made today. Statement of Paul 
J. Blackney before the National Commission at 3.
    Second, individual airline websites are unlikely to replace travel 
agencies as the dominant form of airline distribution for several 
reasons. As shown, travel agents offer expertise and personal services 
that many travellers consider invaluable. Those travellers will not be 
likely to switch to airline websites for their bookings. Many consumers 
may continue to be unwilling to use the Internet to buy airline 
tickets, which can be relatively expensive and can require the consumer 
to choose among a variety of routings and fare options subject to 
different conditions and restrictions. In addition, while the Internet 
provides extensive information and buying facilities for consumers, 
many travel websites do not present this information in a manner that 
readily enables consumers to obtain a complete or largely complete list 
of travel options and to compare the suppliers' different prices and 
service features. Each system has provided efficiency benefits to 
travel agents and more recently consumers because it displays flight 
and fare information for all airlines serving a city-pair market that 
participate in the system. Consumers can access a fairly complete 
display of airline services through the Internet by logging onto a 
website that uses a system (or, like Orbitz, that has supplemented a 
system's information with information obtained through other sources). 
If a consumer instead views a travel supplier's website, he or she will 
likely see only the services offered by that airline and any airlines 
with which it has alliances. In contrast, a travel agent can give a 
customer advice on most of the available service options in a market, 
primarily because the integrated displays offered by each system will 
list the services and most fares offered by every airline participating 
in a system.
    Airlines, moreover, have little ability to encourage most consumers 
to shift their bookings from travel agents to their own websites. 
Several have used offers of additional discounts and frequent flyer 
mile bonuses to increase the number of travellers using websites, but 
many travellers would presumably continue to use travel agents unless 
the discounts and bonus offers became so large that they cancelled out 
the airline's cost savings otherwise achievable from its website.
    The existence of one distribution channel that is attractive to a 
significant and growing number of travellers does not make that channel 
competitive with another channel that a larger if shrinking share of 
travellers finds preferable. With a very few exceptions, any airline 
that uses only one channel will not obtain the business of those 
travellers that prefer the other channel. Similarly, while the airlines 
were able in the 1980's to sell a substantial number of tickets through 
their own

[[Page 69379]]

reservations centers, they depended on the travel agency system for the 
sale of most of their tickets.
    We recognize that Southwest has never participated in any system 
except Sabre and participates even in Sabre at a limited level. While 
Southwest has thrived without significant system participation, its 
success does not indicate that other airlines can succeed while 
avoiding participation in the systems. Southwest has an unusual 
business plan. Southwest, for example, focuses on operating frequent 
point-to-point service in dense markets, does not have a hub-and-spoke 
route system, and has a relatively simple fare structure. 
Transportation Research Board, Entry and Competition at 49-50. 
Southwest has well-established brand recognition and buys relatively 
large amounts of advertising. While JetBlue has also prospered thus far 
while obtaining only a small share of its total revenues from travel 
agents, its experience similarly does not demonstrate that other 
airlines can forgo reliance on the travel agency distribution system. 
Most of the other low-fare airlines, like AirTran and Frontier, have 
concluded that participation in each system is necessary. 62 FR 47608; 
Frontier Comments at 4. In the fourth quarter of 2001, AirTran, for 
example, obtained 33 percent of its bookings from travel agencies using 
a system. AirTran 10-K Report for fiscal year 2001 at 8. The systems' 
apparent market power over most of the airlines exists because those 
airlines do not operate like Southwest or JetBlue, and we have no 
evidence that other carriers could feasibly adopt Southwest's marketing 
strategy without incurring substantial costs.
(b) The Travel Agents' Dependence on the Systems
    Almost every travel agent has used a system to investigate airline 
service options and make bookings for the agency's customers (each on-
line travel agency, moreover, also uses a system, as noted above). One 
survey reported that travel agencies made 93 percent of their domestic 
airline bookings and 81 percent of their international airline bookings 
through a system in 1999. ``U.S. Travel Agency Survey 2000,'' Travel 
Weekly (August 24, 2000) at 133.
    The extensive reliance on the systems by on-line and ``brick-and-
mortar'' travel agencies has stemmed both from the efficiency benefits 
provided by the systems and from the systems' contractual practices 
designed to deter travel agents from using alternatives to the systems. 
Each system offers an integrated display of airline services that 
enables a travel agent to quickly see the services and fares offered by 
every airline in a market (except for the few airlines that do not 
participate in the system) and to book any of those airlines. If a 
travel agent did not use a system, the agent would have to search a 
variety of sources to learn what services were available, which would 
necessarily be more time-consuming and inefficient. Since travel agents 
typically work under significant time pressure, they have an incentive 
to use one system, rather than multiple sources of information. 
Previously, the widespread use of display bias arose from the travel 
agents' same desire to take as little time as possible acting on 
customer requests. See, e.g., Mark Pestronk, ``Change to GDS `model' 
not likely,'' Travel Weekly (July 15, 2002).
    Travel agency business practices provide an additional incentive 
for travel agents to use a system for as many airline bookings as 
possible. The travel agency back-office systems used for accounting, 
billing, and record-keeping functions are tied to transactions made 
through the agency's system. Travel agencies are therefore reluctant to 
make transactions outside of the system because those transactions will 
not be automatically entered in most travel agency back-office systems.
    As a result, searching several websites for E-fares is less 
efficient for travel agents, complicates a travel agency's task of 
preparing reports for corporate customers, and makes it harder for 
corporate travel managers to manage travel programs. Susan Parr Travel 
Comments; NBTA Comments on Proposed Extension at 2. Thus, while many 
travel agents have Internet access and could book airline seats over 
the web, either through an individual airline site or another travel 
agency site, it appears they use the Internet for making a relatively 
small portion of their airline bookings. They have used the Internet 
primarily for booking hotels, tours, and railroad services. See Travel 
Distribution Report (October 18, 2001) at 1. Travel agents nonetheless 
are increasingly using the Internet for bookings. ``Online travel is 
booming,'' Travel Weekly (August 26, 2002).
    The systems' contract practices, however, also discourage most 
travel agencies from using more than one system. The systems' 
productivity pricing structures seem to deter travel agents from using 
the Internet. When travel agents book E-fares through the Internet, for 
example, they run the risk of failing to satisfy the minimum monthly 
booking quota set by the productivity pricing provisions. ``Web air 
fares unlevel the playing field,'' Chicago Tribune (February 16, 2002); 
``Travel Agents Cry Foul over Internet Fare Deals,'' Los Angeles Times 
(February 16, 2002); All About Travel Supp. Comments. The potential 
loss of the lower CRS rates may deter travel agents from booking E-
fares when doing so would be in the best interests of their customers. 
ASTA thus alleges that productivity pricing clauses ``have served 
mainly as a deterrent to the agency's looking to non-CRS sources, such 
as the Internet, to make bookings that more nearly conform to their 
clients' needs.'' ASTA Comments on Proposed Extension at 3.
    Our existing rules have furthered several of the developments that 
may be reducing the systems' market power. Before we revised the rules, 
for example, the systems generally denied subscribers the ability to 
use third-party equipment. 56 FR 12605. Our revised rules gave travel 
agencies the right to use their own equipment. Travel agencies have 
been taking advantage of that rule, for in 1999 thirty-six percent of 
all travel agencies used their own terminals. ``U.S. Travel Agency 
Survey 2000,'' Travel Weekly (August 24, 2000) at 131, 132, 133.
    As noted, travel agency offices have typically relied entirely or 
predominantly on just one system for these tasks. While the services 
offered by each system are comparable, using multiple systems could 
improve a travel agency's ability to serve its customers. Travel agents 
then could acquire more accurate and complete information on available 
airline flights, and the agencies' ability to use multiple systems 
would encourage the systems to compete more on the quality and range of 
their services. 57 FR 43797. Offsetting that factor, a travel agency's 
use of multiple systems can create some inefficiencies, due to 
additional training needs and potential difficulties in keeping track 
of customer records. 56 FR 12607. Each system also offers large 
financial inducements to most travel agency customers to make most or 
all of their bookings on that system. Since the large majority of 
travel agencies therefore depend on one system, almost all airlines 
must participate in each system in order to make its services readily 
saleable by the travel agencies using that system. Delta Comments at 5; 
American Supp. Comments at 5; Continental Supp. Comments at 5; Midwest 
Express Supp. Comments at 3-4.
    Customer demands may push travel agencies into using additional 
sources of information like the Internet. ``Online travel is booming,'' 
Travel Weekly (August 26, 2002). Airlines generally offer many of their 
lowest fares only on

[[Page 69380]]

their own websites and, for airlines that are Orbitz ``charter 
associates,'' on Orbitz. Airlines generally do not make these webfares 
(or E-fares) available for sale through any of the systems used by 
travel agents. Some airlines like Delta allow travel agents to book 
these fares on their websites created for travel agency use. Travel 
agents could also book such fares through Orbitz. Booking an E-fare (or 
any fare) through an airline website or Orbitz or another on-line 
travel agency is now an inefficient process for travel agents, as 
discussed above. Several firms are developing software that will enable 
travel agents to quickly search for fares on multiple websites and 
systems, however. ``Fare game: `Beat the agent''', Travel Weekly (March 
4, 2002) at 6. By agreement with Orbitz, Aqua will also develop a 
program allowing travel agents to simultaneously see the display of 
fares offered by a system and the fares offered through Orbitz, 
including the E-fares sold through Orbitz that airlines do not sell 
through the systems used by travel agencies. May 16, 2002, Orbitz Press 
Release.
    When travel agents can easily and efficiently access websites that 
provide information and booking capabilities, they will be more likely 
to use such alternatives to the systems. A substantial use of such 
alternatives would reduce each system's market power, since an airline 
would not necessarily lose a substantial amount of revenue if it ended 
its participation in one of the systems. The travel agents using that 
system would have alternative means for obtaining the airline's fare 
and schedule information and for booking the airline. The programs 
under development by independent firms will not necessarily achieve 
that result, however. The developers are focusing on giving travel 
agents easy access to E-fares. E-fares, however, make up a relatively 
small share of all airline bookings. PhoCus Wright reports that such 
fares constitute less than 2 percent of an airline's total ticket 
sales. ``Airline Web Sales Soar Despite Sour Year,'' PhoCusWright 
Snapshot, May 2002(3). If the programs do not give travel agents quick 
access to other fares, or if travel agents only use the programs to 
investigate whether E-fares are available, they would not cause a 
substantial shift of bookings away from the systems.
    The systems themselves are also responding to travel agency demands 
for easy access to webfares. Certain systems are developing programs 
that would enable travel agents to sell webfares without leaving the 
system. Galileo Press Release dated May 23, 2002. Sabre recently signed 
an agreement with FareChase, a web automation technology provider, that 
enables travel agencies using Sabre and subscribing to its eVoya 
product to have the option of using a FareChase program that searches 
multiple airline websites for webfares and presents a display of the 
results alongside fares available for booking through the system. 
FareChase Press Release April 29, 2002, and FareChase Information Page 
at Sabre website. These developments will both increase the efficiency 
and quality of service provided by travel agents but at the same time 
make it less necessary for them to use alternatives to the system to 
research and, in some cases, book, airline services. The systems' 
attempts to provide mechanisms for travel agencies to more easily 
access webfares may serve to increase agency dependence on the systems 
and further reduce the incentive for travel agents to use alternative 
electronic means of obtaining information and making bookings. Such a 
development could inhibit the introduction of more competition to the 
systems in the airline distribution arena.
(c) The Airlines' Apparent Lack of Bargaining Leverage Against the 
Systems
    Because most airlines have relied on travel agencies to sell most 
of their tickets, and because travel agencies have typically relied on 
one system to learn what airline services are available, airlines (with 
a few exceptions) generally have not been able to afford not to 
participate in each of the systems. As discussed, an airline's 
withdrawal from one system would likely substantially reduce its 
bookings from travel agents using that system. As a result, airlines 
have not had significant bargaining leverage against the systems, 
because the systems have not needed to compete for airline 
participants.
    Despite the advent of the Internet, travel suppliers in general, 
and most of the airline industry in particular, may continue to depend 
substantially on the systems to distribute their products. Midwest 
Express, for example, states that in the first half of 2000, 26 percent 
of its total bookings came through Sabre, 18 percent through Galileo, 
and 14 percent through Worldspan. Midwest Express Supp. Comments at 
Exhibit 1. According to a survey conducted by Forrester Research, 59 
percent of travel industry supplier respondents indicate that ``more 
than half of their revenue still comes through a GDS.'' In 2001, travel 
industry wide, 55 percent of revenues came through a system while 45 
percent resulted from direct sales. However, among airline industry 
survey respondents only, 70 percent of revenues flowed through a system 
while only 30 percent were attributable to direct sales. Forrester 
Research: ``Travel: Direct Connect Isn't Enough'' October 2001, at 3, 
6. Thus, the airline industry remains more dependent than its travel 
industry counterparts on travel agency sales made through the systems.
    In 2000, bookings fees accounted for 82 percent of system revenues. 
The captivity of the airline industry in particular to the systems is 
again illustrated by the fact 87 percent of total system travel booking 
fee revenues were generated by airline reservations. Forrester 
Research: ``Travel: Direct Connect Isn't Enough'' October 2001 at 14.
    Some parties have argued that the rules, such as the mandatory 
participation rule, enable the systems to impose unreasonable terms for 
airline participation because they require the major airlines to 
participate in each system. As discussed below, we are considering 
whether the mandatory participation rule may limit the airlines' 
negotiating power. When we readopted the rules, we found that the 
airlines' economic needs compelled almost all of them to participate in 
each system. If airlines had been able to avoid participating in 
systems whose terms were unreasonable or unduly expensive, we would 
have allowed the rules to expire. A number of smaller airlines are not 
subject to the mandatory participation rule, since they have held no 
ownership interest in any system, yet most participate in each of the 
systems, as discussed above. However, since several airlines have 
presented a persuasive argument that they could obtain better terms for 
participation if we eliminated the mandatory participation rule, we are 
proposing to do so. If these airline assertions are correct, ending 
that rule could expose the systems to new competitive discipline.
    The systems, however, in the absence of any rules might impose 
requirements on participating airlines that would further limit the 
airlines' ability to choose whether to participate in a system and at 
what level. After our last major rulemaking, for example, we determined 
that we should prohibit the systems from enforcing ``parity clauses'' 
against airlines that did not own or market a competing system. 62 FR 
59784 (November 5, 1997). The parity clauses imposed by most systems on 
airline participants required each airline to buy at least as high a 
level of service from the system as it did from any other system. The 
parity clauses made it

[[Page 69381]]

unnecessary for systems to compete for airline participation at higher 
levels of service (while almost all airlines must participate in each 
system for economic reasons, many airlines do not need to participate 
at the more expensive higher levels). As we explained then, ``[P]arity 
clauses cause airlines either to buy more CRS services than they wish 
to buy from some systems or to stop buying services from other systems 
that they would like to buy, which creates economic inefficiencies and 
injures airline competition.'' 62 FR 59784.
    If an airline could create its own system, it could obtain some 
bargaining leverage. In the past we have found that doing so would 
probably not be feasible. Developing the hardware and software required 
for a new system would likely be prohibitively expensive. The economies 
of scale in the CRS business would prevent a new system from operating 
profitably unless it obtained a substantial number of subscribers. But 
a new system would encounter great difficulty in obtaining an adequate 
subscriber base, since virtually all travel agencies already have 
agreed to use one of the existing systems under long-term contracts 
that normally will deter the agency from using another system for a 
significant number of bookings while they remain in effect. Airline 
Marketing Practices at 49-50; 57 FR 43784.
    The Internet has likely made it easier to create a competing 
service that would provide airline information and booking capabilities 
for travel agents and consumers. Since any such service could be 
accessed through the Internet, a firm entering the business would not 
need to create communications links with the users of its service. Any 
such firm, however, would still incur substantial programming and 
equipment costs in creating an information and booking service and 
establishing the computing facilities necessary to handle all requests 
for information and bookings.
    The five largest airlines, of course, may be establishing such a 
service through Orbitz, though Orbitz was originally developed as an 
on-line travel agency to be used by consumers. The costs of Orbitz'' 
development demonstrate the great expense of an on-line agency using 
alternative technologies that would replicate some system functions. As 
of March 31, 2002, Orbitz' owners had invested $205 million, Orbitz had 
incurred losses of $153 million, and Orbitz expected to continue 
incurring operating losses for some time. Amended Registration 
Statement at 9, 26. By agreement with Orbitz, as noted, Aqua will 
develop a program that will enable travel agents using a system to 
simultaneously see and book the airline services available on Orbitz.
    Orbitz' entry into the on-line reservations business does not 
necessarily suggest that entry would be feasible for other firms. 
Commentators have stated that the on-line travel agency business is 
likely to be dominated by Orbitz and the two larger on-line travel 
agencies, Travelocity and Expedia. Further large-scale entry into that 
business seems unlikely. Orbitz, moreover, was helped by the business 
and financial resources of its five owners, and its most-favored-nation 
clause with those airlines and the other charter associate airlines has 
probably been necessary to its ability to become the third-largest on-
line travel agency. ``Report to Congress: Efforts to Monitor Orbitz,'' 
Office of Aviation & International Affairs (June 27, 2002), at 18-19.
    If airlines could practicably persuade travel agencies to use one 
system rather than another, airlines 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. The airlines, however, have not been 
able to do that thus far. Since travel agencies do not pay booking 
fees, they have no direct incentive to use the system charging the 
lowest fees. Airlines have had no effective incentives that they can 
offer travel agencies to encourage the use of one system rather than 
another. Most travel agencies have multi-year contracts to use one 
system. These contracts typically include financial terms that 
encourage each travel agency to use one system for all or almost all of 
its airline bookings and deter the agency from using the Internet to 
book airlines directly.
    The growing importance for many travellers 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.
    In some cases large airlines can compel travel agencies (and 
corporate travel departments) to switch from one system to another. 
Airlines that dominate an area's airline markets, like Delta at Atlanta 
and American in southern Florida, can achieve this result by denying 
the disfavored system the ability to sell their corporate discount 
fares. Dominant airlines have that ability because travel agencies in 
the area cannot easily succeed without the ability to sell the 
corporate discount fares demanded by many business travellers. We have 
not seen evidence, however, that those airlines (or other airlines) 
have used their leverage in local airline markets as a tool to obtain 
better terms for participation from one of the systems, and airlines 
have such leverage only in areas where they account for the largest 
share of service.
    In a more general sense, United's apparent inability thus far to 
obtain better terms from any system, even though it is no longer 
subject to the mandatory participation clause, raises the question of 
whether the largest airlines have bargaining power against the systems. 
United's sale of its ownership interest in Galileo freed it from the 
requirements of the mandatory participation rule. Our past experience 
suggests that airlines might not have much leverage against the 
systems, given their dependence on travel agency distribution and the 
travel agents' reliance on the systems, if the rules were eliminated. 
It is not clear that the on-going developments in airline distribution 
have proceeded far enough to give the airlines significant bargaining 
leverage against the systems. Many airlines, however, have become less 
dependent on the systems, and the systems have become more dependent on 
the airlines' willingness to provide complete access to their fares, as 
shown by the systems' efforts to obtain webfares for sale through the 
CRSs.
    The major airlines may obtain such leverage if Aqua succeeds in 
obtaining a large number of travel agency subscribers to its service 
giving travel agents ready access to Orbitz' displays. A major 
airline's lack of participation in a system then might not lead to a 
substantial loss in bookings from the travel agents using that system 
if its schedules and fares are displayed in Orbitz. An Orbitz owner (or 
other major airline) conceivably might then begin denying complete 
information on its fares and services to one or all of the existing 
systems (or lower its participation level) until that system agreed to 
lower the airline's booking fees and improved its other terms for 
participation. A system might be more likely to give such an airline 
lower fees if it were not required by our rules to do the same for all 
participating airlines. A system might have incentives to offer better 
terms to a major airline, since such an airline's withdrawal from the 
system would make the system markedly less attractive to travel 
agencies. A system's inability to offer complete information and full 
functionality on an airline frequently booked by travel agents in one 
region

[[Page 69382]]

could undermine the system's ability to obtain subscribers in that 
area.
    None of Orbitz' owner airlines (or any other airline) has said that 
it intends to bargain with systems by threatening to deny them access 
to its fares and services. If they did so, they might be able to obtain 
better terms for participation. That would lower their costs and 
improve the efficiency of their distribution. Such a result, however, 
may not benefit competition overall. Any improvement in terms likely 
would not be shared with smaller airlines, which also depend on travel 
agents and the systems for distribution. Some on-line travel agencies 
have alleged that some Orbitz owners have been willing to give them 
access to E-fares only if the agency ends all efforts to promote the 
services of competitors in certain markets.
    Nonetheless, while in the past some airlines that have had an 
ownership or marketing relationship with one system may have limited 
their participation in competing systems in order to create a marketing 
advantage for their affiliated system, airlines could legitimately 
limit their participation in a system on the ground that the system's 
services are unsatisfactory in some respects or are too expensive. We 
adopted the rule barring parity clauses for this reason, subject to an 
exception for airlines owning or marketing a system. We also found that 
airlines seemed to possess some limited ability to obtain better terms, 
for they could choose not to participate in the more expensive levels 
of service offered by a system. The parity clause rulemaking itself 
resulted from Alaska's efforts to downgrade its participation in Sabre. 
Given the assertions of some airlines that they could obtain better 
terms by bargaining with the systems if they were not subject to the 
mandatory participation requirement, we are proposing not to readopt 
that rule. Eliminating that rule and the rule barring discriminatory 
fees could serve as an experiment to determine whether airlines can 
obtain lower fees and better service from the systems and whether the 
resultant benefits would be offset by the kind of practices that 
originally caused us to adopt the mandatory participation rule.

4. The Costs Imposed by System Practices

    Because market forces in the past have not disciplined the systems' 
prices and terms for services provided airline participants, it appears 
that the systems have been able to impose, and have imposed, costly and 
burdensome requirements on airline participants. It appears that the 
fees charged airlines have not been effectively disciplined by 
competition and may well exceed system costs by a significant amount. 
56 FR 12586, 12595 (March 26, 1991). In past years the fees paid by 
airlines and other travel suppliers accounted for about ninety percent 
of total system revenues, while the fees paid by travel agencies made 
up only ten percent of the total. 62 FR 59784, 59788 (November 5, 
1997); Sabre Holdings 10-K reports for the years 1999 and 2000. Delta's 
CRS booking fee expenses exceeded $350 million in 2001. Statement of 
Scott Yohe before the National Commission at 9. Northwest estimates 
that it will pay over $200 million in booking fees in 2002 despite 
reduced traffic levels. Statement of Al Lenza before the National 
Commission at 3.
    The systems' market power enabled them to drive up airline costs in 
other ways as well. The systems' practice of charging airlines for 
passive bookings was one example (passive bookings are bookings made by 
a travel agent through a system that do not involve sending a message 
to the airline's internal reservations system). Travel agents often 
make passive bookings in order to serve their customers, but such 
transactions usually do not directly benefit the airlines. The systems 
nonetheless charged booking fees for passive transactions. In addition, 
the record suggests that some travel agents may have used the passive 
booking capability for unnecessary transactions in order to meet the 
minimum booking quota established by the systems' productivity pricing 
formulas. The annual fee liability for passive bookings and other 
bookings considered unnecessary by participating airlines amounted to 
$5 million to $10 million for some airlines, and such bookings 
accounted for eight to ten percent of their total fees. Aloha December 
23, 1997 Supp. Comments at 2; Alitalia Comments at 4; Qantas Comments 
at 4. Systems stopped charging participating airlines for passive 
bookings after we began this proceeding, but their action does not 
necessarily indicate that participating airlines have any leverage over 
the price charged for CRS services. Furthermore, the systems that 
stopped charging for passive bookings raised other fees and appeared to 
have incurred no reduction in their overall revenues.
    In addition, three of the systems adopted and enforced parity 
clauses against airlines. A system's parity clause required a 
participating airline to buy at least as high a level of service from 
that system as the airline bought from any other system, whether or not 
the airline considered the price and quality of the system's higher 
level of functionality to be reasonable. Alaska and Midwest Express 
estimated that Sabre's plan to enforce its parity clause against them 
would increase their CRS costs by about ten percent. 61 FR 42201.
    Finally, Galileo revised its display algorithm several years ago to 
benefit United by diverting bookings away from some of United's 
competitors. Galileo's revised display algorithm may have reduced 
Alaska's annual revenues by $15 million and Midwest Express' annual 
revenues by several million dollars. Galileo's algorithm often gave 
United's services a better display position than services offered by 
competing airlines that better met the needs of travel agency 
customers, and it was significantly less efficient for travel agents 
who wished to find the best service for their customers. 61 FR 42212-
42213.
    The higher costs that may be attributable to system practices (and 
different distribution costs generally) can make a significant 
difference in an airline's ability to compete. American states that, 
due to the differing levels with which it and Southwest rely on travel 
agents and, by extension, on the systems for distribution, American 
pays $3 in booking fees per passenger boarded while it estimates that 
Southwest pays less than 50 cents. Statement of George Nicoud before 
the National Commission at 4.

5. The Potential for Anti-Competitive Conduct

    The sale of air transportation through all four of the systems 
operating in the United States has been subject to regulation since the 
Board originally adopted CRS rules. Our rules now cover systems owned 
or marketed by an airline or airline affiliate. Several airlines own 
Worldspan and Amadeus, and Sabre and Galileo are each marketed by its 
principal former airline owner. Ten years ago, when each system was 
controlled by one or more airlines or airline affiliates, we concluded 
that the systems' conduct before the rules took effect demonstrated the 
need for rules to prevent system practices that would deceive consumers 
and their travel agents and prejudice airline competition.
    Two of the systems now have no significant airline ownership, 
though both are marketed by airlines, and the other two are owned by 
several airlines rather than being controlled by a single airline. One 
or more of the systems may cease to be owned or marketed by any 
airline. We believe, however, that, if the systems continue to have 
market power,

[[Page 69383]]

there might be a significant risk that systems would use their market 
power to distort airline competition, whether or not they are owned or 
marketed by airlines. Northwest has thus predicted:

    To the extent that any CRS has market power over the 
distribution of air travel, the CRS will have incentives to exercise 
that power, with negative consequences for airlines, travel agents, 
and consumers.

Northwest Comments on Proposed Extension at 5
    First, experience has shown that a substantial risk exists that a 
system with substantial airline ownership would engage in conduct that 
would violate section 411 but for our rules. Galileo revised its 
display of airline services within North America in a way that gave 
United a substantial competitive advantage over airlines like Alaska 
that operated many single-plane flights and relied less on hub-and-
spoke operations. Galileo created displays designed to promote United's 
interests even though they made it harder for travel agents to serve 
their customers. 61 FR 42208, 42212-42213 (August 14, 1996).
    While the two larger systems, Sabre and Galileo, no longer have 
significant airline ownership, each continues to rely on its former 
major airline owner for marketing support. American markets Sabre, and 
United markets Galileo (Southwest is also marketing Sabre). Amadeus 
Supp. Comments at 4-5. The systems' retention of the marketing 
relationships is consistent with our conclusion that a system without 
any airline ties could not easily compete in the CRS business. See also 
``Editorial: Three fateful mistakes crippled Galileo,'' Travel 
Distribution Reports (June 28, 2001). Sabre and Galileo have other 
contractual relationships with American and United, respectively. 
Galileo hosts United's internal reservations system and provides other 
technological services. Amadeus Supp. Comments at 4-5. Sabre provides 
information technology services to American, and American provides 
management services to Sabre. Sabre Holdings 10-K Report for the Year 
2000 at 16. The two systems also depend on their former owners for a 
substantial share of their total revenue. In 2000 Galileo obtained 
twelve percent of its total revenue from United. Galileo International 
10-K Report for Fiscal Year 2000 at 10. In 1999 Sabre obtained twenty-
four percent of its revenues from American. Amadeus Supp. Comments at 
4.
    It appears that, in the past, systems and their airline affiliates 
have taken steps to prejudice each other's competitors. Some of those 
airlines have taken actions that seem likely to injure their own 
marketing position in an apparent effort to strengthen the marketing 
position of the affiliated system. According to System One, American, 
Northwest, and TWA delayed their introduction of E-ticketing in Amadeus 
in order to benefit their affiliated system. United allegedly denied 
travel agents using one of Galileo's competitors the ability to 
reliably grant frequent flyer upgrade requests. System One Comments; 
System One Reply Comments.
    Airlines with only a marketing relationship with a system have 
similarly made it more difficult for travel agents using another system 
to obtain complete information and make bookings, thus encouraging the 
agencies to choose the system marketed by the airline. For example, 
Amadeus asserts that American has continued to deny travel agents using 
systems other than Sabre access to some of its discount fares even 
though American has spun off all of its Sabre stock. Amadeus Supp. 
Reply at 22.
    This apparent willingness of airlines to engage in practices likely 
to harm the sale of their tickets in order to promote the marketing 
efforts of an affiliated system indicates the strength of the 
continuing ties between each system and its owners (or former owners). 
Even if no airline had a tie with a system, a system might still engage 
in conduct that would prejudice airline competition and make it 
difficult for consumers to obtain unbiased or complete information, as 
Northwest has asserted. One commenter alleges that one system relegated 
a rental car company to a poor display position because competing 
rental car companies bought a preferential display position, a move 
that caused the disfavored car rental company to lose many bookings. 
Marshall A. Fein Supp. Comments. Whether in fact non-airline systems 
are likely to engage in conduct that could distort airline competition 
will be the basis of our decision on whether the rules should treat 
non-airline systems the same as airline systems.
    We note, however, that our rules cover only the sale of airline 
services through the systems. We do not regulate the systems' treatment 
of the display and sale of other travel services, such as hotels and 
rental cars. We invite the parties to present evidence on the systems' 
participation terms for the suppliers of other travel services. Such 
evidence would help us determine whether there is still a need for 
rules governing the systems' treatment of participating airlines.

6. Potential Anti-Competitive Practices in an Unregulated Environment

    The original rules focused on regulations that would either prevent 
display bias or keep the systems' airline owners from using their 
control of the systems to prejudice the competitive position of rival 
airlines. While these issues were crucial in our last rulemaking, we 
also worked on developing rules that would allow market forces to 
discipline system practices to some extent. We therefore adopted rules 
giving subscribers the right to use third-party hardware and software 
and to access any system or airline information source from equipment 
that was not owned by the system. We additionally prohibited certain 
types of subscriber contract terms that unreasonably denied travel 
agencies the ability to use alternative systems or databases. More 
recently we found it necessary to bar systems from enforcing airline 
parity clauses.
    Every system seems to continue to engage in subscriber contract 
practices that keep airlines and travel agencies from using 
alternatives to the systems and thereby entrench each system's market 
power. The likely result is higher airline costs and thus higher fares 
for consumers. A number of the parties assert that our rulemaking 
should focus on these types of contractual provisions. Delta, for 
example, had contended that our primary objective ``should be to 
increase competition among CRS vendors for information services and 
booking fees by eliminating contract and other CRS vendor-created 
barriers that prevent or limit travel agents from using multiple CRS 
databases and Internet connections to competitive sources of travel 
information.'' Delta Comments at 2. Similarly, Alaska states, ``[O]ne 
critical objective * * * should be the elimination of the incentives 
and disincentives that lock travel agents into a particular CRS and 
discourage agents' use of alternative means of communicating with 
participating carriers.'' Alaska Comments at 7.
    Finally, airlines affiliated with a system may engage in conduct 
that may restrict competition and that would not be outweighed by 
consumer benefits. As discussed below, they have in the past denied 
competing systems full access to their fares and withheld some types of 
functionality in order to give a competitive advantage to their 
affiliated system. While some argue that the mandatory participation 
rule inhibits competition between the systems by requiring owner 
airlines to participate in all systems at the same level as in

[[Page 69384]]

their affiliated systems, this potential disadvantage may be outweighed 
by the rule's potentially positive impact in fostering effective 
competition between smaller carriers and the major carriers.

F. The Department's Authority Under Section 411 To Adopt CRS Rules

    As discussed, our authority under section 411 of the Federal 
Aviation Act, recodified as 49 U.S.C. 41712, has provided the basis for 
our rules governing CRS operations. Section 411 authorizes us to 
prohibit unfair and deceptive practices and unfair methods of 
competition by airlines and ticket agents in air transportation and the 
sale of air transportation. Section 411 states, ``[T]he Secretary may 
investigate and decide whether an air carrier, foreign air carrier, or 
ticket agent has been or is engaged in an unfair or deceptive practice 
or an unfair method of competition in air transportation or the sale of 
air transportation.'' If the Secretary ``finds that an air carrier, 
foreign air carrier, or ticket agent is engaged in an unfair or 
deceptive practice or unfair method of competition, the Secretary shall 
order the air carrier, foreign air carrier, or ticket agent to stop the 
practice or method.''
    Thus, to readopt rules governing system operations, we must find 
that rules are necessary to prevent conduct that would constitute 
unfair or deceptive practices or unfair methods of competition in 
violation of section 411. A deceptive practice is one that will tend to 
deceive a significant number of consumers. United Air Lines, 766 F.2d 
1107, 1113 (7th Cir. 1985). An unfair method of competition is a 
practice that violates antitrust laws or antitrust principles. We may 
therefore prohibit some airline conduct permitted by the antitrust 
laws. See, e.g., Pan American World Airways v. United States, 371 U.S. 
296, 306-308 (1963); United Air Lines, 766 F.2d at 1114.
    Section 411, of course, does not give us unlimited authority to 
regulate the practices of airlines and ticket agents. Airline 
deregulation has made the airlines generally free to determine how to 
distribute and sell their services, including sales through travel 
agencies. The antitrust laws similarly allow individual firms to choose 
how to distribute their products and services as long as they do not 
violate one of the provisions of those laws. 65 FR 45554, citing 
Paschall v. Kansas City Star Co., 727 F.2d 692 (8th Cir. 1984) (en 
banc); and Auburn News Co. v. Providence Journal Co., 659 F.2d 273, 278 
(1st Cir. 1981).
    While section 411 also authorizes us to prohibit unfair practices 
as well as deceptive practices and unfair methods of competition, we 
have followed the principle that a practice is ``unfair'' if it 
violates public policy, is immoral, or causes substantial consumer 
injury not offset by any countervailing benefits. Complaint of Ass'n of 
Discount Travel Brokers, Order 92-5-60 (May 29, 1992) at 12, citing FTC 
v. Sperry & Hutchinson Co., 405 U.S. 233, 244, n. 5 (1972). See also 
American Financial Services v. FTC, 767 F.2d 957, 971 (D.C. Cir. 1985). 
We have relied primarily on our authority to prohibit deceptive 
practices and unfair methods of competition as the basis for our 
proposed rules.
    Maintaining CRS rules would comply with our duty under 49 U.S.C. 
40105(b)(1)(A) to exercise our authority consistently with the United 
States' obligations under international agreements. The United States 
has a number of international air services agreements that require it 
to ensure that U.S. systems do not subject foreign airlines to 
discriminatory treatment.
    The public policy provisions of our governing statute, moreover, 
would support the readoption of CRS rules to the extent that they 
remain necessary to prevent practices that would unreasonably reduce 
competition. Congress has stated that we must consider the following 
matters, among others, to be in the public interest: (i) The prevention 
of predatory or anticompetitive practices in the airline industry, (ii) 
the prevention of unreasonable industry concentration, excessive market 
domination, monopoly powers, and other conditions that would allow an 
airline unreasonably to increase fares, reduce service, or exclude 
competition, and (iii) the encouragement of entry by new and existing 
air carriers. 49 U.S.C. 40101(a)(9), (10), (13).

1. Our Authority To Regulate Non-Airline Systems as Ticket Agents

    We have in the past regulated airline systems by making the 
airlines that own or market a system responsible for ensuring the 
system's compliance with our rules. That approach made sense, because 
each system was originally created by an airline, was owned by an 
airline or airline affiliate, and was marketed by one or more airlines. 
The change in ownership of Sabre and Galileo, which are no longer owned 
and controlled by any airline, requires us to reexamine our authority 
to regulate the systems under section 411. We have tentatively 
concluded that section 411 empowers us to regulate such systems if 
necessary to prevent unfair and deceptive practices and unfair methods 
of competition. We may regulate a firm under section 411 if it is an 
air carrier or a ticket agent. It appears that a non-airline system (as 
well as an airline system) is a ticket agent.
    We are addressing this question despite the suggestions from 
several parties that we need not decide here whether we may regulate 
non-airline systems. First, resolving the issue in this proceeding 
rather than in a future separate proceeding should be more efficient. 
Secondly, resolving the issue here would remove any ambiguity about our 
jurisdiction. After American spun off its remaining Sabre stock, Sabre 
informally began taking the position that it was no longer subject to 
our rules since it was no longer owned or controlled by an airline, see 
Orbitz Supp. Reply at 2, notwithstanding the express language in the 
rules making them applicable to any system marketed by an airline. 
While Sabre later changed its position, Sabre Supp. Comments at 8, its 
initial conduct suggests that it believed that we may not regulate a 
system that is not owned by an airline, even if an airline markets the 
system. United, moreover, contends that a marketing relationship cannot 
justify subjecting a non-airline system to the rules. United Supp. 
Comments at 18, n. 20.
    We have therefore determined that we should resolve the question of 
whether section 411 authorizes us to regulate a non-airline system. We 
may do so if a system is a ticket agent. By statute a ticket agent is a 
person ``that as a principal or agent sells, offers for sale, 
negotiates for, or holds itself out as selling, providing, or arranging 
for, air transportation.'' 49 U.S.C. 40102(a)(40). Travel agencies are 
clearly ticket agents, but the statute does not confine the category of 
ticket agents to travel agents alone. In our view a system's functions 
bring it within the definition of ticket agent, since each system 
``offers for sale'' and ``holds itself out as * * * arranging'' air 
transportation.
    A system operates a central computer that collects information on 
airline schedules and fares and the availability of seats, arranges 
that information under its own editing and ranking criteria in displays 
that are provided to travel agents, and provides a booking capability 
enabling travel agents to make airline reservations for their 
customers. The systems carry out these functions under contracts with 
the airlines, which pay the systems for providing the information and 
booking capabilities to travel agencies and other system users.

[[Page 69385]]

    By listing airline services in its display and enabling travel 
agents to book those services, each system is offering air 
transportation for sale. The system, moreover, is an active participant 
in any sales transaction, not just a transmitter of messages between 
travel agent and airline. Systems, for example, may require an airline 
to accept any booking made by a travel agent using the system. See 
America West Petition at 23, n.12. This requirement indicates that 
systems view themselves as responsible for the booking transaction 
itself, not just for providing a communications link.
    Because each system does more than just transmit messages between 
airlines and travel agents, a system is quite different from a straight 
communications link, the analogy cited by United for its argument that 
a system cannot be considered a ticket agent. United Comments at 13. 
When a consumer uses the telephone to buy goods and services, for 
example, the telephone line links the consumer with the firm selling 
the product or service, and the consumer conducts the transaction 
directly with the retailer. In contrast, a travel agent using a system 
to make a booking communicates exclusively with the system, not the 
airline, unless the travel agent uses a direct access feature that 
enables travel agents to obtain information and make bookings directly 
with an airline's internal reservations system. Even then much of the 
communication will be with the system. Furthermore, telephone companies 
do not choose which data will be sent to the listener. The systems, in 
contrast, edit their displays of airline services. In fact they must 
edit and rearrange the schedule and fare data obtained by them for 
their integrated displays of airline services, since the raw 
information they obtain directly or indirectly from airlines is not in 
a form that would be useful to travel agents.
    The systems also provide other functions to travel agents that 
enable them to serve their customers when buying airline tickets. The 
systems' passive booking functionality makes it possible for travel 
agents to print itineraries for customers participating in a group 
booking and to issue tickets for customers who earlier reserved their 
seat directly with the airline. These functions confirm the systems' 
status as active participants in the sale of air transportation.
    We know of no judicial or agency decisions construing the term 
``ticket agent'' in a manner which would preclude treating a system as 
a ticket agent. When we and the Board determined that the CRS rules 
should not cover systems not owned or marketed by an airline, neither 
we nor the Board concluded that our authority under section 411 would 
not permit us to regulate the practices of a non-airline system. 49 FR 
32548; 57 FR 43794.
    In addition, we have some power to bar airlines and travel agencies 
from doing business with systems that do not comply with at least some 
of the standards set by our rules. Regulating the systems' contractual 
relationships with airlines and travel agencies could enable us to 
prohibit some potentially prejudicial practices. We could, for example, 
bar airlines from purchasing favorable bias in system displays or from 
acquiring the systems' marketing and booking data. We are proposing 
some such rules in this proceeding. In other respects, however, 
regulating CRS practices by regulating airline conduct may not be 
entirely workable under the terms of section 411. The section 
authorizes us to adopt rules when necessary to prevent unlawful conduct 
by an airline or ticket agent, not by a party doing business with an 
airline or ticket agent. Barring an airline or travel agency from doing 
business with a system that does not follow the rules' standards would 
seem to require findings that the airline or travel agency would 
otherwise be engaged in a deceptive practice or unfair method of 
competition. Whether such findings could be made as to all of the 
practices covered by our proposed rules is uncertain.
    It appears that rules governing non-airline systems may be 
necessary due to the potential risk for unfair and deceptive practices 
and unfair methods of competition. It also appears that extending the 
rules to such systems may not significantly interfere with their 
ability to compete and innovate. First, all of the systems are 
currently bound by the rules, which govern systems owned or marketed by 
an airline. And, as Galileo has stated, the systems have learned to 
live with the rules. Galileo Comments at 10-11. Whether or not we 
maintain our rules, the systems will remain subject to rules in Canada 
and Europe that are comparable in most respects to our current rules. 
Secondly, the on-going changes in airline distribution may ultimately 
make most or all of our rules unnecessary, particularly if the 
development of alternatives means for accessing travel agencies creates 
effective competition for the systems.
    Furthermore, requiring the airline systems to comply with the rules 
while allowing the non-airline systems to operate without restriction 
would create competitive disadvantages for the airline systems. Gaileo 
Supp. Comments at 10-12. The adoption of rules governing non-airline 
systems would equalize the treatment of all systems, whether or not 
they have significant airline ownership, and be consistent with the 
United States' obligations under its bilateral air services agreements. 
Of course, we ask the parties to address whether we should adopt rules 
governing non-airline systems, if we find a need for continued CRS 
regulation, and whether section 411 would authorize our doing so.

2. Antitrust Principles Relevant to System Practices

    This section explains our tentative belief that the practices that 
would be regulated by our proposed rules would violate section 411. It 
appears that they would either reduce competition in the airline and 
airline distribution industries and be analogous to antitrust law 
violations, or would cause consumers and their travel agents to receive 
biased or inaccurate information on airline services. We believe that 
the systems can engage in such practices because each system still 
seems to have market power over airlines. Market forces therefore have 
not disciplined the price and terms of services offered airlines by the 
systems. In particular, the systems appear to be charging booking fees 
that seem to exceed the fees that would be charged in a competitive 
industry. The record also shows that the systems have engaged in other 
practices that their customer airlines would likely not accept if the 
industry were competitive, such as imposing charges for booking fee 
bills and fees for passive booking transactions that allegedly provide 
no benefit for the airlines.
    In Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451 
(1992), the Supreme Court explained that market power is the power ``to 
force a purchaser to do something that he would not do in a competitive 
market,'' 504 U.S. at 464, quoting Jefferson Parish Hospital v. Hyde, 
466 U.S. 2, 14 (1984), and ``the ability of a single seller to raise 
price and restrict output.'' 504 U.S. at 464, quoting Fortner 
Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503 
(1969). The Court's definition of market power appears to fit each 
system's relationship with the airlines, since the systems appear to 
have been able to impose high fees and unattractive terms for 
participation on airlines. In Eastman Kodak the Court also noted that 
market power is usually inferred from the seller's possession of ``a 
predominant share of the market.''

[[Page 69386]]

504 U.S. at 464. Insofar as electronic access to travel agency 
subscribers is concerned, it appears that each system effectively holds 
such a predominant market share, as explained above.
    We believe that the actions that would be covered by our proposed 
rules may violate section 411 whether done by airline or non-airline 
systems. In our last rulemaking, we did not examine whether a non-
airline system's operations could harm competition in the airline and 
airline distribution businesses. At that time, no non-airline systems 
existed, and we doubted that any non-airline system could operate 
successfully. We suggested that there should be no need to regulate a 
non-airline system since, without airline control, such a system would 
lack incentives to engage in conduct that would distort airline 
competition. We did not wish to apply the rules to a non-airline system 
when there appeared to be only a theoretical possibility that such a 
firm might operate. 57 FR 43794. In light of developments over the past 
several years, however, as explained above, we now believe that there 
are reasons to consider applying the rules to non-airline systems as 
well as airline systems. It is possible that a system that had no 
ownership or marketing ties with an airline might engage in conduct 
that would prejudice airline competition and make it difficult for 
consumers to obtain unbiased or complete information. See Northwest 
Comments on Proposed Extension at 6; Marshall A. Fein Supp. Comments.
    Given the systems' market power over airlines, we concluded in our 
last reexamination of the rules that the practices addressed by those 
rules constituted unfair methods of competition. Those practices are 
analogous to conduct prohibited by the antitrust laws: A firm's refusal 
to allow competitors to obtain access to an essential facility on 
reasonable terms, and monopoly leveraging (the use of market power in 
one line of business to obtain unfair competitive advantages in a 
second line of business). These antitrust analogies were applicable 
because each of the systems was controlled by airlines that competed 
with other airlines whose ability to market their services depended on 
their ability to participate in the systems on reasonable terms. 57 FR 
43789-43791.
    The Seventh Circuit affirmed the Board's rules, which were based on 
very similar findings. United Air Lines v. CAB, 766 F.2d 1107 (7th Cir. 
1985). The Court stated that the Board's finding that some of the 
systems had substantial market power was sufficient to authorize the 
Board's regulation of CRS practices: That finding ``would bring their 
competitive practices within the broad reach of section 411,'' for the 
Board ``can forbid anticompetitive practices before they become serious 
enough to violate the Sherman Act.'' The court reasoned that the types 
of conduct prohibited by the Board on antitrust grounds--price 
discrimination and denying a competitor access to an essential facility 
on equal terms--were ``traditional methods of illegal monopolization'' 
that the Board could prohibit, even though no system had a monopoly 
under Sherman Act standards. United Air Lines, 766 F.2d at 1114.
    The antitrust principles underlying our proposed rules include the 
essential facility and monopoly leveraging doctrines that we relied 
upon in our earlier rulemakings. In addition, some of our proposed 
rules derive support from other antitrust principles.
    First, we have been concerned by system practices that prevent 
travel agencies and airlines from bypassing a travel agency's principal 
system and that thereby entrench each system's existing market power 
over the airlines. That concern led us ten years ago to adopt the rule 
giving travel agencies the right to use third-party hardware and 
software and to access any system or database from the agency's 
computer terminals, unless the system owned that equipment. Several 
current system practices that seem problematic to us give systems the 
ability to obtain all or most of a travel agency's bookings. These 
practices appear to violate the principle that a firm that dominates a 
market may not engage in conduct that is designed primarily to maintain 
or increase its dominance.
    The Sherman Act allows a dominant firm to increase its market share 
by being more efficient or offering better products or services. See, 
e.g., Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534, 544-546 
(9th Cir. 1983). The antitrust laws prohibit dominant firms, however, 
from using exclusivity agreements when they significantly limit 
opportunities for other firms to remain in or enter the market by 
foreclosing ``a substantial share of the relevant market.'' Tampa 
Electric Co. v. Nashville Coal Co., 365 U.S. 320, 328 (1961).
    A monopolist generally may not engage in conduct that is 
economically rational if it eliminates competition. See, e.g., Aspen 
Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985). The 
principle that a dominant firm may not engage in conduct designed to 
prevent competition will be applicable to both airline and non-airline 
systems.
    Other practices by systems and the airlines owning or marketing a 
system may be contrary to the antitrust laws' prohibition against tying 
clauses. We prohibited airline parity clauses because they resembled 
tying arrangements prohibited by the antitrust laws, and our rules 
prohibit each system from requiring airlines to buy unrelated services 
from the system as a condition for participation. 49 FR 32554-32555; 49 
FR 11656, 11664; 62 FR 59795-59796. A tying arrangement--a seller's 
agreement to sell one product only on condition that the buyer purchase 
a second product from the seller (or promise not to buy the product 
from another seller)--is a violation of the Sherman Act if the seller 
has appreciable market power in the tying product and if the 
arrangement affects a substantial volume of commerce in the tied 
product. Eastman Kodak Co. v. Image Technical Services, supra, 504 U.S. 
at 461-462. Tying arrangements are objectionable because they force 
buyers to accept conditions that they would not accept in a competitive 
market. See, e.g., Jefferson Parish Hospital, 466 U.S. at 12-15. As the 
Court has explained, ``[T]he essential characteristic of an invalid 
tying arrangement lies in the seller's exploitation of its control over 
the tying product to force the buyer into the purchase of a tied 
product that the buyer either did not want at all, or might have 
preferred to purchase elsewhere on different terms.'' When a seller 
imposes a tying arrangement on a buyer, ``competition on the merits in 
the market for the tied item is restrained * * *'' Jefferson Parish 
Hospital, 466 U.S. at 12. A tying arrangement can cause consumers to 
pay higher prices, a result contrary to the goals of the antitrust 
laws. Eastman Kodak Co., 504 U.S. at 478. We based our prohibition of 
the enforcement of the systems' parity clauses on findings that those 
contract provisions had the harmful effects of tying provisions--they 
limited competition between the systems, and they increased the prices 
paid by the systems' customers. 62 FR 59795.
    Some types of conduct by airline systems may violate the monopoly 
leveraging principle: a firm may not illegitimately use its monopoly 
power in one industry to acquire an unfair competitive advantage in a 
second industry. Two courts have accepted this principle as a basis for 
finding a Sherman Act violation. Berkey Photo, Inc. v. Eastman Kodak 
Co., 603 F.2d 263 (2d Cir. 1979); Kerasotes Michigan Theatres, Inc. v. 
National Amusements, Inc., 854 F.2d 135 (6th Cir. 1988). The

[[Page 69387]]

monopoly leveraging theory is also consistent with the Supreme Court's 
reasoning in United States v. Griffith, 334 U.S. 100 (1948). We 
recognize that other courts have argued that monopoly leveraging is 
unlawful under the antitrust laws only where the conduct otherwise 
violates that statute. See 57 FR 43790-43791. Monopoly leveraging 
nonetheless should be a valid basis for finding that a firm has engaged 
in an unfair method of competition under section 411, since we may 
prohibit conduct that does not violate the antitrust laws.
    In addition, our proposed rules would keep airline systems from 
engaging in actions that may be proscribed by the essential facility 
doctrine. That doctrine requires a firm that controls a facility 
essential for competition to give its competitors access to the 
facility on reasonable terms. The firm will violate section 2 of the 
Sherman Act if it denies access (or imposes unreasonable conditions on 
access). A facility is essential if it cannot be feasibly duplicated by 
a competitor and if the competitor's inability to use it will severely 
handicap its ability to compete. 61 FR 42203, citing Aspen Skiing Co. 
v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985); and Delaware & 
Hudson Ry. v. Consolidated Rail Corp., 902 F.2d 174 (2d Cir. 1990). In 
our last major rulemaking we determined that each of the systems is 
comparable to an essential facility and must therefore offer airlines 
access to its services on reasonable terms. 57 FR 43790. This was an 
alternative ground for our prohibition of airline parity clauses and 
our requirements that the systems' terms for airline participation must 
be non-discriminatory. 62 FR 59796.
    Several of these principles are equally applicable to the non-
airline system practices regulated by our rules. For example, the 
essential facility doctrine is applicable when a firm that does not own 
an essential facility is able to deny reasonable access to its 
competitors by agreement with the facility's owner. See, e.g., Hecht v. 
Pro-Football, Inc., 570 F.2d 982 (D.C. Cir. 1977). In addition, the 
Federal Trade Commission has held that its authority to prohibit unfair 
methods of competition in other industries under section 5 of the 
Federal Trade Commission Act, 15 U.S.C. 45, which is analogous to 
section 411, authorizes it to prohibit practices by a monopolist in one 
industry that unreasonably restrict or distort competition in a second 
industry, even if the monopolist does not participate in the second 
industry.
    In LaPeyre v. FTC, 366 F.2d 117 (5th Cir. 1966), the Fifth Circuit 
affirmed such an FTC order. The FTC had held that a monopolist 
manufacturer of shrimp peeling machinery had engaged in an unfair 
method of competition by charging shrimp canners in the Pacific 
Northwest prices twice as high as those charged Gulf Coast shrimp 
canners. The manufacturer charged different prices largely because the 
machinery produced greater cost savings for the Pacific Northwest 
canners. The Fifth Circuit affirmed the order on the ground that the 
FTC could bar a monopolist from charging discriminatory prices that 
affected competition in a second industry. LaPeyre thus held that ``a 
monopolist may be required to use uniform and reasonable criteria when 
dealing with those who compete in an adjacent market,'' Fulton v. 
Hecht, 580 F.2d 1243, 1249, n. 2 (5th Cir. 1978).
    The Second Circuit, however, has taken a somewhat narrower view of 
the FTC's authority. That court held that the FTC could not regulate 
the conduct of a firm with monopoly power in one industry in order to 
promote competition in a second industry unless the monopolist either 
competes in the second industry as well or intends to restrain 
competition in the second market or acts coercively. Official Airline 
Guides, Inc. v. FTC, 630 F.2d 920, 927-928 (2nd Cir. 1980). The Court 
therefore reversed an FTC order requiring the Official Airline Guide, 
the publisher of the standard sourcebook for information on airline 
schedules, to improve its listings of commuter airline flights so that 
commuter airlines would be better able to compete with the jet 
airlines. The Court reasoned that allowing the FTC to generally 
regulate a monopolist's conduct insofar as it affected competition in 
an industry in which the monopolist did not compete would give the 
agency too much control over businesses. 630 F.2d at 927. The FTC, 
however, has stated that the Second Circuit's decision was 
``erroneous'', although the Commission apparently has not since issued 
a decision holding that a monopolist committed an unfair method of 
competition due to its business practices with customers in an industry 
where the monopolist did not operate. See Earl Kintner & William 
Kratzke, VII Federal Antitrust Law (1988) at 54-55.
    The Second Circuit's opinion suggests that the FTC could regulate a 
monopolist's conduct in one industry in order to prevent that firm from 
carrying out intent to restrain competition in a second industry or 
from acting coercively. 630 F.2d at 927-928. The rules we are proposing 
to adopt as to non-airline systems (and airline systems) are intended 
to prevent systems from trying to reduce competition in the airline 
industry and from engaging in coercive conduct.
    We thus have tentatively concluded that there is a legal basis for 
our proposed rules regulating system practices in established antitrust 
principles and that the rules would be within our authority under 
section 411 to prohibit unfair methods of competition.

3. Antitrust Principles Relevant to Airline Practices

    We also propose to expand the rules governing the practices of 
airlines affiliated with a system or using system services. We are 
proposing to restrict the airlines' ability to obtain some types of 
marketing and booking information, since we believe that the detailed 
information now being provided by the systems likely reduces fare 
competition and enables airlines dominating metropolitan area markets 
to pressure travel agencies into diverting sales from competing 
airlines. While we are tentatively proposing to eliminate the mandatory 
participation rule, we request that parties comment on whether we 
should maintain or strengthen that rule.
    Such airline practices may violate antitrust principles, if the 
airlines do not have legitimate business reasons for their conduct and 
the market structure and other factors would cause the practices to 
significantly reduce competition. An airline's refusal to give travel 
agencies access to its corporate discount fares unless they use the 
system affiliated with that airline could be analogous to unlawful 
tying.
    Other possible airline practices that would be covered by our 
proposed rules appear to be contrary to antitrust principles because 
they involve the use of an airline's dominant position in some local 
markets either to maintain or increase that dominance or to distort 
competition in the area's CRS market. Airlines can obtain a dominant 
position in some metropolitan area airline markets due to the hub-and-
spoke system used by all network airlines. The airline that has a hub 
at a city usually has a dominant share of the city's airline market. 
This dominance results in large part from the competitive advantages 
given it by operating a hub--it serves more cities from the hub, and it 
offers more frequent service on most of its routes at the hub. Airlines 
capitalize on the advantages of having a large market share by offering 
frequent flyer programs and travel agency override commission programs 
that will be more attractive to travellers and travel agencies, 
respectively. General

[[Page 69388]]

Accounting Office, ``Airline Deregulation: Barriers to Entry Continue 
to Limit Competition in Several Key Domestic Markets'' (October 1996) 
at 14-19; Findings and Conclusions on the Economic, Policy, and Legal 
Issues, Enforcement Policy Regarding Unfair Exclusionary Conduct in the 
Air Transportation Industry (January 17, 2001) at 23-24.
    The hubbing airline's dominance of the local airline market, 
however, also enables it to force travel agencies to comply with its 
wishes. Travel agents in that city will book their customers most often 
with that airline, and their ability to obtain marketing benefits from 
that airline, such as the ability to book important customers on 
oversold flights and to sell its corporate discount fares, may make or 
break their business. Cf. Airline Marketing Practices at 25. As a 
result, travel agencies cannot easily resist demands by the dominant 
airline that they stop booking customers with competing airlines or 
that they use the system affiliated with that airline. See Large 
Agencies Coalition Comments at 9.
    An airline's abuse of a dominant position in local airline markets 
to increase or continue that position would violate the principle that 
firms with market power may not engage in transactions designed only or 
primarily to protect such power. When such an airline engages in 
conduct designed to compel travel agencies to use its affiliated 
system, it is leveraging its market power in one industry to increase 
its market share in another industry. Monopoly leveraging is contrary 
to antitrust principles for purposes of section 411.

4. The Continuation of Rules on Display Bias

    Insofar as we have based our rules against display bias on our 
authority to prohibit unfair and deceptive practices, our authority to 
readopt those rules is clear. The types of display bias barred by the 
rules are deceptive practices that would tend to deceive a significant 
number of consumers. The Seventh Circuit held on review of the Board's 
rules that the Board's findings sufficed to bring the adoption of the 
rules prohibiting display bias within the Board's authority under 
section 411. United Air Lines, 766 F.2d at 1113.
    Since we believe that the non-airline systems are ``ticket agents'' 
within the meaning of section 411, we may require them to comply with 
the rules barring display bias.

G. Considerations Favoring Fewer Regulations

    Some parties have argued that we should consider terminating or 
phasing out the rules instead of strengthening them. They have 
questioned the effectiveness of the current CRS rules, most recently in 
their comments on our proposal to extend the rules for another year. 
They argue that the continuing growth in on-line distribution of 
tickets is favorably changing the competitive structure of airline 
distribution in ways that could make the termination or phasing out of 
the rules viable. They argue at a minimum that we must carefully 
analyze the changing structure before we strengthen or perpetuate the 
existing rules.
    Several parties, particularly United, have asserted that the 
changes in the systems' ownership and the Internet's growing role in 
airline distribution have made the rules obsolete. We based the current 
rules on each system's ownership by airlines, but the two largest 
systems now have no significant airline ownership, and the two smaller 
systems each have several airline owners. According to these parties, 
the existing rules may actually cause rather than prevent anti-
competitive behavior. They assert, for example, that the dominant 
systems seem to have decided that coverage of the rules enhances their 
market power rather than limits it. They argue that the allegedly 
obsolete rules actually impose substantial hidden costs, citing the 
systems' sharply escalating booking fees, which they attribute to the 
current rules that insulate the systems from competition. Since 
airlines must do business with all of the systems, the latter have no 
incentive to reform their business practices or lower their prices. 
Meanwhile, the airlines have no leverage to obtain better terms and 
conditions through negotiations with the systems. Our rules allegedly 
inhibit negotiations between the systems and participating airlines 
over fees and participation levels.
    We have set forth our tentative views on these issues elsewhere in 
this notice. We presently believe that the airlines' inability to 
obtain better terms from the systems has largely been the result of the 
systems' market power, not a product of our rules. Nonetheless, we are 
specifically requesting comment on alternative proposals that would 
promote competition in the CRS business. The assertions made by United 
and other airlines about the impact of the mandatory participation rule 
and the rule prohibiting discriminatory booking fees may be correct. We 
are therefore proposing to end those rules, as discussed below.
    There may be other options that would move in the direction of less 
regulation of the traditional systems during a period in which we would 
expect growing competition in the on-line market to improve the overall 
competitive potential of the airline distribution system. Proposed 
options have included a suspension option and a phase out of the rules 
that would be completed when on-line sales constitute a large enough 
share of the total market.
    For example, Worldspan and Delta's comments on our proposed 
extension of the rules' sunset date suggested that we should suspend 
the rules for two years as an experiment to see what rules are actually 
necessary in light of the current operation of the airline and airline 
distribution industries.
    More recently, Continental has suggested that the rules should be 
phased out with a transitional period beginning immediately and lasting 
until the systems account for less than forty percent of airline ticket 
sales. During the transitional period, we should retain only the basic 
CRS provisions such as the rules on the display of information designed 
to ensure that an unbiased display remains available to travel agents.
    Our current proposals would modify rather than eliminate the rules, 
however, we acknowledge the possibility that sunset of the rules or 
more flexible CRS rules might create more effective competition in the 
CRS sector in relation to growing competition on the Internet. We have 
tried to take such factors into account in shaping our specific rule 
proposals, as discussed below. However, we invite comment on all of 
these proposals aimed at determining how we can make these proposals 
most effective. For example, as noted above, we are proposing more 
flexible provisions in areas such as mandatory participation and 
constraints on fees that could encourage more effective negotiations 
between participating airlines and the systems.
    This leads to one of the more significant generic issues in this 
proceeding. In the face of largely unregulated Internet competition, 
one question that arises is whether we should affirmatively consider a 
package of participation requirements and alternative pricing 
approaches (booking fees and contract arrangements affecting travel 
agencies) geared to making the overall distribution network (including 
the traditional regulated CRS sector) maximally ``incentive 
compatible'' with growing competition from diverse

[[Page 69389]]

marketing arrangements burgeoning in the on-line distribution sector.
    If we find appropriate and workable approaches in the context of 
this proceeding, we will carefully evaluate them. This evaluation will 
also shape our final proposals for the continuing review of CRS issues 
over the next several years.

H. The Specific Rule Proposals

    While we are looking at a range of options, such as allowing the 
rules to expire or phasing them out, we are also proposing specific 
rules in the event that we determine that CRS regulation remains 
necessary for an additional period. The rules being proposed by us are 
intended to prevent deceptive practices that could mislead consumers 
and unfair methods of competition that would reduce competition in the 
airline and CRS businesses and increase airline costs. If we conclude 
that rules are necessary, we will prefer to adopt rules that will help 
enable market forces to discipline the systems' terms for airline 
participation to the maximum extent possible, as we stated when we 
began this rulemaking. 62 FR 47609. The development of system 
competition for airline customers would lessen the need for detailed 
regulation by us. Enabling market forces to operate effectively in the 
CRS business, combined with on-going developments in airline 
distribution, may eventually eliminate the need for most or all CRS 
rules. For the most part our proposed rules are intended to create more 
competition in the CRS and airline businesses.
    We are not trying to adopt rules that would address all potential 
problems. Any such comprehensive and detailed set of regulations would 
necessarily impose significant burdens on the systems, and creating 
rules designed to eliminate all risk of possible illegal conduct would 
likely interfere with legitimate business practices. As to each issue 
we therefore are considering the likelihood and seriousness of the harm 
that could result in the absence of regulation, along with the benefits 
and costs likely to result from the adoption of a rule.
    Developing rules sometimes requires us to choose among goals that 
cannot easily be reconciled. Rules proposed to solve one problem may 
worsen another problem. For example, increased competition between the 
systems for travel agency customers would be desirable, and a number of 
parties, particularly the travel agency groups, have proposed rule 
changes that would give travel agencies more leeway to switch systems 
and use multiple systems. However, increasing the systems' competition 
for travel agency customers could drive up the systems' marketing 
expenses and thus lead to higher fees for their captive customers, the 
airlines.
    We will discuss the major rule proposals in the following order: 
(i) The scope of the rules, (ii) the use of third-party hardware and 
software by travel agencies and their ability to use one terminal to 
access several systems and databases, (iii) mandatory participation, 
(iv) display bias, (v) booking fees, (vi) booking and marketing 
information, (vii) travel agency contracts, (viii) Internet regulation, 
and (ix) international issues.
    We will discuss only the more significant issues raised by the 
comments and our proposed rules. Where we are proposing to readopt 
existing rules, we will rely on the findings and analysis in our last 
review of the rules unless we have updated or modified them in this 
notice.

1. The Scope of the Rules

    The current rules cover systems owned or marketed by airlines that 
are used by travel agencies to obtain information, make bookings, and 
issue tickets for passenger air transportation. The rules do not cover 
computer systems that provide some but not all of these functions, 
systems that are not owned or marketed by an airline or airline 
affiliate, and system services that are not used by travel agencies 
(for example, services used by corporate travel departments and 
consumers accessing a system through the Internet). The rules also do 
not cover the operations of traditional travel agencies or on-line 
travel agencies. The description of the rules' applicability is set 
forth in section 255.2, and the definition of ``system'' is in section 
255.3.
    The major issue on the rules coverage is whether the rules should 
govern non-airline systems. We are proposing to apply the rules to both 
airline and non-airline systems, as discussed above.
    Many parties have urged us to expand the scope of the rules in 
other respects. We discuss one such request--the proposal that the 
rules cover at least some of the practices of Internet sites where 
consumers can obtain information and make bookings on airlines--below 
in our discussion of Internet rule proposals.
    A number of parties contend that the rules should cover the 
relationships between the systems and corporate users, primarily 
corporate travel departments. Their major concern is the tying by an 
airline of access to its corporate discount fares with the use of the 
system affiliated with that airline. The parties have an opportunity to 
comment on whether this kind of tying and similar system practices 
should be considered unfair methods of competition, as discussed below 
in our discussion of the mandatory participation requirements.
    Our current rules do not expressly regulate the terms for airline 
participation when someone other than a travel agent uses a system. As 
a result, a system could believe, for example, that it could charge 
discriminatory booking fees for bookings made by someone other than a 
travel agent. Given the systems' apparent market power, each system 
could also impose unreasonable terms for airline participation for non-
travel agency sales. The record does not indicate that the systems have 
imposed prices and terms for system participation in such circumstances 
that would be contrary to the rules' requirements for travel agency 
sales. We therefore are not proposing any rule on this issue.
    Amtrak and various bus companies contend that the rules should 
require an improved display of train and bus services. Amtrak wants the 
systems to be required to list high-speed rail service together with 
airline flights, while Greyhound and the Airport Ground Transportation 
Association urge us to require systems to display bus services operated 
to airports. IATA counters that such expanded displays of non-airline 
services could impose substantial costs on the airlines, due to the 
existing coding system's limited capacity to handle a wide variety of 
non-airline services. We cannot grant the requests to mandate better 
displays of train and bus services. Our jurisdiction under section 411 
is limited to the marketing of air transportation. 56 FR 12604; 57 FR 
at 43797.

2. Definitions

    Our major proposal for revising the rules' definitions involves 
changes to the definition of ``system''. First, as discussed above, we 
propose to include non-airline systems within the scope of the rules. 
Doing so will require changing the definition of a system by omitting 
the requirement that the system be offered by an airline or its 
affiliate.
    Secondly, we want to ensure that information and booking services 
accessed by travel agencies over the Internet are not treated as 
systems subject to the rules, when they do not present a potential for 
anticompetitive conduct and deceptive conduct. Our goal is to 
facilitate the development of alternatives to the systems for both 
travel agencies and airlines and thereby

[[Page 69390]]

reduce the systems' market power and potentially eliminate or reduce 
the need to regulate them. The Internet can provide alternatives to the 
systems for travel agents willing to use them. Individual airlines like 
Delta have set up websites for travel agent use. A number of travel 
agents use sites primarily created for consumer use, like Orbitz, to 
obtain information and make bookings. In addition, firms are developing 
software products that allow travel agents to search multiple websites 
and make bookings. See, e.g., ``Fare game: `Beat the Agent,' '' Travel 
Weekly (March 4, 2002) at 6. We doubt that such sites should be covered 
by our rules when used as alternatives to one of the existing systems, 
either on a transaction-by-transaction basis or on a short-term basis. 
Defining a ``system'' as an information and booking tool used by 
subscribers under a long-term contract might exclude such services, but 
other changes could more effectively exclude such services while 
continuing to cover CRS services that should be covered. We ask the 
parties to comment on how best to exclude Internet sites from the scope 
of our rules, when their use should not require regulation.
    Since we would keep the condition that the system charge airlines 
for bookings made through its service, the definition would not cover 
direct connection services offered by individual airlines and other 
firms that do not charge booking fees. This proposal and the previous 
proposal thus would exempt firms from being covered as a system if they 
do not charge booking fees or if they provide services to travel 
agencies only under short-term contracts or on a transaction-by-
transaction basis.
    In addition, under the current rules a computer reservations system 
is not subject to the rules unless it provides airline information and 
a booking and ticketing capability. We assumed that travel agencies 
would not choose a system that was unable to perform all of these three 
functions. 57 FR 43794. Since then the airlines have developed E-
ticketing, and most passengers no longer use paper tickets. GAO, 
``Effects of Changes in How Airline Tickets Are Sold'' at 8; March 7, 
2002, Press Releases by American and United. Given the growth of E-
ticketing, the ability to issue tickets may no longer be a crucial 
function needed by travel agencies. We therefore propose to redefine 
the systems subject to the rules as computer reservations systems that 
provide airline information and a booking capability. A firm that only 
provides information on airline services, whether electronically or 
otherwise, will continue to be outside our rules.
    The rules currently define a ``system owner'' as an airline that 
owns at least five percent of a system's equity, in order to implement 
the rule requiring each airline with a significant ownership interest 
in one system to participate in competing systems at the same level at 
which it participates in its own system and certain similar rules 
regulating relations between such an airline and travel agency 
subscribers. While we are proposing to eliminate the mandatory 
participation rule, the rules impose other obligations on system 
owners. If we did extend the mandatory participation rule to airlines 
that market a system, whether or not they have any ownership interest, 
as has been urged by some commenters, the rule presumably should also 
cover airlines with any ownership interest in one system. At the same 
time we doubt that the rules should cover an airline that indirectly 
holds a small ownership interest in a system because it holds a non-
controlling amount of stock in a public company that owns a system. We 
ask the parties for suggestions on whether and how we should redefine 
system owner.
    We also ask the parties whether we should change the definition of 
``subscriber,'' now described as a ticket agent that holds itself out 
as a neutral source of information about, or tickets for, the air 
transportation industry and that uses a system. Because many travel 
agencies obtain incentive commissions from one or more airlines, they 
may favor the airlines likely to pay them a higher commission. We 
recognize, however, that virtually all, if not all, travel agencies 
currently hold themselves out as impartial sources of information for 
consumers. Since we would like the rules to be consistent with industry 
developments, we invite the parties to comment on whether the 
definition should be changed by striking the word ``neutral.''
    Finally, while we are not proposing to base the coverage of the 
rules on whether a system is owned or marketed by an airline, several 
of our proposed rules would impose obligations on airlines that market 
a system (or limit the rights given airlines if they market a system). 
We are not proposing to define the kind of marketing relationship that 
would make these provisions applicable. We invite the parties to 
comment on whether a tighter definition should be used.

3. Third-Party Hardware and Software

    When we last reexamined the rules, travel agencies normally used 
equipment provided by a system, and with rare exceptions no system 
allowed subscribers to use its equipment to access other systems or 
other databases providing airline information and booking capabilities. 
If a travel agency wanted to access another system, it would have to 
acquire a separate set of computer terminals. That was sufficiently 
cumbersome and expensive that few agencies took the trouble to do so. 
56 FR 12607; 57 FR 43796-43797.
    To enable travel agencies to use several systems and have direct 
links with internal airline reservations systems and other databases, 
we adopted a rule, section 255.9, that allows travel agencies to obtain 
their own equipment for CRS access and to access any system or database 
with airline information from the terminals used by an agency, unless a 
system owns the equipment. The rule additionally allows travel agencies 
to use third-party hardware and software in conjunction with system 
services, except as necessary to protect a system's integrity. Several 
airlines had stated that they would create direct links between their 
internal reservations systems and travel agency computer terminals. 
That would give airlines some opportunity to bypass CRSs and perhaps 
the ability to decline to participate in every system unless the terms 
for participation were reasonable. 57 FR 43797.
    In proposing the rule, we expected that it would benefit 
competition in several respects:

    This proposal, if effective, could be the least regulatory means 
of alleviating the continuing competitive problems created by the 
systems. Giving agencies the ability to switch easily among systems 
using the same terminal would encourage vendors to compete on 
improving the functionality and information of each system in order 
to encourage subscribers to make greater use of it. It could also 
enable participating carriers to gain some bargaining power over 
booking fees by enabling them to encourage agencies to use a system 
with the lowest booking fees. If so, that would limit booking fees, 
which are otherwise unrestrained by market forces.

56 FR 12607.
    We further noted that giving travel agencies the right to use 
third-party hardware and software and to use the same terminal to 
access different systems and databases would be consistent with the 
trends in other computer service industries, for networking was 
becoming increasingly important and common. Our proposal was also 
consistent with the Federal Communications Commission's decisions on 
telephone access, for the FCC had held that telephone companies could 
not arbitrarily restrict their

[[Page 69391]]

customers from connecting third-party equipment with the telephone 
system. 56 FR 12605.
    The rule has had some impact. In 1999 thirty-six percent of all 
travel agencies used their own terminals, and twenty-eight percent of 
all agencies used third-party software as a front-end for a system. 
About thirty percent of all travel agents used a system to access the 
Internet, whereas only three percent could do so in 1997. ``U.S. Travel 
Agency Survey 2000,'' Travel Weekly (August 24, 2000) at 131, 132, 133. 
The rule nonetheless has been less beneficial than expected. Few travel 
agencies use more than one system, few seem to bypass the systems by 
using the Internet for a significant number of airline bookings, and 
airlines have found it impracticable to establish direct links with 
individual travel agencies.
    Technical problems do not block travel agents from accessing 
different systems and databases from one terminal. Both United and 
Galileo point out that travel agencies can obtain software enabling 
them to access multiple systems and databases. Galileo Supp. Comments 
at 7, n.6; United Supp. Reply at 23. Travel agencies nonetheless rarely 
make use of this capability. Legitimate business reasons in part 
explain the agencies' continuing reliance on one system and failure to 
seek information and make bookings with multiple systems and databases. 
Before the Internet, creating a direct link between an agency and an 
airline was relatively expensive. In addition, using multiple systems 
and databases could increase an agency's training costs and make 
keeping track of records more difficult. 56 FR 12607.
    Notwithstanding the foregoing considerations, we presently believe 
that the systems' contract practices may be the major reason for the 
travel agencies' failure to use multiple systems and databases. Our 
rule allows each system to keep subscribers from using computer 
terminals owned by the system to access competing systems and 
databases. The systems have discouraged travel agencies from buying 
their own equipment by offering them equipment in conjunction with CRS 
services on very attractive terms. The systems allegedly offer travel 
agencies a package of system services and equipment at a price barely 
above the price of system services without equipment. This makes it too 
costly for agencies to acquire their own equipment. Large Agency 
Coalition Comments at 3-4; Midwest Agents Selling Travel Comments at 2; 
Delta Comments at 10. As a result, travel agencies typically have not 
bought their own equipment. The agencies then cannot take advantage of 
our rule giving them the right to access multiple systems and databases 
from equipment owned by any entity other than the system itself.
    The systems could, of course, allow subscribers to use system-owned 
equipment to access other systems and databases, but they apparently 
rarely grant such permission. Delta Comments at 8-10; Alaska Comments 
at 10-11. The systems also may have restricted subscriber access to the 
Internet from system-owned equipment. ``U.S. Travel Agency Survey 
2000,'' Travel Weekly (August 24, 2000) at 140.
    Each system additionally has offered financial incentives to its 
subscribers that encouraged each to make all or most of its bookings on 
that system. The most common such incentive is productivity pricing. A 
productivity pricing structure gives travel agencies large discounts 
from the standard charges for system services and equipment if the 
travel agency meets a specified minimum booking level for each 
terminal. The booking quota is high enough so that the agency as a 
practical matter cannot afford to make substantial use of another 
system or database for its bookings. Alaska alleges that the systems' 
use of productivity pricing (and their restrictions on travel agency 
use of system-owned equipment) made it difficult for Alaska to 
establish direct links between its internal reservations system and 
selected major travel agencies. Alaska Comments at 4-5. ASTA contends 
that productivity pricing keeps travel agents from using the Internet 
to book fares lower than those sold through a system. ASTA Comments on 
Proposed Extension at 3.
    As a result of these system practices, few travel agencies have 
accessed multiple systems and databases from the computer terminals in 
their offices for airline bookings. See, e.g., Delta Comments at 10. 
The continuing prevalence and impact of such restrictions is unclear, 
since travel agents are increasingly using the Internet for airline 
bookings. ``Online travel is booming,'' Travel Weekly (August 26, 
2002).
    Because the rule's exception for system-owned equipment may have 
effectively annulled it, a number of parties urge us to revise the rule 
to allow agencies to access any system or database from equipment owned 
by the system as well as equipment not owned by the system. These 
parties include Delta, U.S. Airways, America West, Alaska, Midwest 
Express, Qantas, Varig, the Asia Pacific airline group, ASTA, and 
Amtrak.
    Worldspan would not oppose this revision as long as the rule stated 
that any equipment or software connected with the system must be 
compatible with the system.
    Sabre and Galileo oppose any change in this rule. They argue that 
travel agencies have the option of buying their own equipment if they 
want to access other databases and that changing the rule would 
override the system's rights as the owner of the equipment. Sabre also 
asserts that changing the rule would destroy the economics of the 
business, since the system could no longer expect to obtain the booking 
fees generated by the travel agency. Sabre Reply at 36.
    We are proposing to readopt the existing rule with one change, the 
elimination of the provision that allows a system to block travel 
agencies from using equipment owned by the system to access other 
systems and databases. We believe that our findings on the potential 
competitive benefits of such a rule remain valid. Enabling travel 
agencies to access different systems and databases and travel suppliers 
from one computer would encourage competition between the systems and 
between the systems and alternative electronic sources of information 
and transaction capabilities for travel agencies. That in turn would 
apply some competitive discipline to booking fee levels. Experience 
seems to show that making such a rule effective will require both 
eliminating the exception for system-owned equipment and restricting 
the use of productivity pricing and other contract provisions that 
cause travel agencies to use one system for all or most of their 
bookings (our tentative findings on productivity pricing and related 
issues are discussed below in connection with the other subscriber 
contract issues).
    These findings are consistent with the recommendations of several 
parties. Delta's initial comments thus asserted that our primary 
objective ``should be to increase competition among CRS vendors for 
information services and booking fees by eliminating contract and other 
CRS vendor-created barriers that prevent or limit travel agents from 
using multiple CRS databases and Internet connections to competitive 
sources of travel information.'' Delta Comments at 2. Similarly, Alaska 
states, ``[O]ne critical objective * * * should be the elimination of 
the incentives and disincentives that lock travel agents into a 
particular CRS and discourage agents' use of alternative means of 
communicating with participating carriers.'' Alaska Comments at 7.

[[Page 69392]]

    Enabling other firms to compete with the systems for a share of 
each travel agency's business, moreover, would encourage technological 
innovation. A firm that can develop superior technology should have a 
competitive advantage in obtaining travel agency customers. This may 
not occur as long as the systems' contract provisions and restrictions 
on the use of equipment block travel agencies from choosing a service 
that better meets their needs. Several firms are already developing 
more efficient programs that travel agencies can use for searching 
several systems and websites for information and making bookings in the 
location with the best fare and service. ``Fare game: ``Beat the agent' 
'', Travel Weekly (March 4, 2002) at 6.
    Moreover, as explained below in our discussion of the airline 
proposals for rules requiring CRS fees to be reasonable or cost-
related, the most practicable and desirable solution for the airlines' 
complaints about CRS practices is to foster alternatives that airlines 
can use if the terms for system participation are unacceptable and that 
airlines can encourage travel agencies to use.
    In the last rulemaking, we decided to allow each system to limit 
the use of its own equipment on the basis that the system providing the 
equipment should be able to control its property and obtain some 
compensation for its use. 57 FR 43800. After reexamining the issue, we 
think that eliminating the exception for system-owned equipment would 
not treat systems unfairly when they choose to provide equipment. 
Systems can provide services to travel agencies without providing the 
equipment, since travel agencies can obtain equipment elsewhere. More 
importantly, we would not be restricting the systems' ability to charge 
travel agencies for the use of their equipment. We would only be 
preventing them from unreasonably restricting the equipment's use.
    We believe that the restrictions tend to maintain the systems' 
ability to obtain monopoly rents from airlines. It appears that the 
trend in the business world and in the regulatory arena has been to 
eliminate restrictions that limit access to computer terminals and 
telephone equipment. Our proposed rule would duplicate the practices 
already followed in several foreign countries at the time of our last 
rulemaking. 56 FR 12607; 57 FR 43799.
    The record suggests, moreover, that the systems have offered travel 
agencies equipment at little or no cost, which enables the systems to 
prevent travel agencies accepting those offers from accessing competing 
systems and databases from one computer terminal. The systems have done 
so, notwithstanding our intent that travel agencies be able to use more 
than one system and that no system should be entitled to obtain all or 
most of its subscribers' bookings during the terms of their CRS 
contracts. See, e.g., 57 FR 43827-43828. For this reason we cannot 
accept Sabre's objection to the proposed rule. Sabre asserts that the 
systems would likely become unwilling to provide equipment and that the 
proposal would undermine the systems' assumption that the equipment 
supplied by a system to a travel agency will generate booking fee 
income. Sabre Reply at 36. Sabre's position is contrary to our long-
standing policy that a subscriber should be free to use multiple 
systems and databases and that a system therefore should not be 
entitled to obtain--or expect to obtain--most or all of a subscriber's 
bookings.
    To provide travel agencies some additional assurance that they may 
use third-party hardware and software we invite comment on additional 
provisions that would prohibit systems from discriminating against 
subscribers for using a back-office system in conjunction with bookings 
outside the system and from charging disproportionately high fees for 
system services to subscribers that do not use equipment provided by a 
system. The latter provision would not affect the systems' pricing of 
equipment. These proposals would add some specificity to the existing 
rule that bars systems from directly or indirectly prohibiting or 
restricting subscribers from using third-party hardware and software or 
using the same equipment for accessing one system and other systems or 
databases.

4. Contract Clauses Restricting Airline Choices on System Usage

    As discussed above, we seek to enable airlines to use alternatives 
to the systems so that market forces may discipline the prices and 
terms offered airlines for CRS services. To achieve this goal, airlines 
must be able to choose whether they will participate in a system and at 
what level, and to encourage travel agencies to obtain information and 
make bookings in ways that would bypass the systems. We therefore 
adopted a rule prohibiting the systems from enforcing parity clauses 
except as to airlines that owned or marketed a competing system. The 
parity clauses imposed by most systems required each participating 
airline to buy at least as high a level of service from the system as 
it did from any other system (for example, Sabre's parity clause 
required any airline participating in any competing system at the full 
availability level to participate in Sabre at that level or a higher 
level). We prohibited the enforcement of parity clauses because they 
made it unnecessary for systems to compete for airline participation at 
higher levels of service (while almost all airlines must participate in 
each system, as discussed, many airlines do not need to participate at 
the higher levels, which are more expensive). As we additionally 
explained, ``[P]arity clauses cause airlines either to buy more CRS 
services than they wish to buy from some systems or to stop buying 
services from other systems that they would like to buy, which creates 
economic inefficiencies and injures airline competition.'' 62 FR 59784.
    We recognized, however, that an airline affiliated with one CRS as 
an owner or marketer might participate in competing systems at a level 
lower than its level of participation in its own system in order to 
induce travel agencies in regions where it is the dominant airline to 
choose its affiliated system rather than a competing system. We 
therefore allowed a system to enforce parity clauses against airlines 
that owned or marketed a competing system. A system could not enforce a 
parity clause, however, until it had given us and the airline fourteen 
days advance notice of its intent to do so. 62 FR 59797-59799.
    None of the parties has asked us to reexamine the rule prohibiting 
the enforcement of parity clauses, subject to the exception for 
airlines marketing or owning a system, so we propose to readopt the 
rule. Our proposal to end the mandatory participation requirement, if 
adopted, may require that the parity clause rule be changed to 
eliminate that exception.
    Sabre, however, raises two related issues regarding system contract 
practices that appear to limit airline choices on system participation 
(a third issue, the tying of participation in the system's services 
provided to travel agencies with participation in websites using the 
system, is examined below with the other Internet issues). Sabre states 
that its contract with participating airlines prohibits them from 
discriminating against travel agencies using Sabre. If broadly 
interpreted, the clause arguably could keep airlines from taking steps 
to encourage travel agencies to use an alternative system that might be 
more efficient or less costly for the airline. Sabre's contracts also 
give it the right to limit a participating airline's ability to 
withhold fares from Sabre; Sabre alleges, for example, that the

[[Page 69393]]

contract gives it the right to demand that airlines make their E-fares 
available through Sabre although Sabre ``has chosen not to do so at 
this time.'' Sabre Reply at 10.
    If Sabre's contracts are typical, the systems may be imposing 
contract terms on airlines that unreasonably restrict airline choices 
on how to distribute their services. Such contract clauses could keep 
an airline from pursuing the most efficient and least costly 
distribution channels. Airlines should be free to choose to offer E-
fares only through their own websites, without being obligated by 
system contracts to make them available through other distribution 
channels. This kind of contract clause would frustrate our efforts to 
allow airlines to create ways of bypassing the systems when doing so is 
more cost-effective and likely to establish competitive discipline for 
the systems' prices and terms for participation.
    In addition, a participating airline should have some ability if 
practicable to persuade travel agencies to use a system or similar 
electronic service that provides better service or charges lower fees. 
Insofar as Sabre's contract would bar this, it would keep an airline 
from taking steps to reduce its CRS expenses. It would also be directly 
contrary to our conclusion in the parity clause rulemaking that 
airlines should normally be free to choose the quantity and quality of 
service bought from their suppliers. 62 FR 59784-59785, 59792.
    We therefore request comment on a rule proposal that would prohibit 
a system (i) from barring an airline from ``discriminating'' against 
the travel agencies using the system, at least if the alleged 
discrimination results because the system has higher booking fees and 
poorer service than other systems, and (ii) from requiring any airline 
as a condition for participation to provide that system with fares that 
the airline has chosen not to sell through travel agencies or the 
systems. This proposal should be consistent with our rule prohibiting 
parity clauses, section 255.6(e).
    Parties should comment on whether the rule should create an 
exception for airlines that own or market a competing system.
    We ask the parties to provide additional information on the 
systems' current practices and on the benefits and harm that could 
result from such a rule and suggestions on how to implement a rule 
allowing airlines to favor users of one system over another.

5. The Mandatory Participation Rule

    Our mandatory participation rule, section 255.7, requires each 
airline with an ownership interest of five percent or more in a system 
(a ``system owner'') to participate in competing systems at the same 
level at which it participates in its own system, if the other systems' 
terms for participation at that level are commercially reasonable. We 
adopted the rule because some U.S. airlines with an ownership interest 
in one system limited their participation in competing systems in order 
to encourage travel agencies in their hub cities to use their own 
system. Some airlines also denied complete information on their fares 
and services to competing systems. 56 FR 12608; 57 FR 43800. U.S. 
systems have encountered similar conduct internationally by foreign 
travel suppliers that own or market a competing system. 62 FR 59797.
    The U.S. airlines now covered by the rule are American, Delta, and 
Northwest; the rule also applies to Amadeus' European airline owners. 
As a result of Cendant's acquisition of Galileo and United's sale of 
its Cendant shares, United is no longer subject to the mandatory 
participation rule. American, moreover, reportedly plans to sell its 
Worldspan stock, which it acquired as part of its acquisition of TWA's 
assets. Although United and potentially American are no longer system 
owners for purposes of our mandatory participation rule, each continues 
to market the system that it formerly owned, and Southwest also markets 
Sabre.
    The mandatory participation rule has generated substantial 
controversy in this proceeding in three respects: (i) Several airlines 
and Orbitz claim that the rule is counterproductive, since it allegedly 
enables systems to dictate terms for airline participation; (ii) some 
airlines and systems insist that the rule should be maintained and 
extended to airlines that market a system, not just airlines with a 
significant ownership interest; and (iii) some airlines, systems, and 
travel agencies contend that the rule must prohibit each system owner 
from denying access to its corporate discount fares to travel agencies 
that do not use its system. We will discuss each of these three issues 
in this section.
(a) Ending the Mandatory Participation Requirement
    The larger airlines urge us to abolish or cut back the rule. 
American, United, and Delta contend that the rule should be eliminated. 
Northwest asserts that only a basic level of participation should be 
required of airlines with system ownership interests. United and Delta 
claim that the systems use the rule to force airlines with an ownership 
interest in another system to participate in all enhancements, whether 
or not they benefit the airline. United further claims that abolishing 
the rule would give large airlines some leverage over the systems, 
since an airline could refuse to participate in a system (or all of its 
features) unless the system offered attractive terms for participation. 
According to United, the airlines' ability to negotiate over the terms 
for participation would allegedly create competitive discipline for the 
systems.
    Galileo, Worldspan, Amadeus, System One, and America West initially 
argued that we should maintain the rule. Several of them cite cases 
where an airline that owns or markets a system allegedly has 
unreasonably limited its participation in competing systems in order to 
encourage travel agencies to choose its affiliated system, 
notwithstanding the rule. For example, System One, which markets 
Amadeus, alleges that airlines associated with Sabre and Worldspan have 
denied certain types of transactional capability to Amadeus in order to 
handicap Amadeus' ability to obtain travel agency subscribers. System 
One Comments at 5-10. Worldspan has since advised OMB that it believes 
that the mandatory participation rule should be eliminated.
    We are proposing to end the requirement that airlines affiliated 
with a system must participate in competing systems at the same level 
that they participate in their own system as long as the terms are 
commercially reasonable. We believe that ending the requirement may be 
beneficial, but we invite the parties to discuss further whether the 
requirement should be maintained.
    We adopted the current rule due to our experience that airlines 
owning or marketing a system have at times limited their participation 
in competing systems (or denied complete fare and schedule information 
to competing systems) in order to compel travel agencies in areas 
dominated by such airlines to choose systems affiliated with those 
airlines. 56 FR 12608; 61 FR 42206. The rule was also consistent with 
our decisions finding that a foreign airline had engaged in unfair 
discriminatory conduct by refusing to participate fully in a U.S. 
system that was competing with a system owned or marketed by the 
foreign airline. 57 FR 43800. In addition, the United States' aviation 
agreements with a number of foreign countries similarly require airline 
participation in competing systems.

[[Page 69394]]

    Nonetheless, the mandatory participation rule may unduly limit the 
ability of individual airlines to bargain for better terms with the 
systems. If so, as asserted by several of the airline commenters, 
ending the requirement could enable market forces to discipline the 
systems' terms for airline participation to a greater extent than now. 
While the systems then seemed to have substantial market power, we 
concluded when we adopted our rule prohibiting parity clauses that 
airlines had some ability to choose which levels of participation 
should be purchased. For that reason, we barred the systems from 
enforcing parity clauses against airlines that did not own or market a 
system. The large airlines opposing the requirement contend that they 
could negotiate with other systems for better terms if the rule did not 
force them to participate at a specified level. Delta claims, for 
example, that it obtained better terms for some system features before 
our rule took effect. Delta Comments at 22.
    The airlines' potential ability to limit their purchase of system 
services should enable them to demand better terms in return for 
participating in higher levels of service. Any additional market 
discipline would provide significant public benefits by cutting the 
cost of airline distribution. Further, ending a rule limiting the 
ability of airlines to choose which services they will buy would be 
consistent with our overall goal of creating more choices for airlines. 
Given our past findings on the systems' market power, however, we ask 
the parties to comment on whether and how this proposal would lead to 
lower fees and better terms for airlines participating in a system.
    We recognize that airlines affiliated with a system have at times 
limited their participation in competing systems in an effort to 
prejudice their ability to compete for travel agency subscribers. 
Indeed, a number of the commenters complain that airlines owning or 
marketing a system continue to engage in practices that seem to be 
designed only to create a competitive advantage for their affiliated 
system. However, in this proceeding we are focusing on proposals that 
would benefit consumers by promoting airline competition. In the past, 
when one or more airlines owned each system, competition between the 
systems had a substantial impact on airline competition. Most of the 
systems have weaker ties with their former owners, and the more equal 
functionality offered each participating airline by each system has 
lessened the impact of competition between systems on competition 
between airlines. The airlines currently subject to the rule also own a 
share in Orbitz, and their Orbitz ownership interests may deter them 
from making marketing decisions on the basis of their ties with one of 
the systems. Ending the mandatory participation rule may provide a test 
of the airlines' ability to negotiate better terms for system 
participation. American submitted to OMB a report by the Association of 
European Airlines that analyzes in detail the potential advantages and 
disadvantages of such a change.
    In any event, the potential benefits obtainable from ending the 
rule, according to the proposal's proponents, would outweigh any 
adverse impact on competition between the systems. The travel agencies' 
increasing ability to use alternatives to a system may also reduce the 
anti-competitive effects produced when an airline reduces its 
participation in competing systems in order to create a competitive 
advantage for its affiliated system. In addition, even without a rule, 
section 411 might bar airlines from using their dominance of local 
airline markets and ability to restrict their participation in 
unaffiliated systems as a way to compel travel agencies to subscribe to 
the airlines' affiliated system. The parties should discuss the 
potential benefits and harms for the travelling public from our 
proposal to end the mandatory participation rule. They should also 
address the implications of such a change for the United States' 
compliance with its international obligations.
    We are proposing to eliminate the mandatory participation rule, but 
a possible alternative would be a readoption or extension of the rule 
if commenters can show that doing so would provide significant 
benefits. We are uncertain whether the airlines seeking the rule's end 
would have much bargaining leverage if we terminated the rule. There 
may also be some continuing validity to our historical concern that 
airlines affiliated with a system may limit their participation in 
competing systems or withhold information from those systems in order 
to distort CRS competition. Commenters that believe so should present 
information supporting such a position and address whether and how such 
conduct could affect airline competition and consumers.
    The existing rule requires each airline with a significant 
ownership interest to participate in competing systems at the same 
level at which it participates in its affiliated system, if the 
competing systems' terms for participation are commercially reasonable. 
We invite parties to comment on an alternative rule that should be less 
burdensome, if we determine that airlines owning or marketing a system 
should have some obligation to participate in competing systems. 
Instead of requiring airlines affiliated with one system to participate 
in competing systems, such a rule would prohibit airlines from 
declining to participate in competing systems due to an intent to 
distort competition in the CRS business. The rule could create a 
presumption that an airline's refusal to participate at an equivalent 
level in competing systems was designed to restrict competition, if the 
systems' terms for participation were commercially reasonable. The 
basis for the presumption would be the airlines' usual interest in 
making their services available through all significant distribution 
channels. Such a rule would allow an airline to show that legitimate 
business reasons made it unwilling to participate at an equivalent 
level in the competing systems.
    This should provide airlines that own (or market) a system greater 
flexibility in choosing which services to use in competing systems. On 
the other hand, as we reasoned in our last reexamination of the rules, 
such a requirement would require us to resolve potentially difficult 
issues of intent. 57 FR 43801. The potential advantages of this rule 
over the existing rule may outweigh this disadvantage, however.
    Delta asserts that the rule forces it to participate in features 
even when their performance and quality do not live up to the system's 
initial claims. Delta Comments at 22. We believe that an airline 
covered by the existing mandatory participation rule would not be 
required to participate in a competing system's enhancement if the same 
enhancement offered by the airline's own system provides better service 
at the same price. Our rule requires participation only if the terms 
are commercially reasonable.
    While we are proposing to end the mandatory participation rule, 
some of the arguments made against it seem unpersuasive. United claims, 
for example, that the rule causes the systems to match each other's 
fees. United Comments at 23. The systems, however, were matching each 
other's fees before we adopted the rule in 1992. Airline Marketing 
Practices at 56-57.
    United further asserts that we have no jurisdiction or 
responsibility for promoting competition in the CRS industry. United 
Supp. Reply at 30, n. 41. United's argument wrongly assumes that 
systems are not ticket agents within our jurisdiction under section 
411. In addition, airline efforts to distort competition between the 
systems may

[[Page 69395]]

help preserve the systems' market power in a manner contrary to 
antitrust principles. By limiting the travel agencies' ability to 
choose between systems, they may increase airline distribution costs 
and travel agency costs. Cf. 62 FR 59794. As noted above, however, our 
focus is on airline competition, and CRS competition now may have less 
of an impact on airline competition than when we last reexamined the 
rules.
(b) Extending the Rule
    We are proposing to end the mandatory participation requirement. 
However, parties may comment on whether the requirement, if readopted, 
should be broadened. As noted, the mandatory participation rule 
currently covers only airlines with a significant equity interest in a 
system. American will not be covered if it sells its Worldspan stock, 
and United is no longer covered. American, United, and Southwest each 
market a system in the United States, even though they have no 
ownership interest.
    Galileo, Worldspan, Amadeus, Northwest, Continental, and America 
West have argued that the mandatory participation rule, if kept, should 
cover airlines marketing a system. Sabre, American, and Southwest 
oppose any such broadening of the rule.
    Parties should comment on whether the mandatory participation rule 
should cover airlines that market a system, if we determine to readopt 
the requirement at the conclusion of this proceeding. Such an airline 
may have incentives to limit its participation in competing systems in 
order to undermine their ability to compete for travel agency 
customers, as shown by experience. That may distort competition in the 
CRS business.
    We would, of course, prefer not to interfere with the contracts 
between systems and marketing airlines, but it is possible that doing 
so may be necessary to prevent discrimination against some systems 
designed to give an affiliated system a competitive edge. In addition, 
we doubt that we could maintain a mandatory participation requirement 
for airlines with a CRS ownership interest when airlines marketing a 
system remain free of any such requirement.
    A related issue concerns the refusal by some airlines affiliated 
with a system to give travel agencies (and corporate travel 
departments) access to their corporate discount fares unless the agency 
(or corporate travel department) uses the airline's affiliated system. 
Balboa Travel Management, a San Diego travel agency, states that it 
lost a potential corporate customer because the airline booked most 
often by the corporation warned that its discount fares would not be 
available through the system used by Balboa. Balboa Travel Management 
Supp. Comments at 1. System One cites cases where American and Delta 
offered corporate discount fares only if booked through Sabre and 
Worldspan, respectively, and Galileo describes similar conduct by 
Northwest and American. System One Comments at 3-4; Galileo Supp. 
Comments at 12 and Exhibit B. See also AAA Comments at 2; American 
Express Comments at 2; Large Agency Coalition Comments at 7; Midwest 
Agents Selling Travel Comments at 4.
    An airline's denial of access to corporate discount fares to travel 
agencies that do not use its affiliated system is an effective 
competitive weapon against rival systems. Amadeus Supp. Comments at 32-
34; November 10, 1998, Amadeus Supp. Comments; Continental Response to 
Amadeus Petition at 3-4.
    The existing rules require each airline with a significant CRS 
ownership interest to make all of its fares and services that are 
``commonly available to subscribers to its own system'' available to 
competing systems. Section 255.7(b). We did not require system owners 
to provide all information on their services, since some information, 
such as information on frequent flyer programs, was traditionally 
shared only with the airline's own system. We declined to adopt a 
general prohibition against a system owner's tying of access to special 
discount fares with the use of the owner's system. We stated, however, 
that an airline would violate its obligation to provide access to its 
commonly-available fares to users of all systems if it ``widely offers 
a discount fare to businesses on the condition that they use its CRS 
for booking the fare.'' 57 FR 43801.
    Some airlines treat their corporate discount fares as fares that 
are not generally available and so are not subject to the rule. Amadeus 
filed a petition (Docket OST-99-5888) asking us to declare that the 
current rules prohibit an airline owning a system from refusing to 
provide its corporate discount fares to competing systems or, in the 
alternative, to amend the rules to prohibit the tying of access to the 
fares with the use of the airline's system.
    Galileo (if the mandatory participation rule is kept), Amadeus, 
System One, Continental, America West, ASTA, AAA, American Express, and 
the Large Agency Coalition contend that we should prohibit an airline's 
tying of access to its corporate discount fares with a travel agency's 
use of the airline's CRS. United, Northwest, and the Asia Pacific 
airline group oppose any prohibition of such tying.
    While we are proposing to eliminate the mandatory participation 
rule, parties should comment on whether the rule should be kept and, if 
so, should require airlines affiliated with a system to provide 
corporate discount fares to competing systems.

6. Rules Barring Display Bias

(a) Background
    Our rules prohibit systems from biasing their displays but do not 
prescribe how a system must display airline services. Section 255.4. As 
explained above, the systems must determine which flights will be 
listed in the display of services provided travel agents and the order 
in which the flights are listed. The rules define display bias as using 
carrier identity in selecting flights from the database and ordering 
the listing of flights in the display. Galileo, for example, may not 
give United's flights a preference just because they are operated by 
United. Other provisions additionally limit the potential for bias. 
Each system must, for example, apply its editing and ranking criteria 
consistently to all markets. It must select connecting points (and 
double connect points) for constructing connecting flights for each 
city pair on the basis of criteria that are applied consistently to all 
airlines and all markets. Participating airlines can designate five 
points to be used as connecting points in a market. Each system must 
follow the same standards of care and timeliness for loading 
information on participating airlines and information on airlines 
owning the system.
    Each participating airline must ensure that it provides complete 
and accurate information to each system in a form that will enable the 
systems to display flights in accordance with our rules on display 
bias. Section 255.4(f).
    In our last overall rulemaking we found that display bias would 
mislead travel agents and their customers. It would also keep non-owner 
airlines from being able to compete on the basis of the price and 
quality of their service, since it would shift significant amounts of 
revenue to the airline benefited by the bias. 57 FR 43786.
    When we strengthened our display bias rules in 1997, we noted that 
a Galileo display, created to prejudice some of United's competitors, 
might be reducing Alaska's annual revenues by as much as $15 million 
and Midwest Express' annual revenues by several million dollars. 
Galileo's display, while

[[Page 69396]]

ostensibly neutral, often and unreasonably gave the flights of United, 
one of Galileo's owners, a better display position than flights offered 
by competitors that better met the needs of travellers and travel 
agents. 61 FR 42212-42213.
    Bias could be effective for several reasons. Travel agents tend to 
book the first flight displayed by a system. Their customers depend on 
them to extract information from the system display, which consumers do 
not view themselves. Travel agents generally work under time pressure 
that often keeps them from taking the trouble to overcome display bias 
by searching several display screens. The systems also hid the extent 
of their bias. Furthermore, the systems' contracts with travel agencies 
limited each agency's ability to offset one system's bias by switching 
systems or using multiple systems. As a result, consumers were often 
unable to obtain accurate and complete information on schedules and 
fares from travel agents relying on a system for their information. 57 
FR 43785-43786.
    Since the rules do not generally prescribe what criteria must be 
used for editing and ranking flights, Sabre, for example, could choose 
criteria for editing and ranking flights that give American's flights a 
better position due to the characteristics of American's service. See 
56 FR 12611.
    The rules also do not regulate the displays created by travel 
agencies for their travel agents and thus do not prohibit agencies from 
biasing those displays. We determined in our last overall rulemaking 
that such a rule was unnecessary because competition between travel 
agencies appeared likely to deter them from offering customers 
misleading or incomplete advice on airline service options. 57 FR 
43809.
    No party is arguing that we should end the rules against display 
bias if we conclude that the systems still require some regulation. The 
rules generally seem to work well, and no party is urging us to 
drastically revise them. Worldspan, however, told OMB that it sees no 
need for rules regulating system displays. Several other parties 
contend that the rules require strengthening. Sabre asserts that we 
should bar ``screen padding,'' multiple listings of the same flights 
under different airline codes. The European Union and the European 
Civil Aviation Conference urge us to conform our rules on display bias 
with the European rules, at least by specifying in several respects how 
flights must be ranked. Frontier urges us to prohibit systems from 
giving connections between code-share partners a preference over 
interline connections. American and America West seek a rule requiring 
change-of-gauge flights to be displayed as connecting flights. Air 
France and Lufthansa contend that systems should be required to use 
elapsed time as a factor in ranking airline services. Galileo, Amadeus, 
Delta, Continental, and America West oppose proposals for a rule 
requiring display criteria to be based on consumer preferences.
    In addition, we will also address an issue raised in an enforcement 
proceeding instituted against American and Sabre in Docket OST-95-430. 
The case resulted from American's distribution to some Sabre 
subscribers of software that would rearrange the displays of airline 
services in favor of American. The program enabled the travel agency to 
create various displays, including one that would show only American 
flights.
    The major issues requiring discussion are whether we should 
continue to prohibit bias and whether we should prohibit the systems 
from screen-padding, prohibit airlines from providing travel agencies 
with programs that would bias the displays, and prohibit travel 
agencies from biasing the displays used by their employee travel 
agents.
(b) Maintaining the Prohibition against Display Bias
    We believe there may be a significant risk that systems, whether or 
not owned by an airline, would engage in display bias if not prohibited 
from doing so. Some commenters have suggested that airlines could 
obtain preferential treatment from a system by paying it to 
discriminate against competitors. Northwest Comments on Proposed 
Extension at 7; Alaska Supp. Comments at 3-4; ASTA Comments at 8-9; see 
also Marshall A. Fein Supp. Comments (description of one system's bias 
against a disfavored car rental company).
    In our last overall rulemaking we considered in detail whether 
display bias provided countervailing consumer and competitive benefits 
and concluded that it did not. 57 FR 43785-43787. We tentatively 
believe that reasoning remains valid, and we accordingly propose to 
readopt the prohibition against display bias. Nevertheless, we will 
consider carefully comments that oppose the readoption of this 
prohibition.
    In that connection, we are not proposing to adopt the suggestions 
from the European Union and the European Civil Aviation Conference that 
we make our rules more like theirs, in particular, that we require 
nonstop flights to be listed first and that other flights be ranked on 
the basis of elapsed time. We continue to believe that we should not 
direct how systems must edit and rank airline service options. We do 
not believe that there is a single best algorithm for displaying 
airline services (an algorithm is the set of rules for constructing a 
display). 56 FR 12609. We note as well that the systems have typically 
offered users several displays of airline services. See, e.g., 61 FR 
42210. Travel agents and consumers should benefit from the ability to 
choose between different displays. We invite comments, however, on 
whether there is greater merit in those proposals than we discern.
    We have adopted a policy statement requiring airlines and travel 
agents to give adequate notice when flights involve change-of-gauge 
service. 14 CFR Part 258. We are not proposing additional restrictions 
on the display of such service.
(c) Screen Padding
    The schedule displays offered by the systems, like the Official 
Airline Guide's schedule listings, identify airline services with two-
character codes (the codes for United and Frontier, for example, are UA 
and F9). When airlines code-share, their nonstop and connecting flights 
are listed under each partner's code, not just under the code of the 
airline operating the flight. The Board endorsed code-sharing by 
prohibiting systems from discriminating against an airline because it 
was using its code on a flight operated by another airline, 14 CFR Part 
256 (the Board acted because United's Apollo system threatened to 
exclude airlines operating under another airline's code). 49 FR 12675 
(March 30, 1984). We have found that code sharing usually benefits 
consumers by creating more integrated services. 57 FR 43805.
    If a system chose to list connecting flights operated under a code-
share agreement under all possible combinations of codes, a single 
connection could occupy a number of lines in the display. A system 
would, for example, list a Northwest flight connecting with a KLM 
flight four times: as a Northwest to Northwest connection, a KLM to KLM 
connection, a Northwest to KLM connection, and a KLM to Northwest 
connection. If a system listed flights operated under a code-sharing 
arrangement under all possible combinations, a few such flights would 
take up substantial space on the display and often move flights with 
the next highest display ranking into a later screen.

[[Page 69397]]

    Our rules allow systems to limit the number of listings given code-
share services, as long as the service is listed at least once under 
each partner's code. A system thus would comply with our rules if it 
listed the Northwest and KLM connecting services as a Northwest to 
Northwest connection and a KLM to KLM connection. Our rules do not bar 
a system from displaying all of the possible code combinations for such 
a flight.
    Sabre, American, Amadeus, Continental, Frontier, and Air France 
contend that the rules should limit the number of times that a code-
share flight is displayed. The parties disagree over what the best 
solution would be, however.
    We tentatively believe that limiting the number of times that code-
share services are displayed might be beneficial. When code-share 
services occupy much of the display, travel agents will have more 
difficulty in finding alternative flights that their customers may 
prefer, and the airlines competing with the code-sharing airlines will 
obtain fewer bookings than they would otherwise. The multiple listing 
of the same connecting service under different codes can push the 
flights offered by competitors to later screens. This may increase the 
bookings made on the code-share flights, even in cases where the code-
share relationship involves no improvement in service. See, e.g., 
American Comments at 12-14.
    On the other hand, airlines engaged in code-sharing understandably 
expect their services to be listed under each partner's code. Code-
sharing is a significant feature of the international alliances that we 
have found provide significant consumer benefits. International 
agreements also provide bilateral rights to offer code-share services.
    The European Union's CRS rules allow a code-share flight to be 
displayed no more than twice, even if the codes of three or more 
airlines are used on the flight. All four of the systems follow the 
European rule within the European Union, and some do so as well in 
other countries. Northwest Reply at 6-7.
    American proposes a rule requiring that all airline codes displayed 
for a flight be displayed in one listing, as is the case for flights 
operated under one airline code. American Comments at 12-14. Amadeus 
suggests that we adopt the European rule. Amadeus Reply at 37. 
Continental suggests that we instead allow one listing of an 
international nonstop flight or set of connections for each code-share 
partner. Continental Reply at 15-16.
    We will consider all of these options further, after reviewing 
comments received in this proceeding. We note, however, that 
Continental asserts that American's proposal is not technically 
feasible. Continental Reply at 15. Amadeus alleges that our adoption of 
the European rule would harmonize our regulations with theirs to some 
extent. Amadeus Reply at 37. It would also reduce the systems' 
programming expenses. On the other hand, as Continental points out, the 
European rule could keep the codes of some code-sharing partners from 
being displayed on a flight. Continental Reply at 16.
    Since code-sharing usually benefits consumers, we are not proposing 
to ban systems from giving any preference to connections between 
flights operated by two airlines under a common code over interline 
connections. We are therefore denying Frontier's request for such a 
rule. Frontier Comments at 4-7. Consumers using code-share connections 
typically obtain smoother service than they would by using interline 
connections. 57 FR 43805. We already require systems to offer a display 
that does not give on-line connections a preference over interline 
connections, in part due to Frontier's earlier dissatisfaction with 
code-sharing. 62 FR 63843-63844. We presently are not aware of a 
substantial reason justifying further regulation on that issue.
(d) Biasing Software Provided by Airlines
    As noted above, the Enforcement Office filed a complaint against 
American and Sabre based on American's distribution to some travel 
agencies using Sabre of a program that enabled them to bias their 
displays in favor of American. American Airlines and Sabre Travel 
Information Network Enforcement Proceeding, Docket OST-95-430. The 
software enabled travel agencies to create several different displays, 
including one that would show only American flights. At that time 
American controlled Sabre. In a ruling on cross-motions for summary 
judgment, an Administrative Law Judge held that American had not 
violated our rules or section 411. He suggested that we might wish to 
reexamine the issue.
    We have not issued a final decision on the petitions for review 
filed by the Enforcement Office and Northwest, and those proceedings 
remain open. If possible, the development of a general rule in this 
proceeding may be more effective than addressing the issue in the 
context of the American case.
    We prohibit the systems from biasing their displays because bias 
causes consumer harm and hinders rival airlines from competing on the 
basis of fares and service quality. In our view, there is little 
difference between the bias incorporated in system displays and 
software distributed by the owner airline that enables travel agencies 
to create displays biased in favor of that airline. The travel agency 
owner in theory can choose whether or not to use the program offered by 
an airline, but the relationship between the travel agency and the 
airline, which is likely to be the airline most important to the agency 
and its customers, makes it doubtful that the agency's choice will be 
entirely voluntary. In the last rulemaking, we prohibited the systems 
from offering secondary displays biased in favor of the owner airline, 
even though the travel agency could choose between using the biased 
secondary display and the neutral display required by the rules. 56 FR 
12611.
    As a result, even though we do not presently plan to prohibit 
travel agencies from creating biased displays on their own initiative, 
we are proposing to prohibit any airline from providing software to 
agencies that would bias the display in favor of that airline. While 
the major threat might arise from one of the major airlines that owns 
or markets a system and is likely to dominate a travel agency's 
regional airline market, we have not yet heard a persuasive reason why 
any airline should be able to distribute software that enables the 
agency to bias the displays. This proposal, moreover, would be 
consistent with our proposal to bar airlines from buying bias from a 
system. Airline-created screen bias can be just as deceptive to 
consumers and harmful to airline competition whether it is built in to 
a system's display or created by software distributed by the airline.
(e) Travel Agency Displays
    Our rules do not regulate the displays made by travel agencies. 
Travel agencies can use the data provided by a system to create their 
own displays ordered according to criteria chosen by them without 
violating the rules, including displays biased in favor of an agency's 
preferred airlines. We refused in our last major rulemaking to bar 
travel agencies from creating biased displays on the grounds that the 
agencies' competition for customers would deter them from giving 
misleading or inaccurate information and that there was no evidence 
that travel agencies often provided misleading advice. 57 FR 43809.
    The Consumers Union asks us to prohibit the use of biased displays 
by

[[Page 69398]]

travel agencies but does not cite evidence that such displays exist and 
cause consumer harm. Consumer Union Supp. Comments at 6, 15. Lufthansa 
alleges that travel agencies commonly negotiate preferred supplier 
arrangements with some airlines and then use in-house software to bias 
the displays in favor of those airlines. Lufthansa Supp. Comments at 3. 
Midwest Express claims that American Express provides biased displays 
to its travel agents that downgrade the flights offered by Midwest 
Express and other airlines that are not among American Express' 
preferred airlines and that American Express will not book a non-
preferred airline unless the customer specifically asks to fly on that 
airline. Midwest Express Comments at 26.
    After considering the issues, we are not at this time proposing any 
rule regulating travel agency displays (or, as discussed below, any 
rule regulating the displays offered by on-line travel agencies). We 
are well aware that individual airlines try to encourage travel 
agencies to give them a larger share of their bookings, usually by 
offering an override commission program that enables the agency to 
obtain higher commissions if the airline's share of the agency's 
bookings exceeds a specified percentage. The major airlines' 
elimination of base commissions will make incentive commissions more 
important to travel agencies. Nonetheless, despite the airlines' 
efforts, and the interests of travel agencies in obtaining override 
commissions, we presently are not aware of a compelling need to 
regulate travel agency displays. The travel agency business is 
intensely competitive. Travel agencies that provide poor or misleading 
advice to their travellers will lose customers. The competitive 
pressures on travel agencies should offset incentives to give customers 
misleading advice. As one travel agency states, ``Travel agencies are 
in the business of building a base of repeat customers--and that 
requires looking after the best interests of those customers.'' Balboa 
Travel Management Supp. Comments at 3. The risk of incurring consumer 
ill-will and lost revenues should keep travel agencies from giving 
consumers bad information. To the extent that travel agencies bias 
their displays, they presumably do so to implement their preferred 
carrier agreements. 57 FR 43809. While those agreements typically 
benefit travel agencies by enabling them to obtain override 
commissions, they may also enable the agency to provide better service 
on the preferred airlines for their customers. In some such cases 
displays that give preferred airlines a better display position may 
also benefit the agency's customers.
    The Department's Inspector General conducted a study of travel 
agency override commissions. Office of the Inspector General, U.S. 
Dept. of Transportation, ``Report on Travel Agent Commission 
Overrides'' (March 2, 1999). Although the report expressed a concern 
that travel agencies may recommend airline services that will increase 
their commission payments rather than the services that best meet the 
needs of their customers, it found no proof that override commissions 
had caused travel agencies to offer misleading or incomplete advice. 
Id. at 10.

7. Equal Functionality

    A number of parties in our last overall rulemaking had complained 
that each system's architecture was biased in favor of the owner 
airline in various respects. The availability information provided on 
the owner airline was likely to be more up-to-date and accurate, each 
system's functionality for obtaining information and making bookings 
worked more easily and reliably when they involved the owner airline, 
and each system had default features that encouraged travel agents to 
book the owner airline. We were unwilling to adopt the more costly 
proposals for ending architectural bias, but the significance of the 
problem caused us to adopt rules requiring systems to provide more 
equal functionality to all airlines participating at the same level. We 
required equal access to enhancements and equal treatment on the 
loading of information, and we barred systems from using default 
features that favored the airline owning the system. 57 FR 43810-43816.
    These rules appear to have been quite effective, for we have 
received no further complaints that a system is allegedly 
architecturally biased in favor of its owner airlines. Amadeus supports 
the retention of these rules, Amadeus Comments at 28-29, and no one 
contends that they are unduly burdensome or unnecessary. We therefore 
propose to readopt these rules without change.

8. Booking Fees

    The booking fees charged airlines for CRS participation have long 
been a source of airline complaints. In its rulemaking the Board 
recognized that discriminatory and excessive fees could prejudice 
airline competition. The Board accordingly adopted a rule prohibiting 
each system from charging unreasonably discriminatory booking fees, 
section 255.6(a). The Board declined to regulate the level of booking 
fees. 49 FR 11664; 49 FR 32552. In our last major rulemaking we 
readopted the rule prohibiting discriminatory fees and required systems 
to provide sufficient supporting information on their booking fee bills 
so that airlines could audit the bills' accuracy. Like the Board, we 
did not adopt a rule limiting the level of booking fees, for none of 
the proposed rules regulating fee levels appeared to be practicable. 57 
FR 43816-43818.
    We found in earlier proceedings that the price and terms for the 
systems' services provided airlines have not been significantly 
disciplined by competition. In contrast, competition disciplines the 
fees paid by subscribers, so the systems obtain the great majority of 
their revenues from the fees paid by airlines and other travel supplier 
participants. Since the systems have not needed to compete for airline 
participants, their booking fees likely exceed their costs of providing 
CRS services to airlines. 56 FR 12595-12596.
    Many airlines view excessive booking fees as the most important 
unresolved problem that we should address, both because the fees are so 
high and because airlines are charged fees for allegedly illegitimate 
and valueless transactions. Several airlines--US Airways, Alaska, 
Frontier, Varig, KLM, and America West--urge us to adopt a rule 
requiring fees to be reasonably related to costs. Midwest Express 
argues that we must limit fee levels in some way. America West has 
filed a petition asking us to roll back the systems' recent fee 
increases and to block them from increasing fees by more than half of 
the overall rate of inflation.
    All four of the systems--Sabre, Galileo, Amadeus, and Worldspan--
oppose limits on booking fees.
    In their comments United and KLM suggested that market forces would 
discipline fees if we weakened the rule barring discriminatory fees 
and, as discussed above, the mandatory participation requirement for 
system owners. American agrees that eliminating the mandatory 
participation rule would help discipline fees. Worldspan argued to OMB 
that the rules regulating fees prevent systems from responding to 
market demands. America West, however, contends that eliminating the 
prohibition against discriminatory fees would help only the large 
airlines with bargaining leverage.
    We agree that high booking fees may be imposing burdensome costs on 
airlines and, if so, higher fares for consumers. As discussed below, 
however, we presently are unsure

[[Page 69399]]

whether the various rules proposed for limiting booking fees would be 
practicable. Rather than focus on proposals that would regulate the 
level of booking fees, we would prefer to develop rules that would give 
airlines some opportunity to bypass the systems or to avoid 
participation in one or more of them or that may give airlines some 
bargaining flexibility. We are focusing on the latter type of proposals 
in this proceeding, such as rules giving travel agencies a greater 
ability to access alternative systems and databases, including the 
airlines' internal reservations systems.
    We will first discuss our proposal to eliminate the prohibition 
against discriminatory fees. We will then discuss the proposals to 
limit booking fees: Proposals requiring booking fees to be reasonable 
or related to costs and that future fee increases be limited by the 
overall rate of inflation. We will consider any other proposals to 
limit booking fees that would be effective and practicable. This 
section ends with a discussion of proposals for excluding certain types 
of transactions from booking fee liability.
(a) Ending the Prohibition against Discriminatory Booking Fees
    The rule prohibiting discriminatory booking fees has kept airlines 
owning systems from imposing higher booking fees on their competitors 
than on non-competitors. 49 FR 11651.
    United and KLM urged us to terminate the rule barring 
discriminatory fees. United Comments at 25-26. American, Worldspan, and 
Orbitz argued to OMB that the prohibition against discriminatory fees 
should be ended.
    United contends that airlines like itself would have some 
bargaining leverage with the systems on fees. United Comments at 24-26. 
We wish to consider this issue further, just as we are proposing to end 
the mandatory participation requirement for airlines with a significant 
CRS ownership interest. Ending the rule barring discriminatory booking 
fees in conjunction with eliminating the mandatory participation rule 
should give some airlines like United some flexibility in negotiating 
for better terms from the systems. If otherwise warranted by the 
features of the market, systems could respond to airline demands for 
lower fees or better service.
    In most unregulated industries a firm is free to demand better 
terms from its suppliers, even if its competitors cannot successfully 
obtain the same terms. The rule barring discriminatory fees may limit 
the ability of individual airlines to negotiate for better terms. If 
so, that would limit the operation of market forces in the CRS 
business. We are therefore proposing to eliminate the prohibition 
against discriminatory fees. We note as well that Worldspan has told 
OMB that the existing rule may interfere with Worldspan's ability to 
develop a new pricing model for its services and keeps systems from 
offering lower prices to more efficient, lower-cost new-entrant 
airlines.
    As with our proposal to end the mandatory participation 
requirement, commenters opposing the continuation of the rule should 
address how ending the prohibition would provide public benefits and 
would not injure airline competition. A supplier's agreement to charge 
one firm prices that are lower than those charged the firm's 
competitors does not normally constitute a violation of antitrust 
principles, but commenters should discuss whether the characteristics 
of the airline industry may undermine the validity of that rule. 
Commenters should address whether the elimination or weakening of the 
bar against discriminatory booking fees would create a risk of anti-
competitive conduct. Commenters should also discuss whether such a 
change in the rules would be consistent with the United States' 
obligations to prevent discriminatory conduct against foreign airlines 
by systems operating in the United States.
    An alternative rule proposed by American to OMB and by the Justice 
Department would bar all booking fees. Such a ``zero fee'' rule would 
effectively require the systems to obtain their revenues from fees paid 
by travel agencies. As shown, the systems compete for travel agency 
subscribers but have not competed for airline participants, since most 
airlines have been compelled by their marketing needs to participate in 
each system, even if the terms for participation are unattractive and 
non-negotiable. Because travel agencies can choose between systems, the 
systems would compete on price. A zero fee rule thus would cause the 
price for CRS services to be set by competitive market forces. Such a 
rule, however, could be disruptive, since the systems now obtain the 
great majority of their revenues from airlines, not from travel 
agencies. In addition, a zero fee rule would enable airlines to obtain 
CRS services without payment, except insofar as they increased travel 
agency compensation to offset the agencies' increased expenses.
(b) Proposals Requiring Reasonable Fees, Fees Based on Costs, or Fees 
Limited by Overall Inflation Rates
    A number of airlines seek rules that would limit booking fees by 
requiring them to be reasonable or related to costs, or by barring fee 
increases exceeding the overall rate of inflation. We have tentatively 
determined not to propose such a rule, since we are not yet persuaded 
that any of these proposals would be practicable.
    We assume, for purposes of this discussion, that the systems' 
booking fees exceed their costs of providing services to airlines by a 
significant margin. We have seen no indication that market forces 
discipline the price or terms for CRS services provided airlines. 
Nonetheless, a rule requiring fees to be reasonable or related to costs 
would be so difficult to administer that it would be impracticable, and 
it would have other undesirable effects.
    We would not adopt a rule requiring fees to be reasonable or 
related to costs unless we were prepared to enforce it. If we did not 
enforce it, the systems probably would continue their current booking 
fee practices. A rule regulating booking fee levels would not lead to 
lower fees unless we held proceedings to determine whether the existing 
fees complied with the rule. Determining whether a system's fees were 
reasonable or based on costs would presumably require a hearing before 
an administrative law judge, the procedure typically followed by other 
agencies with ratemaking authority. Such a proceeding would be time-
consuming. Since each system has different costs and fee structures, a 
separate proceeding would be required for each system. Moreover, the 
systems offer a number of different levels of participation and 
features, each of which has its own price. This variety of service 
levels and features would make a CRS rate case even more complex.
    In addition, determining whether a system's fees were reasonable or 
related to its costs would present very difficult questions on the 
allocation of system costs. A system has at least three kinds of 
users--the airline or airlines using the system as an internal 
reservations system, participating airlines and other travel suppliers, 
and travel agencies and other persons who obtain information and make 
bookings through the system. Allocating costs among these types of 
users would be almost impossible. Furthermore, since the economies of 
scale in the CRS business mean that the smaller systems have the 
highest costs, rates set by us would allow the smaller systems to 
charge higher fees than the

[[Page 69400]]

largest systems, an anomalous result. For these reasons, when we 
considered proposals to require reasonable fees or fees based on costs 
before, we concluded that any such rule would be impracticable. 57 FR 
43817-43818; 56 FR 12617-12618.
    A rule requiring reasonable fees or cost-based fees would 
effectively require us to engage in public-utility-type ratemaking. 
Public-utility ratemaking is disadvantageous because it does not 
encourage regulated firms to operate efficiently and is burdensome for 
them and their customers. It also encourages them to pad their costs 
and investment base. 57 FR 43817; 56 FR 12617.
    In an effort to avoid the difficulties presented by rules requiring 
reasonable or cost-based fees, America West has proposed a rule 
limiting increases in booking fees after 1997 to half of the overall 
inflation rate. America West Reply at 25-26. We doubt that we could 
impose such a restriction on the systems. We have made no finding that 
each system's booking fees exceed the system's costs of providing 
services to airlines. We agree that the decline in many computer-
related costs suggests that the systems' costs of serving the airlines 
could be increasing at a rate lower than the general inflation rate. We 
have no proof, however, that that is true. See Worldspan Answer to Am. 
West Motion to Expedite at 3-4. In these circumstances, the record in 
this proceeding seems inadequate for imposing limits on booking fees of 
the kind sought by America West. A rule limiting fee increases to half 
of the rate of inflation could also be difficult to administer, since 
systems could create new features and services subject to new fee 
levels that would not be covered by the rule.
    For similar reasons, we are not planning to propose a rule that 
would require systems to unbundle different services and features, as 
suggested by Alaska. Alaska complained that the systems bundle services 
together in a way that forces airlines to pay higher fees. The systems 
allegedly deny E-ticketing capability to airlines unless they 
participate at a premium level of service, which forces them to buy 
services they do not want in order to obtain E-ticketing. Alaska 
Comments at 17. Determining which services and features could or could 
not be bundled would involve many of the same difficulties as a rule 
requiring reasonable or cost-based fees. We are therefore not accepting 
Alaska's proposal on this issue.
    Thus, we are unwilling to regulate the level of booking fees, in 
large part due to the practical problems that would result from a 
requirement of reasonable or cost-based fees. We think that the better 
solution for supracompetitive booking fees would be rules that would 
enable airlines and other firms to bypass the systems and thereby end 
the systems' control of the electronic communications between each 
travel agency and the airlines. While these rules would not lead to any 
immediate reduction in booking fees, they would likely lead to lower 
fees over time.
(c) Excluding Transactions From Booking Fee Liability
    The rules allow each system to establish its own fee structure as 
long as its fees are non-discriminatory. Most of the systems charge 
airlines fees for several types of transactions besides bookings, such 
as changes to bookings and cancellations of bookings. In our last 
overall rulemaking we concluded that we would not bar systems from 
imposing charges for transactions besides bookings. 56 FR at 12619; 57 
FR 43818. A fee structure based on charges for different types of 
transactions could well be economically rational.
    When we began this rulemaking, many of the airline parties 
complained that they had to pay fees for passive bookings that 
allegedly did not benefit them and that were fraudulently used by some 
travel agencies to meet their productivity pricing quotas. Passive 
bookings are bookings made by a travel agent through a system that do 
not involve sending a message to the airline's internal reservations 
system. Travel agents often make passive bookings in order to serve 
their customers. For example, a travel agent will make a passive 
booking to issue a ticket for customers who made a booking directly 
with an airline. Travel agents also use the passive booking 
functionality to serve passengers booked as a group. ASTA Comments at 
25-26; Galileo Comments at 31-32. The systems have developed functions 
that enable travel agents to perform many of these tasks without making 
a passive booking, see, e.g., Amadeus Reply at 32-33, but travel agents 
can choose to continue using the passive booking function rather than 
one of these new features. TWA Reply at 4-5.
    While travel agencies assert that passive transactions are required 
for legitimate business reasons, a number of airlines allege that some 
travel agencies (but not most) use the passive booking capability to 
make fraudulent transactions that increase the airlines' booking fee 
expenses. These travel agencies allegedly are usually trying to meet 
their minimum booking quotas under their productivity pricing 
agreements and thereby avoid having to pay the non-discounted charges 
that they would otherwise owe to the system. Fees for passive bookings 
allegedly make up a significant proportion of airline booking fee 
expenses. Aloha and Qantas assert that non-ticketed passive bookings 
and other allegedly illegitimate or unnecessary bookings accounted for 
eight to ten percent of their total bookings. Aloha Comments at 2-3; 
Qantas Comments at 4. Alitalia asserts that eleven percent of its 
bookings consisted of passive bookings. Alitalia Comments at 4. Amadeus 
states that a European study indicated that passive bookings 
constituted 17 percent of Galileo's total bookings and 42 percent of 
Sabre's total bookings (but a much lower percentage of Amadeus' 
bookings). Amadeus Comments at 33.
    The record demonstrates that some travel agents sometimes rely on 
the passive booking function to satisfy their productivity pricing 
formulas, not just to implement transactions necessary for serving 
their customers. One travel agency stated that her agency's contract 
with a system ``provides us with that [passive segment] capability so 
that we can meet the productivity requirements of the [subscriber] 
contract.'' Travel Agents International Comment, cited by, e.g., Alaska 
Comments at 8. When American Trans Air tried to debit travel agencies 
for unacceptable bookings, including most passive bookings, travel 
agencies told it ``that they believed that they were absolutely 
entitled to make non-productive CRS bookings in order to reach their 
productivity goals.'' American Trans Air Comments at 5. See also Varig 
Reply at 24, n.45. A travel agency group stated, ``[T]here are some 
unnecessary transactions being created by travel agencies merely to 
meet productivity-based contracts, which is not ethically right.'' 
Midwest Agents Selling Travel Comments at 3.
    In the initial round of comments in this rulemaking, airlines 
proposed two rules that would reduce or eliminate the fee liability 
generated by passive bookings: a rule barring systems from charging 
booking fees for passive bookings unless they resulted in the issuance 
of a ticket or actual travel and a rule allowing each airline to deny 
travel agencies the ability to make passive bookings on itself. A large 
number of airlines, including Delta, Alaska, American Trans Air, U.S. 
Airways, Midwest Express, America West, Frontier, British Airways, 
Lufthansa, Qantas, Varig, and the Asia Pacific airline group, sought 
rules proscribing fees for all passive transactions or allowing fees 
only for

[[Page 69401]]

passive transactions that resulted in actual travel. As an alternative, 
several airlines, including Lufthansa, Qantas, and America West, 
suggested that each participating airline should have the right to deny 
system users the ability to make passive bookings on its flights.
    Other parties opposed these suggestions. Sabre argued that the 
systems incur costs from passive bookings and that airlines themselves 
should discipline travel agents who commit booking abuses. Amadeus 
contended that the systems are solving passive booking problems; some 
systems, for example, have stopped charging fees for such transactions. 
United asserted that a rule limiting fees for passive bookings would 
accomplish little, since the systems would likely increase other fees 
to offset the lost revenues. The Large Agency Coalition would support a 
prohibition against charging booking fees for passive bookings but 
contends that airlines should not be able to keep system users from 
making passive bookings. ASTA also opposes proposals that would deny 
travel agents the ability to use the passive booking function.
    The initial round of comments provided a basis for proposing rules 
on this issue. However, changes made by the systems as a result of the 
controversy over passive bookings may have made the issue moot. Midwest 
Express, which had supported the proposals to limit fees for passive 
bookings, states that the systems' changes have ended the need for a 
rule. Midwest Express Supp. Comments at 2. At least two of the systems, 
Worldspan and Galileo, have stopped charging fees for non-ticketed 
passive segments. ASTA Response to America West Petition at 2-3. 
Although America West initially filed a petition seeking a rule 
limiting fees for passive bookings, its responses to our supplemental 
advance notice of proposed rulemaking did not mention the issue.
    The issue of booking fees for passive bookings thus may not need to 
be addressed in this rulemaking now (productivity pricing, on the other 
hand, seems to require regulatory action, as discussed below). If a 
rule were necessary, we would likely request comments on the 
complaining airlines' rule proposals. Since passive bookings primarily 
benefit travel agents, not airlines, charging airlines fees for such 
transactions seems unfair. More importantly, however, the systems' 
productivity pricing fee structures encouraged a small number of travel 
agencies to abuse the passive booking function in order to meet the 
minimum monthly booking quotas established by their CRS contracts. 
Since the systems have chosen to base their subscriber contracts on a 
pricing structure that encourages fraudulent transactions, they should 
bear any costs created by travel agent abuse of that function. 
Alternatively, the airlines should be able to deny travel agencies the 
ability to make passive bookings.
    We understand the systems' arguments that travel agents operate as 
agents of the airlines and that the airlines should discipline their 
own agents if they engage in abusive transactions. Galileo Comments at 
34-40; Amadeus Comments at 34-35. We are not convinced, however, that 
that would justify allowing the systems to continue charges for passive 
bookings when their subscriber contracts encourage travel agencies to 
make excessive passive bookings. The airlines claim that they cannot 
effectively discipline individual travel agencies, in part due to their 
number, and in part because some are non-IATA agents who have no formal 
contractual relationship with the airline. Delta Comments at 33; TWA 
Comments at 14; Alaska Comments at 25; Qantas Comments at 19. Their 
inability to do so may additionally result in part from a reluctance to 
antagonize the firms that they rely upon to distribute their services. 
America West Petition at 23-25. However, while the airlines' argument 
does not seem compelling, the systems' choice of a pricing structure 
that encourages more transactions appears to be the source of the 
problem. In addition, the systems have refused to allow airlines to 
deny travel agencies the ability to make passive bookings. If travel 
agencies are operating as the airlines' agents, however, it appears 
that each airline should have the right to determine the type of 
transactions in which they may engage.
    We recognize that the passive booking functionality enables travel 
agencies to better serve their customers. We would be reluctant to 
create rules that could end system functionality needed by travel 
agencies. On the other hand, an airline participating in a system 
should have some control over the services for which it will pay. Any 
further proceeding on this issue would take into account the travel 
agencies' needs and possible alternative remedies that would avoid 
denying them access to important functionality.
    United has argued that restricting or prohibiting fees for some 
types of transactions will not benefit the airlines, since the systems 
will only increase other airline fees to make up for the lost revenues. 
United Reply at 17. United's argument has some force. Some systems 
apparently did increase other airline fees when they stopped charging 
fees for non-ticketed passive bookings. America West Reply at 17-18. 
Nonetheless, since fees for passive bookings impose some costs on 
airlines that appear to be unjustifiable, a rule would likely be 
appropriate if systems were charging airlines for non-ticketed passive 
bookings and using pricing structures that encouraged some travel 
agents to misuse the passive booking function.
(d) Booking Fee Bills
    We adopted a rule requiring systems to provide participating 
airlines with detailed billing information that would enable the 
airlines to audit the accuracy of their bills. We allowed systems to 
charge airlines for providing the detailed information on magnetic 
media. 57 FR at 43818-43819.
    Some participating airlines, however, remain dissatisfied with the 
billing procedures and the adequacy of the information supporting the 
systems' bills. Qantas thus contends that airlines should not have to 
pay for the information needed to audit fee bills. Qantas Comments at 
20. Continental and Lanyon, a firm that conducts audits for airlines, 
argue that the bills should include some additional information, such 
as a statement of which bookings were made over the Internet. 
Continental Comments at 24; Lanyon Reply at 9.
    We are reluctant at this time to propose changes to the rule, since 
these proposals have not been supported by a significant number of 
other parties. Qantas admits that the amount of the fees ``is not 
substantial in comparison to total monthly booking fees,'' but asks us 
to bar fees for billing data on the ground that requiring customers to 
pay for billing data is ``highly inequitable.'' Qantas Comments at 20. 
The rule sought by Qantas would not provide substantial benefits for 
participating airlines and could easily be cancelled out by booking fee 
increases. Similarly, Continental and Lanyon have not shown that the 
additional information sought by them would be essential for an 
airline's auditing of the bills.

9. Marketing and Booking Data

    The data that can be derived from the bookings made through each 
system are invaluable for marketing purposes, since the system can tell 
how many bookings are being made by individual travel agencies on 
individual flights operated by an airline in each of its markets. Delta 
thus can see, for example, how many passengers are being booked by each 
Atlanta travel agency on each flight operated by its rival at that hub,

[[Page 69402]]

AirTran, and in which fare category, and will often obtain this 
information before the agency customers even begin their trip.
    Our rule, section 255.10, currently requires each system to make 
available marketing and booking data that it chooses to generate from 
bookings made by system users. A system could choose to generate no 
data. The rule does not bar systems from providing data to anyone 
outside the airline industry. The rule blocks systems from providing 
data to any foreign airline that owns or controls a system in a foreign 
country, if that system does not provide comparable data to U.S. 
airlines. The rule further prohibits airlines receiving data derived 
from international bookings from giving anyone access to the data, 
except to the extent that an airline uses an outside firm to process 
the data, unless the system provides access to other persons. Each 
system could sell the data to anyone it pleased under any terms if our 
rules did not exist.
    As a result of the rule, each system allows participating airlines 
to buy detailed booking and marketing data generated from its bookings 
(the data are often called MIDT, Marketing Information Data Tapes). 
Each system's data show how many bookings are made by each travel 
agency using that system on each airline in individual markets, the 
fare basis used for each booking, and the flight booked by each 
passenger. See, e.g., Aloha et al. Comments at 3-4. The data tapes 
usually do not include the passenger's name. Galileo Supp. Reply at 9, 
n. 14; Sabre Supp. Reply at 42. But see Aloha et al. Reply at 3. Sabre 
states that its tapes do not identify corporate purchasers. Sabre Supp. 
Reply at 43. The systems make the data available almost on a realtime 
basis.
    Airlines use the data for marketing research and route development 
purposes and to make decisions on pricing and revenue management. They 
also can use the data to implement their override commission and 
corporate discount fare programs, which typically require travel 
agencies and corporate customers to give an airline a certain share of 
their total business in order to receive the additional commissions or 
discount fares. While most airlines purchasing the data are the largest 
airlines, some smaller airlines like Alaska also buy the data. Galileo 
states that about forty-five airlines buy its data tapes. Galileo Supp. 
Reply at 11. The systems generate significant revenues from selling the 
data.
    A number of parties are requesting us to change the rule on 
marketing and booking data. ACAA, a trade association that represents 
low-fare airlines, demands that the Department bar the systems from 
making the data available to airlines without the consent of the 
airline booked by the travel agency.
    ASTA, ARTA, AAA, American Express and the Large Agency Coalition 
contend that systems should be prohibited from releasing the data to 
any airline. The Large Agency Coalition seeks a ban on the release of 
the data since airlines use it for implementing their override 
commission programs. The National Business Travel Association contends 
that the rule reduces a customer's bargaining leverage, since the data 
enable an airline to know all about the firm's travel patterns.
    Several smaller airlines complain that the costs of purchasing and 
processing the data are so high that they cannot afford to buy the 
data. America West, Midwest Express, Aloha, Virgin Atlantic, Varig, and 
the Asia Pacific airline group contend that we should limit the fees 
charged for the data. Midwest Express estimated the annual cost of 
buying and processing the data from the four systems at $1.5 million. 
Midwest Express Comments at 28.
    Several parties contend that airlines use the data to ``poach'' 
customers already booked on another airline. Midwest Express makes such 
a complaint, Midwest Express Comments at 29, as do ASTA and NBTA. ASTA 
Comments on Proposed Extension at 4.
    On the other hand, Sabre, American, Galileo, United, U.S. Airways, 
Amadeus, Worldspan, Delta, Northwest, America West, and British Airways 
urge us to maintain the rule. The systems assert that they should be 
entitled to continue selling the data, since they have invested 
substantial sums in compiling the information and obtain significant 
revenues from selling the data. The systems also note that they now 
sell the data in smaller packages to make the data affordable for 
smaller airlines. See, e.g., Galileo Supp. Reply at 10. The large 
airlines assert that access to the data is pro-competitive, because it 
enables airlines to learn where they need to offer more attractive 
fares and services. Delta Supp. Comments at 33-34. See also Aloha et 
al. Comments. The large airlines have also made large investments in 
developing the ability to process the data.
    The Department's Inspector General has also expressed an interest 
in the issue. His report on override commissions recommended that 
travel agencies be required to advise customers of their override 
commission arrangements. Office of the Inspector General, U.S. Dept. of 
Transportation, ``Report on Travel Agent Commission Overrides'' (March 
2, 1999) at 4. Rather than propose such a rule, we stated that we would 
consider ending the airlines' access to the booking and marketing data 
used to implement override commission programs. June 25, 1999, Letter 
from A. Bradley Mims to Lawrence H. Weintrob.
    Our rule on marketing and booking data has thus generated two 
issues: whether the systems' fees for the data should be limited, and 
whether the type of data released by the systems should be restricted.
    On the fee issue, we are unwilling to propose a rule regulating the 
systems' charges for the data tapes. Regulating prices would be 
contrary to our goal of limiting our involvement in this area except on 
issues when there is a clear need for rules. The systems obviously have 
an incentive to provide data in ways that would invite more airlines to 
buy the tapes. The systems seem to be reshaping the nature of the data 
tapes to increase their sales, as shown by their efforts to provide 
data in smaller packages that will be attractive to smaller airlines 
that do not have worldwide operations. Sabre Reply at 30; Galileo Supp. 
Reply at 10.
    However, we believe that we should restrict the type of data being 
sold by the systems. As discussed below, the availability of the 
detailed data now being sold appears to undermine airline competition, 
at least in domestic markets. We recognize that airlines can and often 
do use the data for legitimate purposes and that markets usually 
operate better when firms have more information. Nonetheless the record 
indicates that the availability of the data has adversely affected 
airline competition and interfered with the travel agencies' ability to 
book the services that best meet their customers' needs.
    Commenters have shown that airlines use the data to coerce travel 
agencies into reducing or ending their bookings on competing airlines, 
and the airlines' access to the data likely limits competition in other 
respects. The data tapes tell the dominant airline which travel 
agencies have been selling tickets on competing airlines and so enable 
it to target travel agencies booking customers with rival airlines. 
Woodside Supp. Comments at 9. The Savannah Airport Commission thus 
states,

    [S]ince the dominant area carrier has access to your travel 
records and bookings (via the CRS) that air carrier can and does 
penalize the agency for booking travel on rival carriers. The 
carrier may deny this practice, but it is happening and will

[[Page 69403]]

continue to happen until some type of safeguards can be implemented.

See also Mon Valley Travel Comments. American Express similarly pointed 
out that an airline's access to the data can reduce competition:

    An airline can thus obtain up to the minute analysis of 
competitors' sales, market share and customer information, even on a 
pre-flight basis. A carrier, so disposed, is able to use this real 
time (and advance) data for predatory pricing, blocking new entrants 
from the marketplace, signaling and other anticompetitive activity. 
What began as a tool to promote competition has become a weapon to 
eliminate it.

Letter from American Express dated April 12, 2000.
    Officials from Legend, the start-up airline based at Dallas' Love 
Field, informed our staff that American was able to use the data to 
target travel agencies selling tickets on Legend and thereby undermine 
Legend's ability to obtain travel agency bookings. See also Office of 
the Inspector General, U.S. Dept. of Transportation, ``Report on Travel 
Agent Commission Overrides'' (March 2, 1999) at 7 (example of new 
airline losing bookings after large airlines had advised travel 
agencies against booking that airline).
    A hubbing airline's dominance of the local airline market may give 
it power to force travel agencies to comply with its wishes. Travel 
agents in that city may book their customers most often with that 
airline, and their ability to obtain marketing benefits from that 
airline, such as the ability to book important customers on oversold 
flights and to sell its corporate discount fares, may determine whether 
or not their business will be successful. Large Agency Coalition 
Comments at 9; Continental Reply to Amadeus Petition at 3-4; cf. 
Airline Marketing Practices at 24-26. As a result, travel agencies have 
been unable to easily resist demands by the dominant airline that they 
stop booking customers with competing airlines. The larger airlines 
should henceforth have a greater ability to influence travel agencies, 
since the agencies' only compensation from those airlines will take the 
form of incentive commissions due to the airlines' elimination of base 
commissions. See also ASTA Comments on Proposed Extension at 2.
    The Transportation Research Board expressed concern that the large 
airlines' access to data on bookings made by travel agencies enabled 
them to influence agency bookings in ways that could not be matched by 
smaller airlines. Transportation Research Board, Entry and Competition 
in the U.S. Airline Industry at 129.
    The National Business Travel Association similarly complains that 
the airlines' access to detailed fare information undermines the 
ability of airline customers to obtain lower fares:

    In the current aviation market, corporations deal with 
overpriced airfares and single airline dominated markets. The 
current CRS regulation opens the door for carriers to eliminate the 
one bargaining tool that corporations still own, and that is data--
travel patterns, including destinations, flight numbers, airline 
flown and class of service.

NBTA Supp. Comments.
    Under general economic theory, moreover, the airlines' ability to 
obtain detailed realtime data on their competitors' sales and fares 
would not promote competition. In a somewhat different context, the 
question of the competitive impact of Orbitz and its most-favored-
nation clause, Professor Alfred Kahn explained why keeping fares and 
sales secret from competitors can further competition in the airline 
industry:

    [T]here is the familiar fact that in an oligopolistic industry, 
the negotiation of special, preferably secret deals with large 
buyers or distributors in a position to threaten to supply their own 
needs or take their business elsewhere is a particularly effective 
form of competition, reflecting an exercise of countervailing power 
on the buying side of the market, in an oligopoly whose members will 
typically be reluctant to cut prices openly and across the board; 
and that the prohibition of any such special deals or a requirement 
of their full disclosure and equal availability, in advance, to all 
comers, will discourage it.

Statement of Alfred Kahn at 20, attached to American Antitrust 
Institute Supp. Comments.
    Markets do not always function better when participants have more 
information. One group of competitors violated the antitrust laws by 
informally agreeing to exchange information on the prices charged 
specific customers, since the effect was to stabilize prices. United 
States v. Container Corp., 393 U.S. 333 (1969). The Board concluded 
that a requirement that cargo rate changes be filed in advance 
inhibited price competition. See National Small Shipments Traffic 
Conference v. CAB, 618 F.2d 819, 829-830 (D.C. Cir. 1980). And in other 
circumstances airlines have used data on each other's fares as a 
vehicle to reduce competition. United States v. Airline Tariff 
Publishing Co., 836 F. Supp. 9 (D.D.C. 1993); and 59 FR 15225 (March 
31, 1994) (Justice Department suit on airlines' use of fare information 
to negotiate fares).
    As discussed, the network airlines' dominance at their hubs enables 
them to pressure travel agencies into reducing or stopping their 
bookings on competing airlines. Another feature of the airline industry 
makes it all the more important to block the systems' sale of the data 
tapes insofar as the data can be used against competing airlines. The 
competitive advantages created by a hub airline's more comprehensive 
route network and more frequent flights make it difficult for other 
airlines to compete at that airline's hub, unless they are serving the 
city from their own hubs. We have found in the past that airlines will 
be reluctant to enter another airline's hub. The only airlines likely 
to do so are the new entrant low-fare airlines, since their low fares 
can offset the service advantages offered by the hubbing airline. 
Findings and Conclusions on the Economic, Policy, and Legal Issues, 
Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air 
Transportation Industry (January 17, 2001) at 22-26, 29. Since 
competing with the incumbent airline will be tough at best for the 
entrant, we think it is important that the entrant not suffer the 
further disadvantage of having the incumbent airline know in advance 
how many seats are being sold on each of its flights by individual 
travel agencies. Ensuring vigorous airline competition in domestic 
markets mandates giving low-fare airlines an opportunity to compete. 
They will not have such an opportunity if the dominant airlines in 
their markets can track their travel agency sales in great detail on a 
realtime basis and use that information to undermine their ability to 
sell tickets.
    To protect competition from the possible misuse of the data tapes 
by dominant airlines, the type of data sold by the systems should be 
limited to information which would serve legitimate marketing needs. We 
appreciate the potential value of the marketing and booking data for 
legitimate marketing purposes. See, e.g., Aloha et al. Comments at 4-6. 
Our goal is to allow the systems to sell as much data as possible while 
minimizing the potential harm to airline competition and to enable 
travel agencies to protect potentially proprietary business data. 
However, at least in domestic markets, an airline's knowledge of its 
own bookings should suffice to tell it whether its marketing 
initiatives are successful (or whether new initiatives should be 
tried). The availability of much other domestic data from other sources 
also makes the CRS data less necessary for marketing purposes.
    In considering whether to restrict the sale of data, we recognize 
that the airlines purchasing the data have made significant investments 
in developing

[[Page 69404]]

the ability to process and analyze the marketing and booking 
information, that the systems have made significant investments of 
their own, and that the systems would lose large amounts of revenue if 
they were barred from selling any data.
    Limiting the availability of data generated from system bookings 
would also make it harder for airlines to implement override commission 
programs based on the airline's relative share of overall travel agency 
bookings (or bookings for specific route or markets). Large Agency 
Coalition Reply at 9. We are not finding that override commission 
programs are anticompetitive. Firms commonly may reward distributors 
for producing higher sales. We believe, however, that airlines use 
override commission programs to take advantage of a dominant position 
in local airline markets to deter travel agencies in those areas from 
booking competitors. See also General Accounting Office, ``Airline 
Deregulation: Barriers to Entry Continue to Limit Competition in 
Several Key Domestic Markets'' (October 1996) at 15-18. While we are 
primarily basing our proposed restrictions on the availability of the 
marketing and booking data on other competitive grounds, the proposed 
changes could additionally promote competition by weakening the ability 
of the largest airlines to use incentive commission programs that 
leverage an existing dominant market share to obtain a larger market 
share.
    The potential use of the data by dominant airlines to deter travel 
agency bookings on competitors has become more problematic due to the 
airlines' elimination of base commissions, a development that will make 
travel agencies more dependent on incentive commissions. When a travel 
agency's only airline compensation depends on its ability to meet 
marketing targets set by the airline, the travel agency may consider 
itself unable to book customers on other airlines that offer comparable 
or better fares and service. NBTA Second Comments on Proposed 
Extension; ASTA Comments on Proposed Extension.
    We therefore wish to consider several proposals that would restrict 
the type of data sold to the airlines and thereby achieve our goals. 
These possible restrictions could prevent most potential competitive 
abuses while enabling the systems to sell, and airlines to buy, much of 
the data now being sold. The following are the major proposals we ask 
the parties to address:
    [sbull] A ban on the release of data on bookings made by individual 
travel agencies. The systems could then sell aggregate data for 
specified geographic areas or markets that would show sales by airline 
for each route but would not reveal how many tickets were sold on any 
airline by any individual travel agency. Such a restriction would seem 
to satisfy the travel agencies' interest in protecting their business 
data and should prevent larger airlines from using the data to coerce 
travel agencies into ending their bookings on competitors. Each airline 
would, of course, know how many bookings it received from each travel 
agency on a route-by-route basis. This proposed restriction would only 
deny airlines access to data on bookings made on competing airlines by 
individual travel agencies. Such a rule would be consistent with 
Sabre's recently-announced plans to sell each individual travel agency 
data on its own bookings and the aggregate data on the bookings made by 
its peers, but not data for individual competitor agencies. Travel 
Distribution Report (May 20, 2002) at 75.
    [sbull] A ban on the release of data on bookings for airlines that 
have not consented to the release of data on their bookings. Any such 
restriction presumably would allow each airline to obtain marketing and 
booking data from a system only if it had consented to the system's 
release of data derived from its bookings to other airlines willing to 
purchase the data. This kind of restriction would protect airlines that 
did not wish their competitors to know how successful their marketing 
efforts were with individual travel agencies.
    We will, of course, consider other possible restrictions proposed 
by commenters as supplements or alternatives to these two. Another 
possible rule would bar the release of data until some period of time 
had elapsed after the booking, so that no airline could immediately 
learn from the data how many bookings on its competitors were being 
made by each travel agency. The delay in the data's availability might 
prevent misuse while not denying airlines access to the same range of 
data now being offered by the systems. We could also bar the release of 
information that would enable anyone to identify the passenger or 
business buying the ticket. Such a requirement would both protect the 
privacy interests of the travel agency customers and promote 
competition.
    The complaints about the potential abuse of the airlines' access to 
data focus on the impact of the use of the data on domestic markets. We 
will consider limiting any restrictions to data generated from bookings 
for domestic travel. The airlines serving international markets are 
generally large airlines, not new entrants. Although travel agencies 
presumably object to the release of any data, whether for international 
or domestic travel, the only airlines that have complained that the 
availability of marketing and booking data has led to abuses are the 
smaller U.S. airlines. In addition, we believe that airlines can obtain 
industry data on bookings for domestic travel from other sources, such 
as our O&D reports, while few if any sources may exist for comparable 
data on bookings for international travel.
    To decide whether restrictions on the availability of the marketing 
and booking data should be adopted, we request additional information 
on the costs and benefits of each of the possible alternatives. We ask 
the parties to provide more detailed information on, among other 
things, the ways in which the airlines that buy the systems' data tapes 
are now using the data and the availability of comparable information 
from other sources.
    We note as well that the Board originally required each system to 
make its data available to all airlines, if it chose to make the data 
available at all, on the ground that the Board could not practicably 
keep the owner airline from gaining access to the data. 49 FR 11658. 
The Board's concern should now be less valid, since two of the systems 
are no longer controlled by airlines and the other two each have 
several airline owners.
    We propose to impose the restrictions by barring airlines from 
buying or otherwise obtaining the data, since our authority to bar 
systems from selling the data is unclear. Section 411 should allow us 
to prohibit airlines from buying the detailed realtime data now sold by 
the systems, since dominant airlines can and do use the data to 
pressure travel agencies into stopping bookings on competing airlines.

10. Travel Agency Contracts

(a) Background
    Practices that limit competition between the systems have been a 
concern because they have affected airline competition. The Board thus 
included provisions designed to prevent anticompetitive practices 
affecting competition between the systems in its original CRS rules on 
two rationales: (i) An airline would be handicapped in entering new 
markets if its affiliated system could not obtain travel agency 
customers in the region, and (ii) practices that restrict competition 
between systems entrench the systems' existing market power and keep 
airlines

[[Page 69405]]

from finding alternative ways of conducting the functions provided by 
the systems. 49 FR 1664-11665. The Board therefore sought to ensure 
that travel agencies had a reasonable opportunity to switch systems or 
use multiple systems. The Board's rules accordingly prohibited certain 
types of travel agency contract clauses that would unreasonably 
restrict a travel agency's ability to use alternative systems, such as 
clauses requiring an agency to use an airline's system for all of its 
bookings on that airline or denying a travel agency commissions for 
bookings on an airline if not made through the airline's own system.
    When we reexamined the rules, we readopted and modestly 
strengthened the Board's provisions. Our rules allow systems to offer 
travel agencies a contract with a five-year term as long as they also 
offer contracts with a term of no more than three years. The rules bar 
systems from imposing minimum use clauses (clauses stating that an 
agency's failure to make a certain number of bookings per month per 
terminal will constitute a breach of contract). On the other hand, we 
allowed systems to continue offering five-year contracts, and we did 
not prohibit productivity pricing. We additionally did not bar the 
tying of access to an airline's marketing benefits to the travel 
agency's use of the system affiliated with that airline. 57 FR 43822-
43828, discussing section 255.8.
(b) Recent Subscriber Contract Practices
    As discussed above, the systems compete vigorously for travel 
agency subscribers. Many travel agencies, unlike airlines, can choose 
between systems, and the systems' competition for travel agency 
customers usually disciplines the price and quality of services offered 
travel agencies. A number of travel agencies in fact obtain system 
services without charge or even receive cash bonuses for choosing one 
system rather than another. Many travel agencies, of course, do not get 
incentive payments; profit margins in the travel agency business have 
traditionally been thin; and many travel agencies believe that the 
systems' fees and contractual requirements threaten the agencies' 
ability to operate profitably. In addition, travel agencies in a city 
dominated by an airline that owns or markets a system may feel 
compelled to use that airline's affiliated system, especially when the 
airline denies access to its corporate discount fares and marketing 
benefits to travel agencies using a competing system. Airline Marketing 
Practices at 24-26; Large Agency Coalition Comments at 9-10.
    Despite the systems' competition for travel agency customers, each 
system's subscriber contracts typically contain provisions deterring 
its subscribers from using another system or an alternative electronic 
means of obtaining airline information and making bookings. The systems 
continue to use contract terms that limit the travel agencies' ability 
to switch systems or use multiple systems. Although our rules currently 
require systems to offer agencies a three-year contract as well as a 
five-year contract, systems have generally made the terms of the 
shorter contract so unattractive that most travel agencies have chosen 
the five-year contract. ASTA Comments at 10-12; Delta Comments at 16-
17. In addition, as discussed above, productivity pricing deters travel 
agencies from using multiple systems or direct connections with an 
airline's internal reservations system.
    Furthermore, when a travel agency terminates its CRS contract 
before the end of the contract's term, the system will commonly demand 
that its damages include the booking fees that the system would have 
obtained if the travel agency had continued using the system during the 
remainder of the life of the contract. Delta Comments at 18-20; ASTA 
Comments at 24-25. Some systems impose other financial penalties that 
deter agencies from switching to another system. AAA Comments at 3-4. 
Systems have demanded such damages even though we stated in our last 
rulemaking that our rules assuring travel agencies the ability to use 
more than one system prevented a system from reasonably expecting a 
travel agency to use its system for all or most of its bookings during 
the contract term. 57 FR 43827-43828.
    The damages claimed by the systems are commonly so large that they 
deter travel agencies from terminating a contract before the end of its 
term. Delta Comments at 19.
    Most travel agencies have had contracts that contain these kinds of 
restrictions. A 1996 survey by the American Society of Travel Agents 
indicates that 83 percent of all travel agency contracts had a five-
year term and that 86 percent of all contracts used productivity 
pricing. ASTA Comments at 10, 12. The systems, however, have recently 
begun offering the smaller travel agencies the option of choosing 
contracts that do not have minimum booking requirements and have 
shorter terms. Travel Distribution Report (April 8, 2002) at 2.
    The contractual provisions raise competitive issues, even though 
the travel agencies have accepted the contracts containing such 
provisions. The provisions limit competition, maintain the systems' 
market power, and keep airlines from bypassing the systems in 
communicating electronically with travel agencies. They also inhibit 
innovation, by discouraging firms from developing new services and 
products that travel agents could use as alternatives to the systems.
(c) The Parties' Positions
    Many of the parties seek rules that would further prevent systems 
from imposing allegedly unfair or anticompetitive contract terms on 
travel agencies. ASTA and Northwest urge the Department to reduce the 
maximum length of subscriber contracts and to prohibit systems from 
collecting certain types of damages--lost booking fees--if an agency 
ends its contract before the contract's expiration date. Amadeus 
asserts that the maximum length of a subscriber contract should be one 
year, and Delta suggests that the Department adopt the European rule, 
which allows travel agencies to cancel an agreement on three months 
notice at any time after the agreement has been in effect for a year. 
ASTA seeks a rule requiring systems to offer contracts with one-year, 
two-year, and three-year terms and barring any contracts with a term 
longer than three years. The maximum length of subscriber contracts 
must be shortened, according to ASTA, because agencies need greater 
flexibility so they can adjust to the rapid changes in distribution, 
such as the growth of the Internet. ARTA asserts that the rules should 
reduce the maximum length of subscriber contracts, and AAA wants limits 
placed on the damages recoverable by a system if an agency breaches its 
contract. America West thinks that the maximum term of travel agency 
contracts should be three years, since a shorter maximum term would 
assertedly cause the systems to increase their booking fees.
    Sabre, Galileo, and the Large Agency Coalition contend that no 
changes should be made in the subscriber contract rules.
    After United imposed a cap on commissions for international tickets 
sold by travel agents, ARTA filed an emergency petition asking us to 
consider its proposal that travel agencies be given the right to 
renegotiate their contracts if the airline owning the system used by 
the agency changes its business practices in ways that make it 
difficult for the agencies to satisfy their CRS contract obligations. 
Docket OST 98-4775. Worldspan and Amadeus have opposed ARTA's proposal.
    ASTA's response to our proposal to extend the sunset date for the 
current

[[Page 69406]]

rules asked us to immediately end the systems' productivity pricing 
provisions that allegedly penalize travel agencies for making bookings 
on the Internet, even when the airlines offer lower fares through 
websites than they offer through the systems used by travel agents.
(d) Our Overall Concerns and Policy Approach
    In determining which rules, if any, should be adopted, our primary 
goal will be to prevent practices in the CRS business that would 
substantially reduce competition in the airline and airline 
distribution businesses, particularly practices that deny travel 
agencies and airlines the ability to use alternatives to a travel 
agency's principal system. To achieve this goal we are proposing to 
revise the rules regulating the systems' relationships with 
subscribers.
    Our proposed revisions should both protect competition in the 
airline and airline distribution businesses and protect travel agencies 
against system contract terms that many regard as unfair and 
unreasonable. We are not, however, proposing now to accept all of the 
travel agency parties' proposals for new rules. The subscriber contract 
issues concern the travel agency parties, because the systems' contract 
terms affect the profitability of each agency and its ability to serve 
its customers. We recognize that travel agents provide the public with 
valuable information and strengthen the ability of airlines to compete 
on the basis of service and fares. System practices have a significant 
impact on the travel agencies' costs and their ability to stay in 
business. Our task in this proceeding, however, is not to develop 
regulations that will shape the travel distribution system. Congress 
has deregulated the airline industry. Congress has given us the 
authority to prohibit unfair methods of competition in the airline 
industry and the marketing of airline services. That authority, as 
shown, allows us to prohibit practices that violate the antitrust laws 
or antitrust principles but does not generally empower us to proscribe 
business practices because they seem unfair. 57 FR 43828. Cf. E.I. Du 
Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2nd Cir. 1984). As a 
result, in considering proposals to readopt or change the subscriber 
contract rules--as well as most of the other rules--we are focusing on 
whether the practices at issue seem to violate antitrust principles.
    In addition, we must consider whether proposed rules could be 
practicably enforced. In the past the systems' incentives to restrict 
travel agency choice and usage of multiple systems have been great 
enough that the systems would seek to evade any rules limiting their 
contract practices and could often do so. 57 FR 43825. We do not wish 
to adopt rules that could be routinely evaded.
    The systems continue to use contract terms that limit the ability 
of most travel agencies to use multiple systems and other means of 
obtaining airline information and booking airline seats. We believe 
that these considerations support the readoption of the rules on the 
relationships between systems and subscribers. The existing rules 
prohibit such practices as minimum use clauses, parity clauses, and 
contracts with a term of more than five years.
    Since we last reexamined the rules, moreover, several of the large 
airlines that own or market a system have been increasingly using their 
clout as the dominant airline in a metropolitan area to compel travel 
agencies in that area to use their affiliated system. These airlines, 
for example, deny travel agencies using a competing system the ability 
to book corporate discount fares. The largest travel agencies argued in 
our last overall rulemaking that they should be given the right to 
exempt themselves from our rules on subscriber contracts. See 57 FR 
43824. It is telling that these travel agencies now contend that rules 
are needed to protect them against airline abuses of market power. 
American Express Comments; AAA Supp. Comments.
    We wish to consider the various proposals for shortening the 
maximum length of subscriber contracts. We are proposing to readopt the 
other existing rules on the systems' relationships with subscribers. We 
therefore propose to continue the prohibitions against roll-over 
clauses and minimum use requirements.
    Resolving which subscriber contract rules should be adopted will 
require more detailed information on the current relationships between 
travel agencies and the systems and on the systems' business practices. 
The commenters should address how our proposed rules and those advanced 
by parties will affect system and travel agency operations. In the past 
each travel agency office normally relied entirely or predominantly on 
one system. We ask the parties how much this is still true. Although a 
growing number of travel agencies have three-year contracts, the record 
suggests that a large majority of agencies have five-year contracts and 
that the systems discourage travel agencies from choosing a three-year 
contract. We would like the parties to provide current data on this 
matter.
    Some parties have suggested that the typical five-year contract 
term and the accompanying provisions requiring the subscriber to pay 
damages if the contract is terminated early do not keep travel agencies 
from switching systems before the end of the five-year term. Other 
commenters disagee. We ask the commenters to provide information on 
this issue.
    While we believe that rules governing subscriber contracts appear 
necessary to promote competition between the systems and between the 
systems and firms offering comparable services, one of the bases for 
our existing rules on system-subscriber relationships and their 
effectiveness may have disappeared due to the changes in the systems' 
ownership. We adopted the rules in part to promote airline competition 
by making it easier for airlines that owned a system to obtain a 
significant number of subscribers for that system in markets that the 
airline wished to enter. We believed that an airline would be reluctant 
to enter new cities if its affiliated system could not increase the 
number of subscribers there. 57 FR 43824. Two of the systems no longer 
have airline owners, and the systems provide all participating airlines 
with more equal functionality and reliability of information. These 
ownership changes seem to have made it less necessary for an airline 
entering a new market to obtain subscribers for its system as a basis 
for effective competition in the airline market.
(e) Shortening the Maximum Term of Travel Agency Contracts
    The current rules fix the maximum term of a subscriber contract at 
five years but require systems to offer travel agencies a three-year 
contract if they offer a five-year contract. Section 255.8(a). In our 
last overall rulemaking, we did not adopt rule proposals that would 
have shortened the maximum length for subscriber contracts.
    Most agencies have chosen five-year contracts, primarily because 
the systems offer more attractive pricing on those contracts than they 
do on three-year contracts. In addition, systems often require a travel 
agency to sign a new contract whenever it adds terminals, which means 
that travel agencies can operate under a series of long-term contracts 
that never expire at the same time.
    The parties disagree over whether and how our rule should be 
changed. We are presently considering the following proposals on this 
issue: readopting our current rule, fixing the maximum term

[[Page 69407]]

at three years, and adopting the European Union rule. We will choose 
the option that best satisfies the legitimate business needs of the 
systems and travel agencies while preventing efforts to deny travel 
agencies the ability at reasonable intervals to switch systems. 
Commenters who support or oppose each proposal should provide a 
detailed analysis showing the benefits and costs likely to result from 
that proposal.
    No clear answer exists on whether we should shorten the maximum 
permissible length of subscriber contracts, for longer-term contracts 
offer advantages and disadvantages. On the one hand, long-term 
contracts can harm travel agencies. If an agency becomes dissatisfied 
with a system's service, it cannot immediately switch to another 
system. Long-term contracts also handicap travel agencies if the 
airline sponsoring a system stops hubbing at a subscriber's city, or if 
a different airline affiliated with a CRS starts a hub in the agency's 
city, since agencies prefer to use the system owned by an airline with 
a substantial market presence. Long-term contracts can provide economic 
benefits ``as an efficient means for the parties to reduce uncertainty 
and spread risks'' and to reduce ``contract negotiation costs.'' 56 FR 
12622. In the past, however, travel agencies have not enjoyed the 
benefit of stability in price and service. 57 FR 43824; ARTA Comments 
at 7. Systems seem to use long-term contracts, moreover, to block entry 
by competitors. 56 FR 12622.
    A five-year contract for CRS services additionally may be unduly 
long due to the rapid changes in technology. Travel agencies should not 
be locked into a long-term contract with one system if other systems or 
alternative services would meet the agencies' needs more effectively 
and less expensively.
    On the other hand, long-term contracts do reduce the parties' 
negotiations expenses. Sabre Reply at 40. Systems will be more likely 
to give travel agencies free equipment and services and other bonuses 
for signing a new contract if the contract will obligate the travel 
agency to use the system for a significant length of time. Large Agency 
Coalition Reply at 8. Maintaining the systems' willingness to provide 
such benefits, however, is not necessarily a proper public policy goal, 
for the systems offset the cost of those benefits by charging their 
captive customers, the airlines, supracompetitive booking fees.
    In determining whether to revise our rules, we would like to take 
into consideration the industry's experience with the European Union's 
rule on subscriber contracts. That rule allows each subscriber to 
terminate its CRS contract without penalty on a few months notice after 
the contract has been in force for at least one year. The parties 
commenting on our subscriber contract proposals should discuss how 
effective the European rule has been and how it has affected the travel 
agencies' ability to switch systems, the systems' ability to operate 
profitably, and the level of booking fees charged airlines.
    We must balance potentially conflicting goals in this area. 
Enabling travel agencies to use multiple systems and databases and to 
switch systems promotes competition. When travel agencies can choose 
among suppliers, they are likely to obtain better prices and service. 
As shown, however, the systems already compete for travel agency 
customers. As a result, proposals to give agencies greater freedom to 
switch systems or use multiple systems have a potential downside--if 
the systems compete more for travel agency customers, they will offer 
travel agencies larger bonuses and other benefits than they do now. The 
systems will attempt to offset the higher costs of marketing their 
services to travel agencies by charging higher fees to airlines, since 
they will still have market power over airlines. Cf. 56 FR 12629. While 
in the last rulemaking we found that our revised rules would not likely 
lead to higher booking fees, 57 FR 43825, we now believe that the 
additional proposals may do so, especially given the systems' 
aggressive competition for travel agency customers. See also Delta 
Comments at 5-6; KLM Comments at 12.
    We are unwilling to consider ARTA's proposal that a travel agency 
have the right to terminate its contract for system services when an 
airline affiliated with the system materially changes the agency's 
business conditions, for example, by cutting the agency's commission 
rates. Despite the ties between the systems and their current or former 
airline owners, the systems and airlines operate independently in most 
respects. The systems are not responsible for airline decisions on 
commission levels and should not lose their contract rights because one 
or more airlines have changed their distribution practices. Travel 
agencies should seek contract terms giving them some protection if 
airline decisions on commission levels or other events require them to 
change the size and scope of their operations.
(f) Contract Clauses Fixing Damages
    The systems' travel agency contracts usually impose liquidated 
damages obligations on any travel agency that terminates the contract 
before the end of its term. These provisions have been controversial, 
because they deter travel agencies from switching systems and make the 
travel agency liable for the booking fees lost by the system when the 
agency no longer uses it. On the other hand, systems understandably 
wish to include contract provisions for enforcing travel agency 
agreements to use a system for the specified term. See, e.g., Sabre 
Reply at 45-46. Systems do not always rely on liquidated damages 
clauses to achieve this result. The contracts used by one system make 
the agency's cost of terminating the contract the same no matter how 
many months remain before the contract's expiration, AAA Comments at 3-
4, whereas the agency's cost for an early termination would decline 
over the term of the contract if the system were relying on a 
contractual damages provision to deter breaches.
    Several parties have asked us to prohibit contract clauses that 
allegedly create an excessive liability for damages if the subscriber 
terminates the contract before the end of its term.
    We are proposing a rule limiting a subscriber's damages obligations 
if it terminates its CRS contract before the end of its term. Our 
proposed rules are intended to give travel agencies a real ability to 
use more than one system and to use electronic means for bypassing the 
systems. We are thereby building on the policy followed by us in our 
last rulemaking. 57 FR 43827-43828. A system accordingly could not 
reasonably expect a subscriber to use that system for all or most of 
its bookings during the term of the contract. We therefore propose to 
bar systems from demanding liquidated damages that would reflect 
booking fees allegedly lost by the system due to the subscriber's use 
of a different system. This limitation on one type of damages should be 
consistent with a potential decision to allow contracts that may last 
several years. We are aware that systems may use other contract 
provisions to enforce a subscriber's contractual obligation to purchase 
system services over a period of several years, but we wish to 
eliminate a type of damage clause that seems designed to compel an 
agency to rely primarily on one system for its bookings.
(g) Travel Agency Equipment Additions
    If a travel agency is obtaining CRS services under an existing 
contract and wishes to obtain additional terminals from the system, the 
system will commonly require the agency to sign a new contract for the 
new equipment. As

[[Page 69408]]

a result, travel agencies using system-owned equipment often operate 
under a series of long-term contracts that never expire at the same 
time. This could undermine our rules limiting the maximum term of 
travel agency contracts.
    Worldspan and the Large Agency Coalition ask us to end this 
practice. The Large Agency Coalition suggests that we adopt a rule 
requiring that new equipment be covered by the same term as the 
agency's existing contract. Worldspan Comments at 10; Large Agency 
Coalition Reply at 4. Sabre opposes rules in this area. Sabre Reply at 
42-43.
    We considered similar requests in the last major CRS rulemaking. At 
that time we decided that a rule barring systems from requiring a new 
contract as a condition of providing additional equipment would not be 
economically rational. If a travel agency requested additional 
equipment near the end of the contract term, the system might refuse to 
provide the equipment. Alternatively, the system could impose a high 
price for providing the additional terminals. In addition, we thought 
that such a rule would likely be difficult to enforce. 57 FR 43825-
43826.
    We will reconsider our earlier analysis in this proceeding. The 
parties should discuss whether a system's insistence on obtaining a new 
multi-year contract for additional equipment significantly interferes 
with the travel agencies' ability to switch systems or use multiple 
systems. However, since our rules give a travel agency the right to buy 
its equipment, the commenters should also discuss whether an agency's 
ability to purchase additional equipment itself rather than accept the 
system's proposal, when it knows that doing so will extend the life of 
the agency's contractual obligations to the system, makes a rule on 
this issue unnecessary.

11. Productivity Pricing

    To reduce the systems' market power over airlines we wish to 
consider propoals that may better enable travel agencies and airlines 
to use alternatives to the systems. As long as the systems have market 
power, they will continue to charge supracompetitive booking fees that 
necessarily increase airline costs and the fares paid by passengers. We 
therefore wish to keep the systems from using contractual practices 
that deny travel agencies a reasonable opportunity to switch systems or 
use multiple systems and databases. Accordingly, we presently propose 
to restrict or potentially prohibit ``productivity pricing.'' Doing so 
is consistent with our existing general rule, section 255.8(b), which 
states, ``No system may directly or indirectly impede a subscriber from 
obtaining or using any other system.''
    The productivity pricing structure gives a travel agency large 
discounts from the ``standard'' charges for system services and 
equipment if the agency meets a specified minimum booking level for 
each terminal (Midwest Express included an example of such a contract 
as Exhibit 9 to its comments). Large Agency Coalition Comments at 6. 
The systems fund the bonuses paid subscribers with the profits they 
obtain from supracompetitive booking fees. Those profits enable them to 
offer travel agencies inducements to make most or almost all of their 
bookings through the agency's principal system. Systems originally used 
productivity pricing formulas when subscribers used equipment provided 
by the system. 57 FR 43826-43827. We believe, however, that the 
systems' subscriber contracts have often included productivity pricing 
provisions, or very similar provisions, even if the travel agency will 
use third party equipment. The systems, however, have recently begun 
offering the smaller travel agencies, but not larger travel agencies, 
the option of choosing contracts imposing no minimum booking 
requirements. Travel Distribution Report (April 8, 2002) at 2.
    Productivity pricing has been widespread. A 1996 survey by the 
American Society of Travel Agents indicated that 86 percent of travel 
agency contracts used productivity pricing. ASTA Comments at 12. By 
2001, however, a smaller share--66 percent--of new CRS contracts used 
productivity pricing. Travel Distribution Report (October 18, 2001) at 
1.
    Productivity pricing on its face operates as a way of rewarding 
travel agencies that make greater use of the equipment provided by a 
system. In practice, however, as explained below, it operates as the 
equivalent of the minimum use clauses that we prohibited when we last 
reexamined our rules. The minimum use clauses had treated a travel 
agency's failure to meet its minimum booking quota as a breach of 
contract. In that rulemaking we reasoned that minimum use clauses 
seemed ``designed to protect the [system's] subscriber base from 
competition rather than to ensure that the [system] receives adequate 
compensation for the services and equipment provided the subscriber.'' 
57 FR 43826. While most of the parties commenting on the issue 
supported our proposal to bar minimum use clauses, those parties 
supported productivity pricing, which assertedly served legitimate 
goals and did not deter travel agencies from using multiple systems. We 
then reasoned that productivity pricing ``encourages the agency to make 
more efficient use of its CRS equipment (and to avoid obtaining more 
equipment than reasonably needed for its business).'' We accordingly 
did not proscribe productivity pricing. 57 FR 43826-43827.
    The industry's experience with the systems' use of productivity 
pricing since that rulemaking has caused us to reexamine that 
reasoning. It now appears that the systems have not been using 
productivity pricing to encourage more efficient use of their 
equipment. They have instead apparently been using it to encourage 
travel agencies to use one system for all or almost all of their 
bookings. As discussed above, systems have used productivity pricing or 
equivalent pricing formulas even when the travel agency is not using 
equipment owned by the system.
    We believe that productivity pricing may unreasonably restrict 
travel agency use of multiple systems and databases since the systems 
use it as they once used minimum use clauses. They set the booking 
quota high enough that the agency as a practical matter cannot afford 
to make substantial use of another system or database. As alleged by 
one travel agency group, all four systems ``have instituted de facto 
minimum use clauses by making the cost of non-use so prohibitive that 
the agency cannot possibly afford to switch systems or add a second 
system in mid-contract.'' Large Agency Coalition Comments at 6.
    We would not be concerned with productivity pricing and similar 
contract terms in subscriber contracts if the only parties affected by 
these terms were the systems and travel agency subscribers. 
Productivity pricing, however, may harm consumers both directly and 
indirectly. It may keep travel agents from booking the best fares for 
their customers, and it increases airline costs by preventing airlines 
from using alternative electronic means of communicating with travel 
agencies.
    Productivity pricing may keep travel agents from serving their 
customers properly by deterring travel agents from using the Internet 
to book E-fares, which are normally not available through the systems 
used by travel agents. When travel agents book E-fares through the 
Internet, they run the risk of failing to satisfy the minimum monthly 
booking quota set by the productivity pricing provisions. ``Web air 
fares unlevel the playing field,'' Chicago Tribune (February 16, 2002); 
``Travel Agents Cry Foul over Internet Fare Deals,'' Los Angeles Times 
(February 16, 2002); All

[[Page 69409]]

About Travel Supp. Comments. The potential loss of the lower CRS rates 
may well deter travel agents from booking E-fares when doing so would 
be in the best interests of their customers. ASTA thus alleges that 
productivity pricing clauses ``have served mainly as a deterrent to the 
agency's looking to non-CRS sources, such as the Internet, to make 
bookings that more nearly conform to their clients' needs.'' ASTA 
Comments on Proposed Extension at 3.
    Insofar as the terms deter travel agencies from using alternative 
means for obtaining airline information and booking airline seats, they 
affect the airlines, which lose opportunities to encourage travel 
agencies to bypass a system by, for example, making bookings directly 
with airlines through airline websites over the Internet or by a direct 
link to an airline's internal reservations system. Market forces have 
not disciplined the price and terms of services offered airlines by the 
systems, primarily because most airlines have had no readily available 
alternative means of electronically providing information and booking 
capabilities to travel agents. An airline could create direct links 
between individual travel agencies and its internal reservations 
system, but the cost of doing so apparently has made this an 
unattractive alternative in most cases. The Internet, however, has made 
direct bookings much less costly, since a travel agent with Internet 
access can book seats through airline websites or the special websites 
created by some airlines for travel agency use. Productivity pricing 
appears to deter travel agents from using such options for bypassing 
the systems and so would undermine the policies followed by us in past 
CRS rulemakings. See 56 FR 12622; 57 FR 43823, 43826.
    Our present belief that productivity pricing clauses reduce 
competition for the systems is consistent with the parties' comments. 
Alaska thus states that productivity pricing prevented Alaska from 
getting travel agencies to use an alternative to the systems, Alaska 
Comments at 9-10:

    [P]roductivity pricing provisions have a strong tendency to lock 
travel agents into the use of a single CRS and to inhibit their use 
of alternative channels, including other CRSs and direct links to 
carriers. Alaska's own attempt to establish direct computer links 
with major agencies in the Pacific Northwest demonstrated that 
travel agents were extremely loathe to use those links because they 
would not receive additional productivity credits from their 
principal CRS and would therefore pay more to (or receive less from) 
their CRS vendor each month.

    Several airlines have made proposals that would bar or restrict 
productivity pricing. Delta, Aloha, Alaska, American Trans Air, and 
Qantas contend that we should prohibit it. Continental suggests that we 
should bar cash payments and bonuses that exceed the cost of the 
equipment covered by the productivity pricing agreement. Continental 
Comments at 24-25.
    Sabre, Worldspan, and Galileo, on the other hand, oppose any 
prohibition of productivity pricing. The Large Agency Coalition 
proposes that productivity pricing be barred only insofar as travel 
agencies must pay penalties for failing to meet their booking quota.
    We ask the parties to comment on proposals that will prohibit or 
limit the use of productivity pricing. Since the systems are apparently 
using productivity pricing as a means to keep travel agencies from 
using a second system or another alternative to the system initially 
chosen, productivity pricing would operate as an unreasonable 
restriction on competition. In particular, it would protect each 
system's market power.
    Productivity pricing would enable the travel agency to obtain 
credit if it efficiently uses the equipment provided by the system. 
Continental has therefore proposed that we allow systems to offer 
travel agencies discounts equal to the cost of the equipment if they 
meet a monthly booking quota. We will consider that proposal, since we 
prefer to limit contract terms only when necessary to keep the systems 
from unreasonably restricting competition. Such a proposal would enable 
travel agencies to obtain equipment at discounted prices while not 
encouraging them to use one system for all or almost all of their 
bookings.
    Productivity pricing in the traditional sense was tied to the 
agency's use of equipment provided by a system and so technically may 
not exist as to subscribers using their own equipment. Travel agencies 
using their own equipment often operate under comparable contractual 
provisions rewarding them if they make the majority of their bookings 
on their primary system. Varig Comments at 7-9. The systems could 
develop other ways to give travel agencies financial incentives to make 
all or almost all of its bookings through one system, and one system 
has advised us that some other systems are doing so.
    Therefore, our current proposal covers more than productivity 
pricing. Providing financial incentives to travel agencies to use one 
system for all or most of its bookings would appear to frustrate our 
goal of giving travel agencies more leeway to use multiple systems and 
databases, including the Internet.

12. The Tying of Marketing Benefits With System Subscriptions

    Airlines that have CRS ownership interests or a marketing 
relationship sometimes tie a travel agency's access to override 
commissions and marketing benefits, such as the ability to waive 
advance-purchase restrictions on discount fares, with the agency's 
choice of the system owned by the airline. Our rules prohibit the tying 
of override commissions with the agency's use of the airline's system, 
section 255.8(d). In our last proceeding we did not extend this rule to 
marketing benefits, even though that would promote competition on the 
merits, since we doubted that a broader rule would be enforceable. 57 
FR 43828.
    Sabre, System One, Continental, America West, and the Large Agency 
Coalition contend that the Department should prohibit the tying of the 
travel agency's use of an airline's system with the agency's ability to 
obtain marketing benefits. These parties have cited cases where an 
airline affiliated with a system took such action. Sabre Comments at 
33-34; Galileo Comments, Exhibit B.
    Delta opposes any such rule, largely on the ground that any 
prohibition could not be practicably enforced. United contends that the 
Department should eliminate all rules limiting an airline's ability to 
tie commissions and benefits with the use of its system. United 
Comments at 27-29.
    We are concerned about the use of an airline's dominant position in 
a local airline market to distort CRS competition in the same area. For 
that reason we are requesting comments on whether we should ban 
airlines from denying travel agencies access to their corporate 
discount fares when the agency does not use the system affiliated with 
the airline offering the fare. We think, as we did during our last 
overall rulemaking, that this practice unreasonably restricts 
competition in the CRS business. However, we continue to be concerned 
that a rule proscribing such tying could not be effectively enforced. 
Some commenters state that the current rule prohibiting the tying of 
commissions with use of a particular system has been ineffective, since 
the airlines owning or marketing a system often violate the rule. Sabre 
Comments at 33; Large Agency Coalition Comments at 7, n.2.
    We wish to explore whether an effective rule prohibiting tying 
practices would be possible. As Sabre pointed out, Canada's rules had 
addressed the

[[Page 69410]]

issue of the tying of marketing benefits by requiring each airline 
affiliated with a system to tell travel agencies that their commissions 
are not tied to their use of a particular system and to annually 
certify that the airline had not tied the agency's commissions to its 
use of the system affiliated with the airline. Sabre Comments at 33 and 
Attachment I. See also Large Agency Coalition Reply at 3.
    We ask the parties to comment on whether the Canadian rule was 
effective and whether it (or other proposals) would make a prohibition 
against tying effective.
    United's claim that a firm should be free to encourage businesses 
to buy products and services from a company that it owns is usually 
true. The cited principle is invalid when, as can happen in the airline 
industry, a firm with market power compels businesses to become 
customers of its affiliated company when they would rather buy the 
goods or services from independent companies.
    United has also suggested that an airline that owns or markets a 
system should be able to offer a travel agency higher commissions or 
other benefits if the agency agrees to use a system that charges 
airlines lower fees or provides better service. United Reply at 17. The 
parties should comment on whether any rule should contain an exception 
allowing an airline to do that and whether an exception of that kind 
could be written that would not encourage airlines affiliated with a 
system to use their dominance in regional airline markets as a means of 
compelling travel agencies in those areas to choose their affiliated 
system.

13. Regulation of the Internet-Based Airline Distribution Systems

    In our last review of the CRS rules, we considered only the need 
for the rules adopted by the Board and other proposed rules that would 
govern CRS operations and the systems' relationships with the airlines 
and travel agencies. At that time, ``brick-and-mortar'' travel agencies 
sold about eighty percent of all airline tickets, and consumers bought 
most of the remainder directly from the airlines. Few travellers bought 
tickets on-line. 57 FR 43794-43795. Since then the Internet has become 
a significant avenue of airline distribution. Many consumers research 
airline services and buy tickets on the Internet, either directly from 
an airline or through one of the on-line travel agencies or a website 
operated by one of the ``brick-and-mortar'' travel agencies, like 
American Express. As discussed above, some U.S. airlines already obtain 
more than thirty percent of their bookings from the Internet, and over 
ten percent of all airline tickets are now bought on-line.
    Our rules cover system operations insofar as the systems are 
providing travel agencies with information and booking capabilities on 
airline services but do not cover travel agency operations, either on-
line or ``brick-and-mortar,'' or sales made directly by a system to 
consumers. Given the growing importance of the Internet's role in 
airline distribution, and the possible analogies between Internet 
practices and the system practices that have been examined in past CRS 
rulemakings, we stated that we would consider in this rulemaking 
whether some of the CRS rules (or similar rules) should be applied to 
websites used by consumers for buying tickets. 65 FR 45557.
    Insofar as this proceeding is concerned, the Internet's role in 
airline distribution presents several major issues. Various parties 
have asked us to consider the following:
    [sbull] Whether rules are necessary to prevent consumers from being 
harmed by websites offering potentially inaccurate or biased 
information.
    [sbull] Whether we should adopt rules governing websites like 
Orbitz and Hotwire that are owned by several airlines.
    [sbull] Whether on-line travel agencies should be entitled to 
protection from allegedly discriminatory treatment on such matters as 
commission rates.
    [sbull] Whether we should require airlines to allow all travel 
agencies to sell the discount fares offered on airline websites.
    [sbull] Whether we should bar systems from requiring airlines to 
make their services saleable by all system users selling tickets over 
the Internet.
    On the other hand, few parties seek rules regulating individual 
airline websites.
    After considering the parties' arguments, we have tentatively 
determined that we need not now propose rules that would substantially 
regulate the Internet's use in airline distribution, as explained 
below. We appreciate the importance of preventing deceptive practices 
and anticompetitive conduct that could cause serious harm to consumers 
and airline competition. However, rather than propose rules on the 
basis of a relatively short experience, we prefer to see how the 
Internet's use in airline distribution develops and whether its 
evolving use threatens airline competition and consumer access to 
accurate and complete information on airline services. Our experience 
with the Internet thus far does not confirm that broad regulations are 
necessary.
    We intend to continue watching the Internet distribution practices 
of airlines and on-line travel agencies and will take action if that 
becomes necessary. Even if our rules do not specifically regulate on-
line displays, on-line travel agencies must comply with section 411, 
which prohibits unfair and deceptive practices, and our rules, which 
require travel agencies to provide accurate information on airline 
services. 14 C.F.R. 399.80. We are ready to take enforcement action 
against any travel agency (or airline) that provides deceptive 
information on airline services, and we have done so in several cases. 
See, e.g., Orders 2001-5-32 (May 30, 2001) and 2001-6-3 (June 7, 2001).
    We invite commenters who disagree with our tentative proposal on 
this issue to present their proposals with information and analysis 
showing that they would provide public benefits without harming 
competition or the development of new on-line marketing approaches.
    We will, however, propose a policy statement on one Internet-
related issue here, the requirements for disclosure of travel agency 
service fees. Orbitz' decision to charge consumers a fee for making a 
booking through its website has raised the question of how such a 
travel agency fee should be displayed in light of our longstanding 
policy that any fare advertisement must state the full amount that a 
consumer must pay for the air transportation.
(a) Regulation of Internet Displays of Airline Services
    Some parties have expressed a concern that on-line travel agencies 
may bias their displays in favor of preferred airlines if we do not 
adopt rules prohibiting them from doing so. Assertedly some on-line 
travel agencies may find it profitable to sell display bias to 
individual airlines with the result that the Internet sites will 
mislead the consumers using them. See, e.g., American Comments at 11.
    As a result of this concern, as well as related concerns that on-
line travel agencies may operate in other ways that would prejudice 
airline competition and mislead consumers, a number of parties are 
urging us to regulate Internet operations in some respects. These 
parties include Sabre, American, Worldspan, Amadeus, Continental, 
Alaska, America West, Midwest Express, the European Union and the 
European Civil Aviation Conference, Qantas, the Asia Pacific Airline 
Group, ASTA, ARTA, and the Consumers Union. The Consumers Union 
submitted

[[Page 69411]]

a survey of on-line agency websites that it believes indicates that 
such websites provide incomplete and misleading information. Sabre and 
others also contend that airlines controlling websites can use them to 
distort competition. Alaska and others assert that the rules should 
prevent unfair practices that would allow one firm to dominate travel 
distribution on the Internet. Some systems contend that they will be 
competitively handicapped if their operations are subject to the 
Department's rules while Internet firms are not regulated.
    Galileo, United, Delta, Continental, British Airways, Microsoft, 
Preview Travel, Biztravel.Com., and OAG Worldwide oppose including 
Internet sites within the scope of the CRS rules. They generally claim 
that there is no need to regulate Internet sites and no evidence of 
harm thus far.
    American and Northwest contend that websites should be regulated 
only to the extent of requiring them to give notice of any bias. U.S. 
Airways and America West suggest that our rules require disclosure if 
an on-line agency omits some airlines from displays as may happen, for 
example, if those airlines do not participate in the system used by the 
on-line agency.
    Expedia contends that only websites owned by airlines require 
regulation, for independent websites have neither the incentive nor the 
ability to reduce airline competition. Orbitz and OAG Worldwide allege 
that consumers will avoid biased sites, so no rules are needed. In 
arguing that rules are unnecessary, Delta and others assert that 
Northwest was able to compel Lowestfare.com to change practices that 
allegedly discriminated against Northwest and other non-favored 
airlines.
    Amadeus, in contrast, asserts that consumers are ill-equipped to 
detect bias and that they could not practicably avoid biased sites if 
all sites were biased.
    Orbitz' entry into the on-line travel agency business has affected 
the positions taken by some of the parties. In particular, several of 
the airlines owning Orbitz initially argued that rules were necessary 
to prevent on-line travel agencies from biasing their displays. After 
they created Orbitz, they reversed their position and now argue that we 
should not adopt such rules. See Sabre Supp. Reply at 15-18.
    After considering the parties' arguments on this issue, we are 
tentatively proposing not to adopt regulations governing on-line 
displays of airline services, as stated above. Many of the parties have 
recommended different treatment for the two major types of websites 
offering airline tickets: airline sites and on-line travel agencies. 
While many of the parties urge us to adopt rules regulating the 
displays offered by on-line travel agencies, few parties seek rules 
regulating the displays offered by airline websites.
    As to airline website displays, most of the commenters agree that 
consumers do not expect an airline to offer unbiased information on its 
own website. Consumers instead assume that such a website will favor 
the airline's own services. While some parties contend that we should 
regulate any website operated by an individual airline if it enables 
consumers to book flights on other airlines, we disagree. We are not 
now willing to extend the reach of our rules against display bias to 
sites operated by individual airlines, no matter what travel services 
may be purchased through the site. Consumers cannot reasonably expect 
to obtain unbiased information from an airline website, since the 
airline will understandably seek to promote its own services and those 
of any allied airlines.
    The controversy over the regulation of Internet displays of airline 
services thus essentially involves the question of whether we should 
regulate the displays offered by on-line travel agencies. We have 
decided against proposing rules governing on-line travel agency 
displays at this time for several reasons.
    First, we are declining to regulate the displays created by 
``brick-and-mortar'' travel agencies. One rationale for that decision--
the travel agencies' interest in keeping customers satisfied--applies 
to the on-line travel agencies. A consumer dissatisfied with the 
service offered by one on-line agency can easily switch to another on-
line agency. On-line travel agencies should have an additional 
incentive to avoid biasing their displays since newspapers and 
magazines conduct surveys of the different websites and report on which 
site offers the best fares and the best service. See, e.g., ``Orbitz 
Takes Off, in the Spotlight,'' New York Times (June 17, 2001), travel 
section at 13. An on-line travel agency that biased its displays would 
likely fare poorly in such surveys. These factors should keep on-line 
agencies from biasing their displays even though some have agreements 
with individual airlines giving them incentives to increase an 
airline's share of the agency's total bookings.
    Furthermore, we have not yet seen sufficient evidence to conclude 
that bias is a serious problem at on-line travel agency websites. 
Although the Consumers Union submitted a study indicating that on-line 
agencies often failed to provide the best available fare, a result that 
it believes suggests the displays may be biased, it concedes that these 
results do not prove that bias exists. Consumers Union Supp. Comments 
at 4-6. The on-line agencies, of course, deny they bias their displays, 
Travelocity Supp. Reply at 14-18; January 17, 2001, Letter from Mark 
Britton, General Counsel for Expedia. See also ``Travel Web Sites Say 
Airline Deals Don't Affect Searches,'' Washington Post (April 3, 2002). 
No airline has alleged that bias by on-line travel agencies is 
currently a common problem. Midwest Express, however, asserts that 
Expedia's displays are unreasonable, since Midwest Express' nonstop 
service in one market is listed well below the connecting services 
offered by other airlines. Midwest Express Supp. Comments at 11-14. 
Expedia has denied this. It contends that its displays rely in part on 
fare levels in ranking flights and that Midwest Express' tendency to 
charge higher fares assertedly causes the airline's flights to receive 
a lower display position.
    Parties have cited Northwest's dispute with LowestFare.com on both 
sides of this issue. Amadeus notes that Northwest considered 
LowestFare.com's displays biased. Amadeus Supp. Reply at 14-15. Delta, 
on the other hand, contends that Northwest was able to force 
LowestFare.com to change its display practices, thereby showing that 
regulatory intervention is unnecessary. Delta Supp. Reply at 14-15. We 
believe that Northwest's experience suggests that regulatory 
intervention is not critical at this time, since Northwest was able to 
get LowestFare.com to change its display practices.
    Furthermore, if some on-line travel agencies present biased 
information or offer displays that are otherwise inadequate, consumers 
can easily protect themselves by searching several websites before 
choosing a flight, and they usually do so. Travelocity Supp. Reply at 
5-6. One study indicates that over sixty percent of leisure passengers 
who buy tickets on-line visit at least two sites before making a 
purchase and that nearly forty-five percent visit four or more sites. 
Orbitz Supp. Reply at 5. See also Sabre Supp. Reply at 24. Thus many 
consumers appear to be willing to take time to search for the best 
option and will be less likely to choose the first option shown on a 
display (or rely on just one source of information).
    We are unconvinced by arguments that regulations are needed because 
consumers are less experienced than travel agents in searching for 
airline services and so can be misled more

[[Page 69412]]

easily by an on-line travel agency. Consumers have less experience, but 
they are more likely to take additional time to research the available 
airline service options. Although an individual on-line travel agency 
that wished to deceive consumers could do so with respect to those 
consumers who do not search multiple sites, most consumers search at 
least two websites before booking a fare.
    A rule requiring on-line travel agencies to follow the rules 
applicable to the CRS displays provided travel agencies, moreover, 
could be harmful by discouraging new methods of offering airline 
tickets on-line. Priceline and Hotwire, for example, have created 
innovative methods for selling discounted tickets to travellers. Other 
firms may create other new techniques for providing airline information 
and tickets. A rule prescribing the displays to be used by on-line 
travel agencies could discourage such innovation.
    Furthermore, some parties define bias in a relatively broad fashion 
that would call for our review of display practices other than the 
editing and ranking of flight options. Some parties assert, for 
example, that posting banner advertisements or giving any preference to 
one airline is bias, even if the site clearly gives consumers the 
option of choosing to book other airlines instead of the preferred 
airline. Orbitz Supp. Reply at 14-15. We do not regard such practices 
as bias. Travelocity Supp. Comments at 18-19.
    Some commenters nonetheless contend that our decision to prohibit 
systems from biasing the displays provided travel agents supports the 
prohibition of bias in on-line travel agency websites. See, e.g., 
Travelocity Supp. Comments at 17. We disagree. In our view, the 
displays offered consumers by on-line travel agencies and the displays 
offered travel agencies by systems are not analogous. Substantial 
differences exist between travel agent use of CRS displays and consumer 
use of websites. We prohibit the systems from biasing the displays 
offered travel agents because travel agents are often under time 
pressures that keep them from searching for the best possible service 
and make them more likely book one of the first flights listed even if 
other flights would better meet a customer's needs. Travel agents, 
moreover, do not usually access more than one system when investigating 
airline service options. In addition, the customer never sees the CRS 
display and must rely on the travel agent's expertise and diligence. In 
contrast, as shown, consumers using the Internet can and do easily look 
at alternative websites before choosing a flight. Thus many consumers 
take time to search for the best option and will be less likely to 
choose the first option shown on a display (or rely on just one source 
of information).
    To obtain comprehensive on-line information on airline services, 
consumers should search several sites, even if all are unbiased, since 
no site will offer complete information on available airline services. 
Individual on-line travel agencies have been negotiating special deals 
with airlines and offering those fares to travellers visiting their 
websites. Bear, Stearns, ``Point, Click, Trip,'' at 48, 49. Any such 
fare would be available only from the on-line travel agency that 
obtained the special deal. Thus consumers cannot expect to obtain 
reasonably complete information on available fares by viewing only one 
on-line travel agency website. And surveys of on-line travel agencies 
show that different agencies often show somewhat different fares. See, 
e.g., ``Orbitz Takes Off, in the Spotlight,'' New York Times (June 17, 
2001), travel section at 13.
    On-line agencies are additionally unable to enable consumers to 
book every airline. For example, consumers can buy Southwest tickets 
on-line only at Southwest's website. Southwest's refusal to participate 
in any system at a high enough level creates the risk of errors in 
bookings by consumers, and Southwest has refused to guarantee that it 
will provide seats to consumers affected by such booking errors. 
Southwest has therefore refused to allow on-line agencies to sell its 
tickets. ``Southwest stops selling tickets in Travelocity.com,'' Travel 
Distribution Reports (March 8, 2001). Consumers now are normally able 
to obtain information on the airlines' discount E-fares only by viewing 
the website of each airline or Orbitz, to the extent that airlines have 
agreed to make their E-fares available through Orbitz (whether Orbitz 
should have preferential access to such fares is an issue discussed 
below).
    The on-line travel distribution business thus has so far developed 
in a way that does not enable consumers to obtain comprehensive 
information from a single website. Applying display bias rules to on-
line travel agencies would not change this.
    We do not intend to foreclose further discussion of this issue, and 
will consider all proposals for rules governing Internet displays of 
airline services. However, to justify the adoption of such rules, we 
would need evidence that they were necessary to protect consumers, and 
would not impose undue burdens on the firms being regulated. One 
possibility would be a requirement that each on-line travel agency 
provide information on which airlines are or are not saleable through 
its website and the criteria used in editing and ranking the airline 
services displayed in response to a consumer's request. Alternatively, 
commenters may submit proposals that would set out general principles 
for on-line displays without prescribing in detail how displays must be 
constructed. Parties suggesting rules in this area should address the 
issue of why on-line agencies may require regulation when we have not 
generally regulated ``brick-and-mortar'' agencies. Examples of any 
analogous regulation of Internet services might also prove helpful.
(b) The Airlines' Differing Treatment of Travel Agencies
    The airlines do not treat all on-line travel agencies the same and 
do not treat them the same as ``brick-and-mortar'' travel agencies (nor 
do they treat all ``brick-and-mortar'' travel agencies the same). For 
example, airlines were generally paying lower commissions for on-line 
bookings than they do for bookings made at ``brick-and-mortar'' travel 
agencies, and at least four airlines--Continental, Northwest, KLM, and 
Southwest--stopped paying commissions for on-line bookings well before 
they eliminated base commissions for ``brick-and-mortar'' travel 
agencies. In addition, most U.S. airlines have agreed with Orbitz that 
Orbitz may sell their E-fares even though airlines generally have not 
allowed other travel agencies (on-line or off-line) to sell their E-
fares through the systems used by travel agents. Some airlines 
negotiate special fares with individual on-line travel agencies that 
other on-line travel agencies cannot sell.
    ``Brick-and-mortar'' travel agencies can book E-fares for their 
customers only by going to an airline website or Orbitz, and they are 
unlikely to receive a commission for any such booking. Searching for 
fares and booking tickets outside the travel agent's system is more 
inefficient, as explained above. The travel agency also earns no 
credits under a productivity pricing clause when it makes bookings 
through the Internet rather than its system.
    Travelocity and Expedia generally do not have access to the E-fares 
available on airline websites and Orbitz, except to the extent that 
individual airlines have agreed to make such fares available to them.
    The Interactive Travel Services Association, the on-line travel 
agencies' trade association, urges us to adopt rules

[[Page 69413]]

that would stop the airlines from discriminating against on-line travel 
agencies. ARTA, American Express, and RADIUS, formerly called Woodside 
Travel, a large travel agency, contend that we should stop airlines 
from making discount fares available only through an airline website. 
The National Business Travel Association contends that we should 
require airlines to make their E-fares available through all 
distribution channels. Amadeus asserts that an airline should be 
required to make available to every website all of the fare information 
provided by that airline to any website with which it is affiliated. 
Other parties contend that we should block the airlines from giving 
special treatment to Orbitz. A large number of travel agencies request 
a rule requiring airlines to allow them to sell the discount fares sold 
on airline websites and Orbitz, since they allegedly cannot compete 
when travellers can routinely obtain lower fares from other 
distribution channels.
    United, Northwest, Southwest, America West, and other airlines 
argue that airlines should be able to offer discount fares through 
their websites without making them available through other distribution 
channels. They assert that only the low distribution costs incurred 
when travellers book seats through airline websites make it possible 
for the airlines to offer their E-fare discounts.
    We are not inclined to propose, on the basis of current 
information, a requirement that airlines treat all types of travel 
agencies the same, to treat on-line travel agencies the same as off-
line travel agencies, or to give all travel agencies access to fares 
that the airline has chosen to sell through limited channels. We 
recognize the danger that airlines affiliated with one on-line travel 
agency may seek to use any market power they have in airline markets to 
distort competition in the airline distribution business, but we 
currently believe that the enforcement process, not the adoption of 
general rules, would be the most effective method for addressing such 
conduct that involves unfair methods of competition.
    Travel agencies offer services valued by many travellers, and they 
often find better fares than travellers can obtain from airlines or 
Internet sites. Nonetheless, given our limited role in regulating the 
airline and airline distribution industries, we presently doubt that we 
could require airlines to offer their most attractive fares to all 
distribution channels. As discussed above, in this proceeding we are 
primarily relying on our authority under section 411 to prohibit unfair 
methods of competition. Unfair methods of competition, as shown, are 
practices that violate the antitrust laws or antitrust principles. The 
antitrust laws generally allow individual firms to choose how to 
distribute their products and services. The Robinson-Patman Act, 15 
U.S.C. 13, restricts a seller's ability to offer lower prices to some 
buyers than to others without justification, but it does not cover the 
sale of services. It appears that an airline's decision to provide 
higher commissions or better treatment to one type of distribution 
channel (or to some but not all firms within the same channel) would 
not ordinarily conflict with antitrust principles.
    Requiring airlines to treat all travel agencies the same also seems 
contrary to the industry's established distribution practices. 
Individual airlines have always given some types of travel agencies 
benefits not given others, and have given different distribution 
channels different terms for selling tickets. GAO, ``Effects of Changes 
in How Airline Tickets Are Sold'' at 15; Airline Marketing Practices at 
25, 26; American Supp. Reply at 25-26. Airlines have varied their terms 
for the sale of their tickets on the basis of such factors as the 
relative cost and effectiveness of using different firms and 
distribution channels. The systems similarly offer different travel 
agencies different terms depending on such factors as the agency's 
location and probable volume of business. Individual on-line travel 
agencies have negotiated special arrangements with individual airlines 
and other travel suppliers. Travel agencies may also give their best 
customers offers not made available to other customers. See, e.g., 
American Reply at 7.
    The systems, travel agencies, and software firms are developing 
programs that will enable travel agents to easily access airline E-
fares. See, e.g., Travel Distribution Report (May 6, 2002) at 66, 68; 
Travel Weekly (April 29, 2002) at 61; Travel Weekly (May 27, 2002) at 
1. Orbitz, as noted above, has also arranged for the development of 
such a program. These efforts should reduce the need for any Government 
intervention.
    Congress, however, also determined that the issue of travel agency 
access to Internet fares and related travel agency issues should be 
studied by a commission, the National Commission to Ensure Consumer 
Information and Choice in the Airline Industry. The commission is due 
to submit its report on these issues to the President and Congress by 
November 16, 2002.
(c) Regulation of Joint Airline Websites
    To a great extent, of course, the parties' concern with the 
airlines' different treatment of different agencies is attributable to 
Orbitz, the on-line travel agency owned by five major airlines, and 
Orbitz' ability to sell many discount fares that are not available for 
sale through other travel agencies. A number of parties broadly assert 
that any site owned by two or more airlines, such as Orbitz and 
Hotwire, may well be operated in a manner which will reduce competition 
and lead to consumers receiving biased or inaccurate information. See, 
e.g., Expedia Supp. Comments at 11-12; Travelocity Supp. Comments at 
10-11; Southwest Supp. Reply.
    We are not proposing rules on the conduct of joint airline websites 
at this time. The only jointly-managed airline websites are Orbitz and 
Hotwire, except to the extent that the partners in airline alliances 
may have created joint websites (the parties seeking rules covering 
jointly-operated websites have not asserted that websites operated by 
alliance partners inherently require regulation). We do not know 
whether more such websites will be created and, if so, how they would 
operate. In the present circumstances, we believe the enforcement 
process would be the best means for addressing any problems with 
deceptive practices and unfair methods of competition created by such a 
site. An enforcement proceeding could effectively take into account the 
characteristics of an individual website while a rule might be unable 
to do so, especially when any rules would necessarily be based on 
predictions about how such a website would operate.
    Insofar as this issue involves concerns presented by Orbitz' 
business plan and strategy, we have been addressing those concerns 
through our informal examination of Orbitz. We have been investigating 
Orbitz' operations to see whether it may be engaged in deceptive 
practices or unfair methods of competition. One subject of that 
investigation has been whether Orbitz has been given unfair 
preferential access to the airlines' discount fares, especially their 
E-fares. We have submitted a progress report to Congress on that 
investigation. ``Report to Congress: Efforts to Monitor Orbitz'. We 
have not reached any definitive conclusions on whether Orbitz, 
operations may violate antitrust principles, in part because of the 
continuing changes in the on-line distribution business, and in part 
because the Justice Department has not concluded its own antitrust

[[Page 69414]]

investigation into Orbitz. We are continuing to monitor Orbitz' 
operations. If Orbitz or its owner airlines engage in unlawful conduct, 
we can and will use our authority to end any unlawful practices. See, 
e.g., April 13, 2001, Letter from Susan McDermott and Samuel Podberesky 
to Jeffrey Katz, at 6.
    In addition, Orbitz and any other website operated jointly by two 
or more airlines are subject to the antitrust laws and section 411, 
which authorizes us to prohibit conduct that violates antitrust 
principles or the antitrust laws. The antitrust laws themselves 
prohibit competing firms from operating a joint venture in ways that 
unreasonably restrict competition. Any restrictions on the 
participating firms' conduct must be reasonably necessary for the 
accomplishment of the joint venture's legitimate goals, and conditions 
on access to the joint venture, or denials of access, are subject to 
the rule of reason or, if the joint venture has market power, can be 
unlawful per se. See, e.g., Northwest Wholesale Stationers v. Pacific 
Stationery & Printing Co., 472 U.S. 284 (1985); NCAA v. Board of 
Regents, 468 U.S. 85 (1984); Associated Press v. United States, 326 
U.S. 1 (1945); United States v. Realty Multi-List, Inc., 629 F.2d 1351 
(5th Cir. 1980). Firms cannot agree among themselves to boycott a firm 
competing with one or more of them. Toys ``R'' Us v. FTC, 221 F. 3d 
928, 934-936 (7th Cir. 2000). We will apply these principles if 
necessary through enforcement action taken under section 411.
    A number of parties contend that we must at least require airlines 
to enable other travel agencies, both on-line and off-line, to sell the 
E-fares that they are authorizing Orbitz to sell. They claim that the 
inability of other travel agencies to sell the low fares available to 
Orbitz will undermine their competitive position. See, e.g., the 
comments filed by several Uniglobe agencies.
    We are reluctant to adopt a regulation that would require airlines 
to give other travel agencies the ability to sell their E-fares if they 
allow Orbitz to sell them. As explained above, section 411 does not 
empower us to dictate to the airlines how they will distribute their 
tickets, unless they are engaged in practices that violate the 
antitrust laws or antitrust principles. An airline's decision to make 
E-fares available to Orbitz but not other on-line travel agencies would 
not necessarily violate the antitrust laws or antitrust principles, 
just as, for example, an airline's decision to give special deals to 
one of the largest on-line travel agencies, Travelocity or Expedia, but 
not other travel agencies would not necessarily violate section 411. 
``Brick-and-mortar'' agencies, moreover, can book E-fares through an 
airline website or, in many cases, Orbitz, though other on-line travel 
agencies cannot.
    We recognize that the Department's Inspector General has also 
suggested requiring airlines to provide their E-fares to other on-line 
travel agencies if the agencies agree to the same terms as Orbitz, that 
is, promise each airline to rebate a portion of the CRS fees for all 
bookings on that airline made through the on-line agency. Testimony of 
Inspector General Kenneth Mead before the Senate Commerce Committee, 
July 20, 2000, at 22-23. However, we are not presently proposing to 
impose such a requirement in this rulemaking. Despite its attractive 
features, his recommendation would require us to dictate how the 
airlines would treat different distribution channels, a kind of 
intervention that would usually be outside our authority under section 
411.
    While we are not proposing now to adopt a rule on this issue, we 
recognize that Orbitz' ability to sell E-fares that other on-line 
travel agencies cannot sell does raise legitimate concerns. Our 
investigation of Orbitz is therefore examining, among other things, 
whether Orbitz' access to the airlines' E-fares violates antitrust 
principles and thus constitutes an unfair method of competition. As 
indicated, if Orbitz and any airlines are engaging in conduct contrary 
to antitrust principles, we have the power to address those violations 
in enforcement proceedings.
    The commenters seeking a rule requiring at least Orbitz' owner 
airlines to make their E-fares available to other on-line travel 
agencies rely on an analogy with our mandatory participation rule for 
airlines with an ownership interest in a system. See, e.g., Amadeus 
Supp. Comments at 23-28; Travelocity Supp. Comments at 21-22. These 
situations do not appear to us to be analogous. We adopted the 
mandatory participation rule due to our experience with cases where 
U.S. and foreign airlines that owned or marketed a system restricted 
their participation in competing systems in order to give their 
affiliated system a competitive advantage. 56 FR 12608. In the case of 
Orbitz, our initial investigation indicated that airlines were 
providing Orbitz with access to their E-fares in exchange for booking 
fee rebates not provided by other on-line travel agencies. Orbitz 
itself had an interest in obtaining access to the E-fares because of 
its need for a marketing advantage that might offset the strengths of 
the existing on-line travel agencies. April 13, 2001, Letter from Susan 
McDermott and Samuel Podberesky to Jeffrey Katz. As a result, there may 
have been legitimate business reasons for the arrangement between 
Orbitz and the airline charter associates whereby Orbitz has gained 
access to the airlines' E-fares. In contrast, the refusals by airlines 
affiliated with one system to participate in competing systems at an 
equivalent level appeared to reflect a goal of restricting rather than 
promoting competition. Our continuing examination of Orbitz will 
include the issue of whether the airlines' decisions restricting access 
to their E-fares may be unlawful.

14. Prohibit Tying of Internet Participation

    Orbitz presents the question of whether in some circumstances the 
major airlines would violate antitrust principles if each decides to 
allow only its preferred distribution channel to sell its best fares. 
Each system's arrangements for providing service to participating 
airlines raise a similar question, whether a distribution firm with 
market power may deny airlines the ability to choose which of the 
firm's customers may sell the airlines' tickets. The systems' practices 
present this issue, for their participating airline contracts typically 
require the airline to allow its services to be booked by every user of 
the system, including both on-line and off-line travel agencies. Some 
airlines cite as well Sabre's insistence that participating airlines 
sell their services through Travelocity, the on-line travel agency 
controlled by Sabre.
    We wish to consider whether participating airlines should have a 
greater ability to choose which websites may sell their services, a 
change sought by a number of participating airlines. They assert that 
an airline should be able to choose which on-line sites can sell its 
services. Delta Comments 28-30; United Reply at 11-15; Continental 
Supp. Comments at 16-17; Midwest Express Supp. Comments at 23-27.
    Each system currently requires each airline or other travel 
supplier to participate in the system on a worldwide basis--the airline 
or travel supplier must agree that its services will be saleable 
through the system by anybody using the system, whether the user is an 
accredited travel agency, a non-accredited travel agency, a corporate 
travel department, an on-line computer service, or a consumer accessing 
the system through a website operated by a traditional travel agency or 
an on-line agency. Airlines may have little ability to keep system 
users from being able to sell their tickets. TWA Comments at 14.

[[Page 69415]]

    Delta, Northwest, U.S. Airways, Continental, Alaska, America West, 
Midwest Express, Air France, the Asia Pacific airline group, KLM, 
Lufthansa, Qantas, and Varig assert that the rules should prohibit 
systems from tying access to traditional travel agency subscribers with 
access to Internet sites. A ban on such tying would allegedly enable 
airlines to decide whether such access was attractive, and they could 
conceivably bargain over the fees and terms on which such participation 
was offered. Many airlines also initially claimed that giving consumers 
access to a booking capability over the Internet and on-line computer 
services has increased the number of fraudulent bookings.
    Sabre, Preview Travel, and Biztravel.Com. contend that we should 
not prohibit such tying.
    In this proceeding we will consider a proposal that would prohibit 
such tying. In general, an airline should be able to determine how its 
services should be distributed and which firms should be able to sell 
its tickets. The rule proposed by the airline parties would be 
consistent with our decision to prohibit parity clauses, except as to 
airlines that owned or marketed a system, since parity clauses 
unreasonably restricted the ability of participating airlines to choose 
the level of service they would buy from each system. A rule barring 
tying could enable market forces to discipline the systems' terms for 
participation in the services they offer to on-line travel agencies and 
other Internet users, since airlines might be able to decline 
participation if the terms were unreasonable.
    We therefore ask the parties to comment further on whether we 
should prohibit the tying of participation in a system's ``brick-and-
mortar'' travel agency services with participation in its services to 
on-line travel agencies and other Internet sites selling airline 
tickets. In theory the proposal could help enable market forces to 
discipline the terms for airline participation in the systems, a 
desirable goal.
    The present record contains comments indicating that the rule may 
not be essential. Northwest was able to stop LowestFare.com from 
selling its tickets when Northwest concluded that LowestFare.com's 
website did not fairly present Northwest's fares. Delta Supp. Reply at 
13-15. Southwest, as noted, is keeping on-line agencies that use Sabre 
from selling tickets on Southwest. In addition, the airlines initially 
claimed that the proposed prohibition was needed due to the alleged 
need to prevent abusive bookings by some consumers. That concern 
appears to be moot. Sabre Supp. Comments at 26.
    Moreover, it is possible that such a rule could lead to 
anticompetitive results if misused by airlines with ties to other 
systems or on-line travel distributors. Some airlines, such as Orbitz'' 
owners, might decline to participate in the services offered Internet 
users by some systems in order to promote the competitive position of 
an affiliated system or on-line travel agency. The risk of similar 
types of conduct led us to adopt the mandatory participation rule and 
to allow systems to enforce parity clauses against airlines that owned 
or marketed a competing system. We are, of course, proposing to 
eliminate the mandatory participation rule, which suggests that the 
policies underlying that rule might not justify making exceptions in 
any rule barring the tying of participation in websites with 
participation in travel agency services. We ask the parties to comment 
on whether a rule prohibiting the tying of participation in travel 
agency services with participation in services for all website 
customers of a system should include an exception for airlines owning 
or marketing a competing website (other than an airline's own website).
    We also determined in our last overall rulemaking that system 
contracts requiring airlines to participate in a system on a worldwide 
basis were not unlawful. 57 FR 43819. We reasoned that such contract 
provisions might avoid disputes over a foreign airline's refusal to 
participate in a U.S. system in countries where that airline preferred 
to support the marketing efforts of an affiliated system. We 
conditioned our acceptance of such contract clauses on the system's 
compliance with the principles requiring unbiased displays and 
prohibiting discriminatory treatment of participating airlines, to the 
extent that U.S. and foreign rules do not regulate the system's 
operations.
    To enable us to decide whether we should prohibit tying, we ask the 
parties to comment on whether a prohibition against tying would be 
technologically feasible. We also ask the parties to comment on an 
individual airline's ability, if any, to block any Internet site or a 
``brick-and-mortar'' travel agency from selling its tickets, including 
whether the systems' contracts with participating airlines bar airlines 
from taking such action against a firm using the system and whether a 
travel agency can evade an airline's termination of the agency's 
authority to sell the airline's tickets. The parties should comment on 
whether the result would be different from their ability to terminate 
``brick-and-mortar'' agencies and, if different, the basis for the 
distinction sought by these airlines. We also invite the parties to 
raise any other issues relevant to our decision on this issue.

15. Harmonization With Foreign Rules

    The European Union, Canada, Australia, and other foreign countries 
have adopted their own CRS rules. In many respects, our rules are 
similar to the European and Canadian rules. For example, all of the 
rules prohibit display bias, though there are differences on the 
precise terms of the prohibition, and all bar systems from 
discriminating unreasonably between airline participants. However, 
there are also significant differences between our rules and those 
adopted, for example, by the European Union. The European rules, for 
example, require booking fees to be related to system costs and 
prescribe a display algorithm.
    The European Union, ECAC, and several foreign airlines ask us to 
harmonize our rules with the European rules.
    We recognize that a greater similarity between our rules and the 
European rules would provide benefits, especially by avoiding the need 
for the systems to follow potentially different business practices in 
different jurisdictions.
    We are unable, however, to make our rules substantially identical 
to the European rules. Congress has not given us open-ended authority 
to regulate the CRS business. Any rules adopted by us must be within 
our authority under section 411 to prohibit unfair and deceptive 
practices and unfair methods of competition by airlines and ticket 
agents. Our statute imposes procedural requirements on our enforcement 
of rules that may not apply in Europe. We must also follow 
Congressional and Executive mandates that we carefully consider the 
costs and benefits of our proposed rules.
    We wish to prevent conflicts with the rules of the European Union 
and other foreign governments, to use their rules as possible models 
for our rule revisions and to review their experience with those rules, 
and to give careful consideration to the comments submitted by foreign 
airlines and governments.

16. Retaliation Against Discrimination by Foreign Airlines and Systems

    In the past, as discussed above, we have seen cases where a foreign 
airline limited its participation in a U.S. system (or imposed 
restrictions on travel agencies using a U.S. system in its homeland) to 
deter travel agencies in its homeland from choosing a U.S. system 
instead of the system owned or

[[Page 69416]]

marketed by the foreign airline. In a few cases of such apparent 
discriminatory conduct, we proposed countermeasures to encourage the 
foreign airline to end its discriminatory conduct. We acted under the 
International Air Transportation Fair Competitive Practices Act, 
recodified as 49 U.S.C. 41310, which has authorized us to impose 
countermeasures when a foreign airline or other firm engages in 
discriminatory conduct against a U.S. airline. To further deter 
discriminatory treatment, our rules authorize a system to engage in 
discriminatory conduct against a foreign airline that operates a 
foreign system, if that system subjects a U.S. airline to 
discriminatory treatment and the system has given us and the foreign 
airline fourteen days advance notice of its plan to take 
countermeasures. Section 255.11(b).
    As noted, Congress amended 49 U.S.C. 41310 to give us broader 
authority to take countermeasures against an unjustifiably 
discriminatory or anticompetitive practice against a U.S. CRS or the 
imposition of unjustifiable restrictions on access by a U.S. system to 
a foreign market. This broadens the statute by authorizing us to take 
action when a U.S. system is subject to discriminatory conduct by a 
foreign firm.
    Sabre asked us to strengthen the rules by imposing an obligation on 
ourselves to impose mandatory sanctions if, at the end of an 
enforcement proceeding, we determined that a foreign system or foreign 
airline affiliated with a system had engaged in unjust discrimination 
against a U.S. system. Sabre Comments at 35-37.
    We are not proposing to adopt Sabre's requested rule. If we 
determine that a foreign airline has engaged in unlawful conduct, we 
will continue to take appropriate action when a U.S. airline or system 
is subject to discriminatory treatment by a foreign firm designed to 
prejudice the U.S. firm's ability to compete, whether or not we adopt 
Sabre's proposed rule.

17. Enforcement Mechanisms

    A person who believes that our rules are being violated may seek 
enforcement of the rules by filing a third-party enforcement complaint 
under 14 CFR Part 302, Subpart D. We may also initiate enforcement 
action when we have reason to believe that the rules are being 
violated. Any enforcement proceeding resulting in a Department decision 
would usually require a hearing before an administrative law judge. 
Parties may not use the courts to enforce our rules, although a court 
would follow our rules when applicable in contract cases and other 
proceedings involving a system.
    In our last rulemaking, we considered proposals to provide 
additional avenues for enforcement, including arbitration and requiring 
the systems' contracts with airlines and travel agencies to incorporate 
many rule provisions. We ultimately decided that these proposals were 
unnecessary or not likely to be beneficial overall. 57 FR 43829.
    A number of commenters complain in this proceeding that the rules' 
enforcement has not been effective. They assert that private parties 
have little ability to enforce the rules if we do not. Since the courts 
generally will not hear private suits to enforce the rules, a firm 
injured by a rule violation can only obtain relief if we take 
enforcement action against the offender. Airlines and travel agencies 
have allegedly had little success defending their rights in private 
lawsuits. Airline participants have complained in particular that they 
are unable to obtain refunds from the systems for booking fees charged 
for allegedly improper or abusive transactions by travel agents. See, 
e.g., Alaska Comments at 21-23; Aloha Comments at 9-10. The courts have 
also held that suits brought by travel agencies or airlines against a 
system under state law are generally preempted by federal statute. 
While parties may enforce their state law contract rights, they may not 
enforce non-contractual rights created by state law. See, e.g., Amadeus 
Petition at 8-9.
    Continental, Northwest, Aloha, Alaska, American Trans Air, ARTA, 
the Large Agency Coalition, and, as to fee disputes, Qantas contend 
that we should develop better enforcement procedures, for example, by 
giving parties the right to obtain arbitration of disputes. Northwest 
and Continental suggest that we should impose a ninety-day deadline for 
our action on petitions to change the CRS rules or enforcement 
complaints involving violations of those rules.
    Sabre, American, Galileo, and Amadeus oppose any change in 
enforcement mechanisms.
    We are not planning to propose the rules suggested by commenters 
for better enforcement of the rules. We retain discretion to pursue an 
enforcement policy that is appropriate in individual circumstances. We 
note that our Enforcement Office has added a significant number of 
attorneys and other staff members, and it will be prepared to 
vigorously pursue act on complaints of violations of the CRS rules and 
section 411 in the future.
    We also do not appear to have the authority to require arbitration 
of disputes over compliance with the rules. A statute cited by United, 
5 U.S.C. 572(a) and 575(a), seems to prohibit agencies from requiring 
parties to resolve disputes through arbitration unless all of the 
parties consent.
    We fully recognize the importance of enforcing our CRS rules, and 
intend to do so vigorously in the future. We will consider suggestions 
by the parties for additional enforcement mechanisms that may be within 
our authority.

18. Sunset Date for the Rules

    Our rules have a sunset date, originally December 31, 1997, to 
ensure that we would reexamine the need for the rules and their 
effectiveness. Section 255.12. We have not been able to complete our 
reexamination of the rules by the original sunset date and so have 
extended the rules to ensure that they would remain in effect while we 
conducted our reexamination. See 67 FR 7100 (February 15, 2002).
    Many of the parties urge us to establish a new sunset date, 
although they disagree over what the new date should be.
    We have tentatively decided not to propose a new sunset date for 
the rules at this time. Current options under consideration are to 
sunset the rules in March 20003, to establish a new sunset date, or to 
reexamine the rules when industry developments warrant doing so. We 
recognize that developments such as the recent changes in the systems' 
ownership and the rapid growth in the Internet's use for airline 
distribution may well require a reexamination of need for and 
effectiveness of the rules within a few years. As noted earlier, these 
changes and other changes in airline distribution may even eliminate 
the need for some or most of the CRS rules. We can also amend the rules 
in part if necessary, as we did after we completed our last major CRS 
rulemaking.
    We concur with the view that further consideration of the generic 
alternatives to traditional CRS regulation discussed above and the on-
going developments in airline distribution may warrant a review of the 
effectiveness of our traditional CRS regulation after the completion of 
this proceeding. We will be consulting with other agencies, including 
the Department of Justice and OMB, on how best to accomplish such a 
review. We actively encourage comments from the public on the scope of 
such a review and its timing.

19. Effective Date of the Rules

    Normally new rules take effect thirty days after their publication. 
Some commenters, however, may contend that

[[Page 69417]]

one or more provisions of our proposed CRS rules should take effect on 
a delayed schedule due to the expense or difficulty of compliance 
within thirty days of the rules' publication date. Commenters who 
believe that additional time would be needed for compliance with a 
proposal should so state in their comments and explain why. We are 
willing to consider proposals to phase in some rules, since several of 
our proposals may change the systems' expectations on the likely 
profitability of some of their subscriber contract practices, for 
example.

20. Proposed Revisions to the Department's Policy on Fare Advertising

    Section 411 prohibits unfair or deceptive practices in the sale of 
air transportation. To provide guidance on the meaning of this 
statutory prohibition, we have published a policy statement on fare 
advertisements, 14 CFR 399.84, that states that we will consider an 
advertisement by an airline or travel agency to be an unfair or 
deceptive practice if it states a price that is not the complete price 
that must be paid by the traveler for the air transportation.
    As we have interpreted the policy statement, section 399.84 
requires an airline or travel agency to include in any advertised or 
quoted fare any charge imposed by the airline, such as a fuel 
surcharge, and most governmental charges. See, e.g., Orders 2001-12-1 
(December 3, 2001) and 2001-5-32 (May 30, 2001) (consent orders based 
on failure to include fuel surcharges in fare amounts). The 
governmental charges that may be omitted from the fare amount are 
charges like passenger facilities charges and departure taxes that are 
not ad valorem in nature and are imposed on a per-passenger basis. Any 
advertisement must clearly specify such government charges so that the 
consumer can calculate the total amount to be paid for the 
transportation.
    We are proposing two amendments to this policy statement. The first 
revision would make it clear that each system has an obligation to 
ensure that its displays of fare information follow section 399.84's 
standards. Our second proposed revision would clarify the policy 
statement to allow travel agents to state service fees separately from 
the price of the air transportation, if they comply with conditions 
ensuring that their customers will understand their obligation to pay a 
fee for the travel agency service and will know the total price for the 
transportation, including any travel agency service fee. Any fare 
quotation must continue to include all charges attributable to the air 
transportation, including any airline fuel surcharges. Our proposals 
reflect the development of Internet booking sites created for consumer 
use.
(a) Accurate Display of Fare Information
    Our first proposed revision will make it clear that the policy 
statement covers the systems as well as airlines and travel agencies. 
We wish to extend the policy statement's reach to ensure that the fare 
displays often used by travel agents accurately set forth the total 
fare being charged by each airline.
    Travel agents often use system displays that rank airline flights 
by fares, beginning with the flight with the lowest fare. The fares 
listed in these displays have sometimes omitted government taxes and 
fees, passenger facility charges imposed by airports, and surcharges 
imposed by the airlines, such as fuel surcharges. Obviously a fare 
display that does not include items such as fuel surcharges would 
mislead consumers, since the display would suggest that some airlines 
are offering lower fares than other airlines when in fact the former 
may be offering higher fares. The displays thus deceive consumers and 
distort competition as well. Order 2002-3-12 (March 15, 2002) at 7.
    Our policy statement on fare advertisements expressly covers 
airlines and travel agents but by its terms may not apply to the 
systems' display of airline fares. We therefore propose to require the 
systems to include all charges in their displays of airline fares. 
Participating airlines, of course, have an obligation to provide 
information on their schedules and fares in a manner that enables the 
systems to comply with our rules on displays and the airlines' 
obligations under section 399.84
(b) Travel Agency Service Fees
    Our second proposal would modify the policy statement to set forth 
standards for the travel agencies' disclosure of their own service fees 
to their customers. We have applied the policy statement on fare 
advertising to prevent the separate listing of surcharges which confuse 
consumers, preclude them from making accurate fare comparisons before 
making ticket purchase decisions, and, arguably, constitute a form of 
bait-and-switch marketing tactics. The Enforcement Office has 
traditionally interpreted the policy statement as barring the separate 
listing of a travel agency's service fee and instead requiring the 
agency to include the fee in the fare amount quoted the customer.
    Our examination of the policy statement's application is 
appropriate given overall trends in the travel distribution business. 
Section 399.84 requires that an airline or agent of an airline must 
state the entire price that the customer must pay the agent or airline 
for air transportation. In recent years, as airlines have cut travel 
agent commissions, travel agencies have moved to a greater reliance on 
charging their customers fees for their services and expertise. There 
is also a trend toward more widespread use of Internet travel agencies. 
Like their off-line counterparts, some on-line agents have also begun 
charging service fees. Thus travel agency fees are far more prevalent 
today than they were when the Board adopted section 399.84 in 1984. We 
should therefore reevaluate our interpretation of what constitutes the 
``price for such air transportation'' in light of these changes.
    We recently addressed the policy statement's application to a 
travel agency service fee, because Orbitz wished to list its recently-
adopted service fee separately from the fare amount in its initial 
display of available airfares. We granted Orbitz a conditional 
exemption from the policy statement so that its initial display of 
available fares need not include Orbitz' planned $5 service fee. Our 
exemption order, Order 2001-12-7 (December 7, 2001), allows Orbitz to 
omit the fee from its first quotation of fares but requires Orbitz to 
include the amount of the fee whenever it presents an itinerary that 
can be purchased. The order imposed several other conditions on the 
exemption, including a requirement that Orbitz place a notice advising 
consumers of the fee just above its display of possible itineraries. 
The Enforcement Office thereafter stated that it would apply the Orbitz 
exemption order's standards to all Internet agencies. Order 2002-3-12 
at 1, citing Notice of the Office of Aviation Enforcement and 
Proceedings (December 19, 2001).
    Our exemption order stated that we would further consider what 
disclosures should be required for travel agency fees in a rulemaking. 
We are now asking all interested persons to comment on our proposal to 
amend the policy statement to require all travel agencies as an initial 
matter to state the fare and any travel agency fee separately, subject 
to certain conditions designed to protect consumers.
    Under our proposal, both on-line and off-line agents must fully 
disclose to the consumer the fare, the agency service fee, and the 
total price--and do so in a way that is useful and practical to the 
consumer--early in the transaction process. We tentatively conclude 
that consumers would benefit by requiring

[[Page 69418]]

separate listings of the amount of service fees being charged by all 
sellers of air transportation, as long as standards are in place to 
protect consumers from potential deception. We therefore propose to 
define the ``price for such air transportation'' in 14 CFR 399.84 to 
include all taxes, government and airport fees (including PFCs), and 
all other charges which in economic terms constitute a direct cost of 
the air transportation itself (including, but not limited to, fuel, 
security, and insurance charges). These charges, by definition and in 
practice, are unavoidable and the same no matter where the consumer 
actually purchases the ticket. We propose, however, to continue 
allowing the separate listing of certain governmental fees.
    We propose that the dollar amounts of fees levied by and for 
services provided by a travel agency or travel distribution 
organization must be listed separately from the total cost of the air 
transportation (as defined above). Our proposal includes conditions to 
protect consumers. First, the consumer must be provided with a total 
cost of the entire air ticket transaction. Furthermore, the separate 
agency service fees themselves may not be ad valorem in nature, since 
percentages are difficult for consumers to calculate and would 
seriously hinder price comparisons. In addition, we are imposing a 
limit on service fee amounts to ensure that they are not used merely to 
make the advertised fare seem lower. Service fees (including dollar 
amounts) must be prominently disclosed and be placed proximate to the 
advertised fare wherever they appear and service fees must be included 
in the total price displayed or quoted before the customer decides 
whether to purchase the ticket.
    Our proposal is consistent with the policy statement's purpose and 
the Orbitz exemption order. Service fees are distinguishable from the 
component costs of air transportation itself, including such fees as 
fuel and security surcharges that must be paid by travellers, no matter 
where they buy their tickets. We have repeatedly made it clear that 
such direct air transportation costs must be included in the fare 
quoted and that a change in that policy would not be appropriate or 
beneficial. A travel agency service fee, however, represents the cost 
of a separate service in a separate market. The consumer does not have 
the option of buying the ticket without the fuel surcharge, taxes, or 
the government security fee. The consumer does have the option of 
buying the ticket without the agency service fee (or with a different 
agency service fee) by making the purchase through a different channel. 
Consumers need this information to make informed choices both in the 
airfare market and in the agency service fee market.
    Our proposal should benefit consumers, since every travel agency, 
off-line or on-line, will be giving a consumer notice of the amount 
required by the airline for the purchase of a ticket and the amount of 
any travel agency service fee; the consumer will understand that he or 
she can book a seat for less money by buying the ticket directly from 
the airline or from another agency that charges no service fee. As we 
observed when we granted the exemption to Orbitz, consumers would 
likely benefit if a travel agency quoted the fare separately from any 
travel agency service fee. Order 2001-12-7 at 4.
    Competition among airlines as well as among travel distribution 
outlets is clearly in the interest of consumers. Separate disclosure of 
travel agency fees from the direct cost of the air transportation--
which usually does not vary depending on the outlet through which the 
consumer actually purchases an airline ticket--would arguably foster 
competition among airlines and among travel distribution firms by 
providing more transparent information to consumers.
    Our proposal also agrees with a recommendation made by Consumer 
Reports, which questioned the practice of travel agencies including 
their service fees in fare quotations. ``Is your travel agency playing 
`fare' '', Consumer Reports Travel Letter (June 2001). Consumer Reports 
contends that the separate disclosure of both the service fee and the 
fare is preferable to combining the two.
    We think our clarification should govern service fees charged by 
``brick-and-mortar'' travel agencies as well. Many of those agencies 
are now charging service fees. Our proposal would require them to state 
orally their service fees and the airfare and the total amount for the 
fare and fees. This should enable on-line and off-line travel agencies 
to operate under comparable rules, as requested by RADIUS, a large 
travel agency, in comments that it filed in the Orbitz exemption order 
docket.
    We ask the parties to comment on an alternative proposal as well: a 
policy allowing travel agencies to choose between listing their fees 
separately and including the fees in the price quoted for air 
transportation.

Regulatory Process Matters

Regulatory Assessment and Unfunded Mandates Reform Act Assessment

1. Unfunded Mandates Reform Act Assessment
    The Unfunded Mandates Reform Act of 1995, 2 U.S.C. 1531-1538, 
requires Federal agencies to prepare a written assessment of the costs, 
benefits, and other effects of proposed or final rules that include a 
Federal mandate likely to result in the expenditures by State, local, 
or tribal governments, in the aggregate, or by the private sector, of 
more than $100 million annually.
    The legal authority for the proposed rule is provided by 49 U.S.C. 
41712, which authorizes the Department to prohibit unfair or deceptive 
practices and unfair methods of competition in air transportation or 
the sale of air transportation. The Department is authorized by 49 
U.S.C. 40113(a) to implement that authority by adopting rules defining 
and prohibiting unfair or deceptive practices and unfair methods of 
competition.
    The proposed rule would not result in expenditures by State, local, 
or tribal governments because no such government operates a system or 
airline subject to the proposed regulation. The proposed rule may cost 
the private sector more than $100 million in the first year of 
effectiveness due to the need for systems, airlines, and potentially 
travel agencies to modify their operations to conform to the rule. The 
Regulatory Assessment below provides detailed discussion of the costs 
and benefits for the proposed rule. The Regulatory Assessment also 
presents alternatives to the proposed rule.
2. Introduction to Regulatory Assessment
    Executive Order 12866, Regulatory Planning and Review (58 FR 51735, 
October 4, 1993), defines a significant regulatory action as one that 
is likely to result in a rule that may have an annual effect on the 
economy of $100 million or more or adversely affect, in a material way, 
the economy, a sector of the economy, productivity, competition, jobs, 
the environment, public health or safety, or State, local, or tribal 
governments or communities. Regulatory actions are also considered 
significant if they are likely to create a serious inconsistency or 
interfere with the actions taken or planned by another agency or if 
they materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs or the rights and obligations of the 
recipients of such programs.

[[Page 69419]]

    The Department's Regulatory Policies and Procedures (44 FR 11034, 
February 26, 1979) outline similar definitions and requirements with 
the goal of simplifying and improving the quality of the Department's 
regulatory process.
    The Department has determined that these proposed regulations are 
an economically significant regulatory action under the Executive Order 
and the Department's Regulatory Policies and Procedures, since the 
proposed rules could conceivably have an annual impact on the economy 
of $100 million or more and because of the amount of public interest 
they are likely to generate. This rule proposal has been reviewed by 
the Office of Management and Budget under the Executive Order.
    This preliminary regulatory impact assessment seeks to assess the 
potential economic and competitive consequences of our proposed rules 
on computer reservations systems, airlines, and travel agencies and to 
evaluate the benefits to the industry and the travelling public.
    As background, the Civil Aeronautics Board adopted rules to govern 
airline-owned CRSs that became effective on November 14, 1984. The 
Board's rules barred systems from biasing their primary displays, 
charging airlines discriminatory booking fees, using subscriber 
contracts with a term of more than five years, and imposing certain 
types of contract restrictions on travel agencies that denied them a 
reasonable opportunity to use multiple systems or switch systems. The 
Board rules also required each system to make available to any 
participating airline on non-discriminatory terms any data that the 
system chose to generate from the bookings for domestic travel made 
through the system.
    After the Board's sunset on December 31, 1984, we assumed the 
Board's responsibilities for airline regulation, including its 
regulation of CRSs. We subsequently conducted a study of the CRS 
business, a study of airline marketing practices, and a rulemaking 
proceeding to reexamine the rules to see whether they remained 
necessary and were effective. We issued a final rule on September 22, 
1992, that maintained the Board's rules and strengthened them in some 
respects. We decided the rules were necessary to preserve airline 
competition and to prevent consumers from receiving incomplete and 
biased information on airline services.
    Among other things, our revised rules require each system to 
provide non-owner airlines with information and booking capabilities as 
accurate and reliable as those provided the owner airline. We gave each 
travel agency the right to use its own equipment in conjunction with a 
system and to access other systems and databases from the same 
terminals used to access its primary system, unless the agency uses 
terminals provided by that system. Our current rules also require each 
airline with a significant CRS ownership interest to participate in 
other systems at as high a level of functionality as it does in its own 
system, if the terms for participation are commercially reasonable; 
impose requirements ensuring that the functionality provided for 
participating airlines was generally equivalent to the functionality 
provided the owner airline; and strengthen the rules on subscriber 
contracts.
    In two later proceedings, we amended the rules to strengthen the 
rules against display bias and to prohibit systems from enforcing 
parity clauses against airlines that do not own or market a competing 
system (a parity clause requires the airline to participate in the 
system at at least as high a level as it did in any other system).
    The rules govern systems that are owned or marketed by one or more 
airlines. All four systems now operating in the United States have been 
owned or marketed by one or more airlines since the Board originally 
adopted the rules (the only independent system was acquired by one of 
the airline systems before we conducted our last overall rulemaking). 
The systems accordingly have had to operate in compliance with the 
rules' requirements for some time.
    This notice of proposed rulemaking proposes to adopt the current 
rules with several changes designed to strengthen them. In discussing 
the benefits and costs of our proposed rule changes, we will generally 
focus on the competitive aspects of issues that our proposed rule 
changes are intended to address. Ideally, in a perfectly competitive 
marketplace, the various components of the airline distribution network 
would reflect a balance of market power to the extent that no 
individual component could exert undue influence or exact monopoly 
rents in any aspect of the distribution system. As we know from our 
past and current examinations, however, there have been competitive 
dislocations because of the misuse of market power. Our proposed rules 
are meant to address such problems, to the extent that they continue to 
exist.
    This preliminary regulatory impact assessment discusses the likely 
costs and benefits of our proposed rules. However, we do not have 
information of the kind and detail that would enable us to quantify the 
proposals' benefits to air travellers, airlines, and travel agencies, 
or to estimate the costs of complying with our proposed rules for the 
systems, airlines and travel agencies with accuracy. We are also not 
able to estimate the long-term consequences of our rules on CRS 
competition, including incentives for technological innovation and 
improved productivity. The overriding benefit of greater competition 
and higher productivity in the air travel industry is, of course, its 
downward pressure on air fares and the benefits consumers enjoy as a 
result.
    This preliminary analysis is necessarily relying on a qualitative 
assessment of the costs and benefits of the rules. We specifically 
request that interested parties provide us with detailed information 
about the possible consequences of our proposed rules, especially their 
benefits, costs, and economic and competitive impacts.
3. The Systems' Market Power
    We are proposing to readopt the rules with revisions, because we 
have tentatively found that rules are necessary to keep systems and 
airlines that own or market systems from engaging in conduct that would 
reduce competition in the airline and airline distribution industries, 
increase airline costs and thus the fares charged airline travellers, 
and lead to travel agents and their customers receiving incomplete or 
biased information on airline service options.
    This notice of proposed rulemaking explains our tentative view that 
the systems might engage in such conduct if not checked by regulations. 
As discussed in detail earlier, the systems appear to have market power 
against airlines, because travel agencies sell seventy percent of all 
airline tickets, travel agents rely on a system for booking over ninety 
percent of their domestic tickets and eighty percent of their 
international tickets, and because most travel agency offices use one 
system for all or almost all of their bookings.
    Since relatively few travel agency offices make extensive use of 
more than one system, most airlines have had to participate in every 
system in order to make their services readily saleable by the travel 
agents using each system. No airline can afford to lose access to a 
significant number of distribution outlets, as explained elsewhere in 
this notice. As a result, competition and market forces have not 
disciplined the price or quality of services offered airline 
participants. The systems accordingly have established booking fees for 
airlines that exceed their costs of providing CRS services to the 
airlines. The systems in contrast compete vigorously for travel agency

[[Page 69420]]

subscribers (with the exception of certain areas dominated by an 
airline affiliated with a system), and travel agencies often receive 
CRS services at little or no cost. Some travel agencies obtain large 
cash bonuses for choosing one system rather than another.
    The Internet's growing importance in airline distribution does not 
seem to have significantly eroded each system's market power thus far. 
Most airlines continue to obtain a large majority of their revenues 
from bookings made through travel agencies using a system, both on-line 
travel agencies and ``brick-and-mortar'' agencies. As discussed earlier 
in this notice, many consumers will continue to prefer using travel 
agents, and airlines will have a limited ability to shift consumers 
into on-line bookings.
    The systems' market power has been reflected in their fees and 
other terms for airline participation. The fees paid by airlines and 
other travel suppliers provide about ninety percent of the systems' 
revenues. Travel agencies, the other main user of system services, 
produce no more than ten percent of the systems' revenues. The average 
booking fee in 2000 was $3.54 per segment for airlines using the 
highest level of CRS service. Booking fees equal about two percent of 
the revenue obtained by airlines through the systems. This is a 
significant level of expense in an industry that historically has had 
thin margins of profitability as a percentage of sales.
    Another example of the systems' market power was their recently-
discontinued practice of charging booking fees for passive 
transactions. Travel agents often make passive bookings in order to 
properly serve their customers, but such bookings usually do not 
directly benefit the airlines, which nonetheless are charged fees for 
them. In addition, the record indicates that some travel agents use the 
passive booking capability to make unnecessary bookings in order to 
meet the minimum-booking quota established under their productivity 
pricing formulas. The systems have not taken effective action in 
response to complaints by participating airlines about abusive 
transactions. The annual fee liability for passive bookings and other 
bookings considered unnecessary by participating airlines amounted to 
$5 million to $10 million for some airlines, and such bookings 
accounted for eight to ten percent of their total fees. Aloha December 
23, 1997 Supp. Comments at 2; Alitalia Comments at 4; Qantas Comments 
at 4. The systems stopped charging participating airlines for passive 
bookings after we began this proceeding, but their action does not 
indicate that participating airlines have any bargaining leverage over 
the price and terms for participation. Furthermore, because the systems 
that stopped charging airlines fees for passive bookings raised their 
other fees, they apparently suffered no loss in revenues.
    An additional instance of the systems' use of their market power 
was the adoption and enforcement of parity clauses by three of the 
systems before we banned that practice. Parity clauses required a 
participating airline to participate in a system at at least as high a 
level as they participated in any other system, whether or not the 
airline considered the terms and quality of that system's functionality 
of value. When we were considering our proposal to prohibit parity 
clauses, Alaska and Midwest Express estimated that compliance with 
Sabre's demands would increase their CRS costs by about ten percent. We 
adopted a rule barring systems from enforcing such clauses against 
airlines that do not own or market a competing system.
    System actions like this that increase airline costs over time will 
lead to higher fares for consumers.
4. Proposed Rules
    We will broadly discuss the potential benefits and costs of the 
major elements of our proposed rules, especially from the perspective 
of their potential to enhance competition or to remove barriers to 
competition. One of the main objectives of our regulatory policy is to 
promote consumer welfare by reducing the cost of airline transportation 
by proposing and adopting rules that will result in more efficient and 
competitive airline, CRS, and travel agency industries. We find it 
preferable to propose and adopt rules that rely upon marketplace forces 
to ensure and invigorate competition, discipline competitive problems, 
and inspire technological innovations rather than rules that require 
direct, detailed, and burdensome oversight by the Department. We hope 
to promote consumer benefits while imposing few, if any, additional 
costs on those industries. We are also inviting comments on some 
proposals that would eliminate such regulatory requirements on the 
ground that such action would promote the operation of market forces in 
the CRS business. Preliminarily, we believe that it is possible that 
our proposed rules may raise costs or lower revenues in varying degrees 
for some firms in the air travel distribution industry. However, we 
believe that our overall efforts to promote a more competitive industry 
will result in greater efficiency and substantial benefits to the 
traveling public.
    The following discussion describes our current beliefs about the 
desirability of continuing the CRS rules and their applicability to 
airline and non-airline systems, the use of third-party hardware and 
software by travel agencies and their ability to use one terminal to 
access several systems and databases, the mandatory participation 
requirement of the current rules, display bias, booking fees, the 
availability of marketing and booking data information, and travel 
agency contracts. To the extent that we are proposing to readopt 
existing rules, we will partly rely on the findings and analysis made 
in our last review of the rules unless we have updated or modified them 
in this notice. The body of the notice sets forth in detail the basis 
for our proposed rules. Our intent here is to focus generally on the 
impact on competition.
(a) Continuing Need for the CRS Rules and Their Applicability
    The Department is proposing to readopt the CRS rules with some 
important modifications. Two such proposed modifications are the 
elimination of the mandatory participation requirement and the 
prohibition against discriminatory booking fees. Despite changes in CRS 
ownership and the growing use of the Internet as a distribution tool, 
the structural and competitive conditions of the CRS industry that 
prompted the Department to readopt regulations seem to continue to 
exist today. Neither the Internet nor other developments in the airline 
and airline distribution industries have substantially changed those 
conditions. On-going developments in airline distribution, however, may 
make the rules largely unnecessary in the future.
    Without the rules, we tentatively believe that the systems would 
have the power and incentive to distort airline competition, to provide 
inaccurate or misleading information to consumers, and to charge 
discriminatory fees, as they did prior to the implementation of the 
current rules. The systems would also engage in contract practices and 
other actions that would restrict or eliminate the ability of each 
travel agency to make significant use of any alternative to the 
principal CRS used by that agency. Alternatives could include a second 
system, direct links to airline internal reservations systems, and the 
Internet. Thus, we believe that

[[Page 69421]]

continued regulation of the CRS industry may be necessary.
    A related issue is whether the CRS rules should govern the 
practices of reservations systems that are not owned or controlled by 
airlines. In this regard, we are proposing to apply the CRS rules to 
these non-airline systems as well as to airline systems. As with the 
airline systems, the non-airline systems apparently have market power 
over airlines. A non-airline system could use its power to distort 
airline competition or mislead consumers, and such a system is as 
likely as the airline systems to engage in practices that would 
unreasonably restrict the ability of airlines and travel agencies to 
use alternatives to the systems, thereby increasing airline costs (and 
thus the fares paid by consumers).
    Our proposal to readopt some of the existing rules should not 
generally impose additional burdens on the systems, since they have 
been subject to the rules since the Board first promulgated them. Our 
proposed elimination of the mandatory participation rule and 
modification of the rule barring discriminatory booking fees should 
reduce regulatory burdens for the industry. Since the systems have 
already taken steps to comply with them, the other rules generally 
should not impose additional costs on the systems. We believe that our 
modifications should not impose substantial costs on the systems. The 
systems would have to revise their subscriber contract practices and 
pricing policies, however. If our proposed revisions lead to greater 
competition for the systems, the systems' revenues from participating 
airlines and other travel suppliers could decline. That impact would be 
offset by lower costs and greater efficiencies for airlines and travel 
agencies.
    Some commenters have maintained that, notwithstanding the 
relatively minor costs associated with possible incremental changes in 
the current rules, the existing rules do involve significant costs. 
They maintain that the existing rules contribute directly to the high 
costs of airline distribution (in the form of booking fees) by 
insulating the systems from competitive market forces. In today's 
market environment, the requirements for mandatory participation and 
non-discriminatory booking fees have allegedly transformed a purported 
pro-competitive shield into an anti-competitive one because the rules 
insulate the systems from having to negotiate with airlines about the 
terms for participation in a system.
    We do not believe that the rules increased the costs of airline 
distribution. In our view the systems' market power stemmed from the 
structure of the airline and airline distribution businesses, not the 
consequences of our rules. We invite the parties, however, to comment 
on this issue. We are also proposing to end the mandatory participation 
requirement and the prohibition against discriminatory booking fees, 
since doing so may enable airlines to obtain better terms for system 
participation. These changes may give airlines additional flexibility 
and some bargaining leverage that could be used to obtain more 
favorable prices and improved service.
(b) The Use of Third-Party Hardware and Software
    Most travel agents use personal computers to obtain airline 
information and make reservations. The systems have commonly provided 
equipment to their travel agency subscribers, often at little or no 
cost. Travel agents could easily access any system or travel database 
or the information and booking services available through the Internet 
from the same computer.
    We adopted a rule giving travel agencies the right to use third-
party hardware and software and to access any system or database from 
their equipment unless the equipment was owned by one of the systems. 
This rule kept systems from denying their subscribers the ability to 
use the equipment to access another system or database. Many travel 
agencies have taken advantage of that rule. In 1999 thirty-six percent 
of all travel agencies used their own terminals, and about thirty 
percent of all travel agents used their computer terminals to access 
the Internet as well as a system.
    The systems, however, have commonly offered travel agencies 
contracts for CRS services with equipment at prices comparable to their 
contracts for CRS services without equipment. This practice has made it 
uneconomical for many agencies to purchase their own equipment. Travel 
agencies that chose the system's equipment are usually denied 
permission to access another system or airline database from that 
equipment.
    We are proposing to readopt the existing rule on third-party 
hardware and software and to eliminate the provision that allows a 
system to block travel agencies from using equipment owned by the 
system to access other systems and databases.
    This proposal (and the related proposals on subscriber contracts) 
should decrease airline costs, since they would make it practicable for 
airlines to persuade travel agents to book airline seats by a direct 
link with the airline's internal reservations system or through an 
airline website. The airlines' ability to bypass the systems would 
create competitive discipline for the systems' prices and terms for 
airline participation. The proposal would also give travel agencies 
more flexibility in using alternatives to the systems and make them 
better able to serve their customers. The travel agencies' greater 
ability to use alternatives to the systems should foster technological 
innovation, for other firms may develop alternative services that would 
duplicate many of the functions now provided travel agents by the 
systems.
    The proposal would not keep systems from charging travel agencies 
for the use of their equipment. The proposal, if effective, would lead 
to lower revenues for the systems, if travel agents bypass the systems 
for bookings, since that would weaken the systems' ability to charge 
supracompetitive booking fees. Travel agencies obtaining their 
equipment from a system, however, might face higher charges for the 
equipment.
(c) The Mandatory Participation Rule
    Our mandatory participation rule, section 255.7, has required each 
airline with an ownership interest of five percent or more in a system 
(a ``system owner'') to participate in competing systems at the same 
level at which it participates in its own system, if the other systems' 
terms for participation at that level are commercially reasonable. We 
adopted the rule because some U.S. airlines with an ownership interest 
in one system limited their participation in competing systems, or 
denied those systems complete information on their fares and services, 
in order to encourage travel agencies in their hub cities to use their 
own system. U.S. systems competing overseas at times encountered 
similar discriminatory treatment from foreign airlines; when such an 
airline refused to participate in a U.S. system (or participated at a 
low level or denied important information on fares and services), the 
U.S. system found it almost impossible to obtain subscribers in that 
airline's home country.
    We are proposing not to readopt this rule. The mandatory 
participation rule may impose significant costs on some airlines, since 
it requires them to participate in competing systems when they may 
prefer for legitimate business reasons not to participate. We are 
uncertain whether the rule imposes significant costs. The airlines that 
own or market a system (with one exception) already participate in 
competing

[[Page 69422]]

systems at a high level. However, the major airlines assert that they 
would obtain some bargaining leverage against the systems if they were 
not restricted by the mandatory participation rule and the rules did 
not bar discriminatory booking fees.
(d) Bias
    The systems' display of airline flights and fares has a profound 
effect on airline competition. Travel agents tend to book one of the 
first flights displayed on the screen by a system. Changes in CRS 
display algorithms can increase or decrease an airline's revenues by 
millions of dollars annually. The systems' conduct demonstrate that a 
flight's position on a CRS display continues to affect how often travel 
agents will book customers on that flight. For example, in our last 
display bias rulemaking, Alaska alleged that Galileo was using a 
display algorithm designed to benefit its major owner, United, and that 
the resultant displays would reduce Alaska's annual revenues by about 
$15 million. Midwest Express estimated its annual revenue loss from the 
display at several million dollars.
    We propose to maintain the rule against display bias to give 
airlines an opportunity to compete on the merits. This would also 
enable travel agents to operate efficiently and provide good service to 
their customers.
(e) Booking Fees
    Our current rules prohibit each system from charging unreasonably 
discriminatory booking fees. The booking fees charged airlines for CRS 
participation have long been a source of airline complaints. In our 
past analyses of the industry, we have found that the systems have the 
market power to charge participating airlines supracompetitive booking 
fees, since they are not disciplined by competition.
    We still believe that high booking fees are probably imposing 
burdensome costs that most airlines have not been able to avoid and 
that are likely to increase the fares paid by consumers. We propose to 
eliminate the prohibition against discriminatory fees but not to 
attempt to regulate the level of fees. A rule requiring systems to 
charge only reasonable fees, or fees related to costs, would be costly 
to administer and difficult to apply. Determining whether a system's 
fees were reasonable, or justified by system costs, would demand, among 
other things, an allocation of the system's costs between three users: 
Airlines and other travel suppliers participating in the system, 
airlines using the system as their internal reservations system, and 
travel agency subscribers. Moreover, each system offers different 
levels of participation and features, each with its own price. We are 
therefore focusing on rule proposals that would give airlines some 
opportunity to bypass the systems and to avoid participation in one or 
more systems. Our proposed ending of the mandatory participation 
requirement and the prohibition against discriminatory booking fees may 
enable some airlines at least to bargain for better terms for system 
participation. These changes may also enable the systems to offer 
better terms to airlines that might otherwise choose not to participate 
(or choose to participate only at a low level), like some new-entrant 
airlines.
(f) Marketing and Booking Data
    Section 255.10 of our rules requires each system to make available 
to all participating airlines on non-discriminatory terms any marketing 
and booking data that the system chooses to generate from its bookings. 
In practice, each system sells detailed booking and marketing data that 
show how many bookings are made by each travel agency on each airline 
in each markets and on each flight and that show the fare basis used 
for each booking. The systems make the data available almost on a 
realtime basis.
    Due to the cost of buying and processing the data (often called 
MIDT tapes), most of the airlines buying the data are the larger 
airlines. They use the data for marketing research and route 
development purposes and for implementing their override commission and 
corporate discount fare programs. They also use the data to deter 
travel agencies from booking competitors. In addition, each airline's 
knowledge of the number of bookings and the fare bases for those 
bookings likely dampens fare competition. In an oligopolistic industry 
like the airline industry, fare competition often depends on firms in 
the industry not knowing the prices being charged by their competitors.
    We are proposing to restrict the amount of detailed data that can 
be bought by airlines. We are considering, among other things, whether 
we should bar airlines from obtaining information on the bookings made 
by individual travel agencies and information on bookings for airlines 
that have not consented to the release of such information. Our goal is 
to allow the systems to sell as much data as possible while minimizing 
the harm that might be caused airline competition, because we recognize 
as well that the airlines purchasing the data have made significant 
investments in developing the ability to process and analyze the 
marketing and booking information, that the systems have made 
significant investments of their own, and that the systems obtain large 
amounts of revenue from selling the data.
    Our proposals would benefit consumers by increasing airline 
competition. Restricting the data available to airlines would benefit 
travel agencies by enabling them to book customers on smaller airlines 
without fear that the dominant airline will find out.
    The proposals could reduce the systems' revenues, since they would 
not be able to sell as much data as before, and the airlines buying the 
data may be unwilling to pay as much since an airline dominating a 
metropolitan area would no longer be able to use the data to compel 
travel agencies in that city to reduce or end its bookings on competing 
airlines.
(g) Subscriber Contracts and Productivity Pricing
    Our current rules seek to give travel agencies a reasonable 
opportunity to switch systems or use multiple systems. The rules 
therefore prohibit certain types of travel agency contract clauses that 
unreasonably restrict the use of alternative systems. For example, the 
rules prohibit systems from treating an agency's failure to meet 
minimum booking quotas as a breach of contract, since such ``minimum 
use'' clauses keep travel agencies from using more than one system. Our 
current proposals seek to strengthen those rules in several respects.
    We are asking the parties to comment on proposals to shorten the 
maximum permissible term of subscriber contracts. The rules allow 
systems to offer travel agencies five-year contracts as long as the 
agencies are also offered contracts with a term of no more than three 
years. In practice, the systems typically made the three-year contract 
offers unattractive in order to force travel agencies to choose the 
five-year contract. Some travel agencies nonetheless have three-year 
contracts for system services, and more recently systems have been 
offering the smaller travel agencies (but not larger travel agencies) 
the option of choosing contracts with shorter terms and no minimum 
booking requirements.
    The long-term subscriber contracts handicap travel agencies, 
because they cannot switch to another system if the system that they 
are currently using lowers the quality of its service. Long-term 
contracts may additionally prevent travel agencies from keeping up with

[[Page 69423]]

technological developments. The long-term contracts would not deny 
subscribers flexibility in responding to technological developments and 
changes in service quality if they did not deter subscribers from 
making significant use of more than one system. The contracts' damages 
clauses, which we are not proposing to regulate, typically require a 
travel agency to pay substantial damages if it terminates the contract 
before the end of its term. Long-term contracts can be beneficial 
insofar as they give the parties some assurance of stability in the 
contractual relationship, but the systems' contracts with travel 
agencies seemingly give subscribers little protection against changes 
in price and quality of service. We are therefore requesting the 
parties to comment on whether the rules should fix the maximum contract 
term at three years or adopt the European rule allowing subscribers to 
terminate a contract on several months notice after the contract has 
been in effect for one year.
    We are also proposing to restrict or prohibit the systems' use of 
productivity pricing, a pricing structure that gives travel agencies 
CRS services at discounted rates when they meet a monthly minimum 
booking quota, and similar provisions that effectively deter travel 
agencies from using alternative systems and databases. In our last 
rulemaking we determined to allow the systems to use productivity 
pricing, unlike minimum use clauses, because productivity pricing 
appeared to be a rational mechanism for encouraging travel agents to 
use equipment provided by a system more effectively. Experience has 
shown that the systems may be using productivity pricing as a tool to 
keep travel agencies from bypassing their principal system for any 
significant number of bookings.
    Insofar as productivity pricing deters subscribers from using 
alternatives to their principal system, it would reinforce the systems' 
existing market power against the airlines. It would thereby enable the 
systems to continue imposing supracompetitive booking fees on airlines, 
which leads to higher airfares. Productivity pricing would similarly 
discourage technological innovation. It would make travel agency 
operations less responsive to consumer needs and undercut airline 
competition, because it would keep travel agents from using alternative 
sources of airline information and booking capabilities, such as 
airline websites, that might provide better fares for agency customers.
    The proposed rule could reduce the systems' marketing costs. The 
systems' competition for subscribers causes them to offer travel 
agencies CRS services at little or no cost, and they offer some 
agencies large cash bonuses in the expectation of capturing the lion's 
share of the agency's bookings. The systems can afford these incentives 
because they are able to charge supracompetitive booking fees to 
airlines and other travel suppliers. The proposal could also lead to 
lower airline costs by enabling airlines and travel agencies to bypass 
the systems, a step which would create competitive discipline for 
booking fees. Ending productivity pricing would, however, reduce the 
revenues of many travel agencies, especially the larger travel 
agencies, although at least one travel agency group supports proposals 
for restricting (but not prohibiting) productivity pricing.
(h) On-Line Distribution Systems
    We are not proposing to adopt rules regulating distribution systems 
that utilize the Internet, although we propose to clarify the 
application of our full-fare advertising policy insofar as it involves 
the systems' display of airfares and the listing by travel agencies of 
their service fees separately from the airfare.
    Consumers are increasingly using the Internet for obtaining 
information on airline services and other travel information and for 
buying airline tickets. On-line bookings are significantly less costly 
for airlines, and many consumers see the Internet as the most efficient 
and convenient way to investigate airline services and to make 
bookings. Consumers can use airline websites and on-line travel 
agencies.
    The parties seeking rules that would regulate airline distribution 
over the Internet have focused on two issues: The potential for bias in 
the displays offered by on-line travel agencies and the airlines' 
alleged discrimination in favor of Orbitz, the on-line travel agency 
created by five of the largest airlines, and against the other on-line 
travel agencies. We have tentatively concluded that it would be 
premature to adopt rules on these issues. If on-line travel agencies 
engage in conduct that would deceive consumers, we can and will use our 
enforcement authority under section 411 to stop any such practices. We 
have already done so with respect to certain displays of fares by 
airline and on-line travel agency websites. We are similarly 
investigating Orbitz to see whether its operations involve potential 
violations of section 411. If its operations appear to be unlawful, we 
have the authority to address those issues.
5. Preliminary Summary of the Rules' Costs and Benefits
    Our rules should make the airline and CRS businesses more 
competitive. The traveling public will be the ultimate beneficiary of 
our proposed rules.
    These issues are complex in their potential competitive effects and 
their likely role as incentives and disincentives. Furthermore, they 
are so closely tied together that a change designed to correct a 
problem in one segment of the industry might create a problem in 
another segment. In some instances, the cost impact might be short-term 
but the benefits might be realized only over the long run, especially 
if our rule proposals would result in a more competitive and more 
efficient distribution system. We therefore believe that our proposals 
would lead to a more efficient airline distribution system, lower costs 
for airlines, and greater flexibility for most travel agencies. We ask 
the parties to provide additional information on the costs and benefits 
of our proposals.
    As discussed in the notice of proposed rulemaking, we have 
considered alternatives to our proposed rules. In general, we have 
concluded that more extensive regulation would not provide benefits 
outweighing its costs and that it would unduly interfere with the 
flexibility and efficiency of the systems, travel agencies, and 
airlines. Less extensive regulation, on the other hand, would tend to 
leave the systems' market power in place, thereby allowing the systems 
to continue to operate free of market discipline with respect to the 
services provided airlines.

Initial Regulatory Flexibility Statement

    The Regulatory Flexibility Act of 1980, 5 U.S.C. 601 et seq., was 
enacted by Congress to ensure that small entities are not unnecessarily 
and disproportionately burdened by government regulations. The act 
requires agencies to review proposed regulations that may have a 
significant economic impact on a substantial number of small entities. 
For purposes of this rule, small entities include smaller U.S. and 
foreign airlines and smaller travel agencies. This notice of proposed 
rulemaking sets forth the reasons for our rule proposals and their 
objectives and legal basis.
    Our proposed rules would have a significant economic impact on a 
substantial number of small business entities. In particular, the rules 
would affect travel agencies and air carriers, including regional air 
carriers. The proposal to give travel agencies a greater ability to use 
third-party hardware and

[[Page 69424]]

software and to use a CRS terminal to access other databases would 
benefit small business entities. To the extent that airlines can 
operate more efficiently and reduce their costs, the rules would also 
affect all small entities that purchase airline tickets, since airline 
fares may be somewhat lower than they would otherwise be, although the 
difference may be small.
    The travel agency industry is relatively unconcentrated, although 
the larger agencies have been increasing their market share. The 
industry, however, remains very competitive.
    Our proposed rules should increase the efficiency of the travel 
agency industry. For example, agencies would have a greater ability to 
use multiple systems and databases. Travel agencies should be able to 
obtain better information and booking capabilities on carriers than is 
possible using a single system. New firms may enter the business of 
providing information and transaction capabilities on airline services.
    The proposal to eliminate certain restrictive subscriber contract 
provisions--productivity pricing provisions and five-year contracts--
would benefit travel agencies by giving them more flexibility in 
switching systems and in using multiple systems. As a result, there 
should be increased competition among the systems for agency 
subscribers. Since the travel agency industry is so competitive, most 
of the benefit of improved CRS pricing and services would be passed on 
to agency customers.
    Our proposed rule blocking airlines from obtaining marketing and 
booking information disclosing bookings by specific travel agencies 
would be consistent with the agencies' wish for confidential treatment 
of the data.
    We have not adopted several proposals that could raise travel 
agency costs. If we had adopted a rule limiting the booking fees paid 
by airlines, the vendors would have increased subscriber charges in 
order to offset the lower revenues from air carriers. We are not 
proposing to limit the level of booking fees, however.
    Our proposals to prohibit or restrict productivity pricing may lead 
to increased CRS costs for some travel agencies, but the affected 
travel agencies would be the larger agencies.
    The existing rules affect the operations of smaller travel 
agencies, primarily by prohibiting certain CRS practices that could 
unreasonably restrict the travel agencies' ability to use more than one 
system or to switch systems. The rules prohibit CRS contracts that have 
a term longer than five years, give travel agencies the right to use 
third-party hardware and software, and prohibit certain types of 
contract clauses, such as minimum use and parity clauses, that restrict 
an agency's ability to use multiple systems. By prohibiting display 
bias based on carrier identity, the rules also enable travel agencies 
to obtain more useful displays of airline services.
    Our new rule proposals should benefit most airlines. Our rule 
giving travel agencies the right to access other databases from agency-
owned CRS terminals will enable carriers to establish direct links 
between their internal systems and agencies, thereby making it possible 
for them to obtain some bookings from agencies without paying booking 
fees. Our proposal to restrict the kind of marketing and booking data 
provided by the systems would protect smaller airlines against efforts 
by large airlines to pressure travel agencies into ending their 
bookings with competing airlines.
    Continuing the rules would protect smaller non-owner airlines from 
several potential system practices that could injure their ability to 
operate profitably and compete successfully. No smaller airline has a 
CRS ownership interest. Market forces do not significantly influence 
the systems' treatment of airline participants. As a result, if there 
were no rules, the airlines affiliated with the systems could use them 
to prejudice the competitive position of other airlines. The rules 
provide important protection to smaller airlines. For example, by 
prohibiting systems from ranking and editing displays of airline 
services on the basis of carrier identity, they limit the ability of 
each system to bias its displays in favor of its owner airlines and 
against other airlines. The rules, on the other hand, impose no 
significant costs on smaller airlines.
    Another group of beneficiaries of our proposed rules would be firms 
providing services and databases that compete with those offered by the 
systems. Many of these firms are small business entities. Our proposed 
rules would increase the subscribers' ability to access other databases 
and give firms providing such information and transaction capabilities 
a much greater opportunity to market their services.
    Our proposed rule contains no direct reporting, record-keeping, or 
other compliance requirements that would affect small entities. There 
are no other federal rules that duplicate, overlap, or conflict with 
our proposed rules.
    Interested persons may address our tentative conclusions under the 
Regulatory Flexibility Act in their comments submitted in response to 
this notice of proposed rulemaking.

Assistance for Small Entities

    Under section 213(a) of the Small Business Regulatory Enforcement 
Fairness Act of 1996, Public Law 104-121, we want to assist small 
entities in understanding the proposed rule so that they can better 
evaluate its effects on them and participate in the rulemaking. If the 
rule would affect your small business, organization, or governmental 
jurisdiction and you have questions concerning its provisions or 
options for compliance, please consult Thomas Ray at (202) 366-4731.

Paperwork Reduction Act

    The proposed rules contain no collection-of-information 
requirements subject to the Paperwork Reduction Act, Public Law 96-511, 
44 U.S.C. Chapter 35. See 57 FR at 43834.

Federalism Implications

    This request for comments will have no substantial direct effects 
on the States, on the relationship between the national government and 
the States, or on the distribution of power and responsibilities among 
the various levels of government. Therefore, in accordance with 
Executive Order 13132, dated August 4, 1999, we have determined that it 
does not present sufficient federalism implications to warrant 
consultations with State and local governments.

Taking of Private Property

    This proposed rule would not effect a taking of private property or 
otherwise have taking implications under Executive Order 12630, 
Government Actions and Interference with Constitutionally Protected 
Property Rights.

Civil Justice Reform

    This proposed rule meets applicable standards in sections 3(a) and 
3(b)(2) of Executive Order 12988, Civil Justice Reform, to minimize 
litigation, eliminate ambiguity, and reduce burden.

Protection of Children

    We have analyzed this proposed rule under Executive Order 13045, 
Protection of Children from Environmental Health Risks and Safety 
Risks. This rule does not concern an environmental risk to health or 
risk to safety that may disproportionately affect children.

[[Page 69425]]

Consultation and Coordination With Tribal Governments

    This proposed rule will not have tribal implications, will not 
impose substantial direct compliance costs on Indian tribal 
governments, and will not preempt tribal law. Therefore, it is exempt 
from the consultation requirements of Executive Order 13175. If tribal 
implications are identified during the comment period, we will 
undertake appropriate consultations with the affected Indian tribal 
officials.

Energy Effects

    We have analyzed this proposed rule under Executive Order 13211, 
Actions Concerning Regulations That Significantly Affect Energy Supply, 
Distribution, or Use. We have determined that this is not classified as 
a ``significant energy action'' under that order because it is a 
``significant regulatory action'' under Executive Order 12866 and it 
would not have a significant adverse effect on the supply, 
distribution, or use of energy.

Environment

    The rule would have no significant impact on the environment.

List of Subjects

14 CFR Part 255

    Air carriers, Antitrust, Consumer protection, Reporting and record 
keeping requirements, Travel agents.

14 CFR Part 399

    Administrative practice and procedure, Air carriers, Air rates and 
fares, Consumer protection.

    1. 14 CFR Part 255 is proposed to be revised to read as follows:

PART 255--AIRLINE COMPUTER RESERVATIONS SYSTEMS

Sec.
255.1 Purpose.
255.2 Applicability.
255.3 Definitions.
255.4 Display of information.
255.5 Defaults and service enhancements.
255.6 Contracts with participating carriers.
255.7 Contracts with subscribers.
255.8 Use of third-party hardware, software and databases.
255.9 Marketing and booking information.
255.10 Exceptions.
255.11 Prohibition against carrier bias.

    Authority: 49 U.S.C. 40101, 40102, 40105, 40113, 41712.


Sec.  255.1.  Purpose.

    (a) The purpose of this part is to set forth requirements for the 
marketing and operation of computer reservations systems used by travel 
agents and certain related air carrier distribution practices so as to 
prevent unfair, deceptive, predatory, and anticompetitive practices in 
air transportation and the sale of air transportation.
    (b) Nothing in this part operates to exempt any person from the 
operation of the antitrust laws set forth in subsection (a) of the 
first section of the Clayton Act (15 U.S.C. 12).


Sec.  255.2.  Applicability.

    This part applies to firms that operate computerized reservations 
systems for travel agents in the United States, and to the sale in the 
United States of interstate, overseas, and foreign air transportation 
and of other airline services through such systems. Each carrier that 
owns, controls, operates, or markets a system shall ensure that the 
system's operations comply with the requirements of this part.


Sec.  255.3.  Definitions.

    Affiliate means any person controlling, owned by, controlled by, or 
under common control with a carrier.
    Availability means information provided in displays with respect to 
the seats a carrier holds out as available for sale on a particular 
flight.
    Carrier means any air carrier, any foreign air carrier, and any 
commuter air carrier, as defined in 49 U.S.C. 40102 (3), 49 U.S.C. 
40102 (22), and 14 CFR 298.2(f), respectively, that is engaged directly 
in the operation of aircraft in passenger air transportation.
    Discriminate, discrimination, and discriminatory mean, 
respectively, to discriminate unjustly, unjust discrimination, and 
unjustly discriminatory.
    Display means the system's presentation of carrier schedules, 
fares, rules or availability to a subscriber by means of a computer 
terminal.
    Integrated display means any display that includes the schedules, 
fares, rules, or availability of all or a significant proportion of the 
system's participating carriers.
    On-time performance code means a single-character code supplied by 
a carrier to the system in accordance with the provisions of 14 CFR 
Part 234 that reflects the monthly on-time performance history of a 
nonstop flight or one-stop or multi-stop single plane operation held 
out by the carrier in a CRS.
    Participating carrier means a carrier, including a system owner, 
that has an agreement with a system for display of its schedules, 
fares, or seat availability, or for the making of reservations or 
issuance of tickets through a system.
    Service enhancement means any product or service offered to 
subscribers or participating carriers in conjunction with a system 
other than the basic display of information on schedules, fares, rules, 
and availability, and the basic ability to make reservations or issue 
tickets for air transportation.
    Subscriber means a ticket agent, as defined in 49 U.S.C. 40102 
(40), that holds itself out as a neutral source of information about, 
or reservations for, the air transportation industry and that uses a 
system.
    System means a computerized reservations system offered to 
subscribers for use in the United States that contains information 
about schedules, fares, rules or availability of carriers and provides 
subscribers with the ability to make reservations, if it charges any 
other carrier a fee for system services, and if it is used by a 
subscriber under a formal contract with the system.
    System owner means a carrier that holds any of the equity of a 
system or that has one or more affiliates that hold such an equity 
interest.


Sec.  255.4  Display of information.

    (a) All systems shall provide at least one integrated display that 
includes the schedules, fares, rules, and availability of all 
participating carriers in accordance with the provisions of this 
section. This display shall be at least as useful for subscribers, in 
terms of functions or enhancements offered and the ease with which such 
functions or enhancements can be performed or implemented, as any other 
displays maintained by the system vendor. No system shall make 
available to subscribers any integrated display unless that display 
complies with the requirements of this section.
    (1) Each system must offer an integrated display that uses the same 
editing and ranking criteria for both on-line and interline connections 
and does not give on-line connections a system-imposed preference over 
interline connections. This display shall be at least as useful for 
subscribers, in terms of functions or enhancements offered and the ease 
with which such functions or enhancements can be performed or 
implemented, as any other display maintained by the system vendor.
    (2) Each integrated display offered by a system must either use 
elapsed time as a significant factor in selecting service options from 
the database or give single-plane flights a preference over connecting 
services in ranking services in displays.
    (b) In ordering the information contained in an integrated display, 
systems shall not use any factors

[[Page 69426]]

directly or indirectly relating to carrier identity.
    (1) Systems may order the display of information on the basis of 
any service criteria that do not reflect carrier identity and that are 
consistently applied to all carriers, including each system owner, and 
to all markets.
    (2) When a flight involves a change of aircraft at a point before 
the final destination, the display shall indicate that passengers on 
the flight will change from one aircraft to another.
    (3) Each system shall provide to any person upon request the 
current criteria used in editing and ordering flights for the 
integrated displays and the weight given to each criterion and the 
specifications used by the system's programmers in constructing the 
algorithm.
    (c) Systems shall not use any factors directly or indirectly 
relating to carrier identity in constructing the display of connecting 
flights in an integrated display.
    (1) Systems shall select the connecting points (and double connect 
points) to be used in the construction of connecting flights for each 
city pair on the basis of service criteria that do not reflect carrier 
identity and that are applied consistently to all carriers, including 
each system owner, and to all markets.
    (2) Systems shall select connecting flights for inclusion 
(``edit'') on the basis of service criteria that do not reflect carrier 
identity and that are applied consistently to all carriers, including 
each system owner.
    (3) Systems shall provide to any person upon request current 
information on:
    (i) All connecting points and double connect points used for each 
market;
    (ii) All criteria used to select connecting points and double 
connect points;
    (iii) All criteria used to ``edit'' connecting flights; and
    (iv) The weight given to each criterion in paragraphs (c)(3)(ii) 
and (iii) of this section.
    (4) Participating carriers shall be entitled to request that a 
system use up to five connect points (and double connect points) in 
constructing connecting flights for the display of service in a market. 
The system may require participating carriers to use specified 
procedures for such requests, but no such procedures may be 
unreasonably burdensome, and any procedures required of participating 
carriers also must be used by any system owner when it requests or 
causes its system to use specific points as connect points (or double 
connect points).
    (5) When a system selects connecting points and double connect 
points for use in constructing connecting flights it shall use at least 
fifteen points and six double connect points for each city-pair, except 
that a system may select fewer such connect or double connect points 
for a city-pair where:
    (i) Fewer than fifteen connecting points and six double connect 
points meet the service criteria described in paragraph (c)(1) of this 
section; and
    (ii) The system has used all the points that meet those criteria, 
along with all additional connecting points and double connect points 
requested by participating carriers.
    (6) If a system selects connecting points and double connect points 
for use in constructing connecting flights it shall use every point 
requested by itself or a participating carrier up to the maximum number 
of points that the system can use. The system may use fewer than all 
the connect points requested by itself and participating carriers to 
the extent that:
    (i) Points requested by the system and participating carriers do 
not meet the service criteria described in paragraph (c)(1) of this 
section; and
    (ii) The system has used all the points that meet those criteria.
    (7) If a connecting service is sold under the codes of two or more 
carriers, each system shall ensure that the service is displayed only 
once under the code of each carrier.
    (d) Each system shall apply the same standards of care and 
timeliness to loading information concerning participating carriers as 
it applies to the loading of its own information or the information of 
a system owner. Each system shall display accurately information 
submitted by participating carriers. No system owner may use procedures 
for providing information on its own services to its system that are 
not available to participating carriers. Each system shall provide to 
any person upon request all current data base update procedures and 
data formats.
    (e) Systems shall use or display information concerning on-time 
performance of flights as follows:
    (1) Within 10 days after receiving the information from 
participating carriers or third parties, each system shall include in 
all integrated schedule and availability displays the on-time 
performance code for each nonstop flight segment and one-stop or multi-
stop single plane flight, for which a participating carrier provides a 
code.
    (2) A system shall not use on-time flight performance as a ranking 
factor in ordering information contained in an integrated display.
    (f) Each participating carrier shall ensure that complete and 
accurate information is provided each system in a form such that the 
system is able to display its flights in accordance with this section.
    (g) A system may make available to subscribers the internal 
reservations system display of a system owner or other participating 
carrier, provided that all participating carriers are offered the 
ability to make their internal reservations displays available to 
subscribers, and provided further that a subscriber and its employees 
may see any such display only by requesting it for a specific 
transaction.


Sec.  255.5  Defaults and service enhancements.

    (a) In the event that a system offers a service enhancement to a 
system owner or other participating carrier, it shall offer the 
enhancement to all participating carriers on nondiscriminatory terms, 
except to the extent that such service enhancement is still in the 
development stage or that participation is not immediately feasible for 
technical reasons, in which event the system shall make it available to 
all participating carriers as soon as possible.
    (b) No system may create or maintain a default in any system 
feature that automatically prefers one or more system owners or 
airlines that directly or indirectly market the system over other 
participating carriers.


Sec.  255.6  Contracts with participating carriers.

    (a) No system may condition participation in its system on the 
purchase or sale of any other goods or services.
    (b) Notwithstanding paragraph (a) of this section, a system may 
condition participation in its system in the United States on a 
participating carrier's agreement to participate in the system or 
affiliated systems in other countries, if the system and such 
affiliates agree:
    (1) That the display of services in such system and its affiliates 
will not use any factors related to carrier identity and
    (2) That any fees charged the carrier shall not be discriminatory.
    (c) A system shall provide upon request to carriers current 
information on its fee levels and fee arrangements with other 
participating carriers. A system's bill to a participating carrier for 
any fee must contain adequate information and be on magnetic media so 
that the participating carrier can determine whether the bill is 
accurate. At a minimum, booking fee bills must

[[Page 69427]]

include the following information for each segment: PNR record locator 
number, passenger name, booking status, agency ARC number, pseudo-city 
code, CRS transaction date, city-pair information, flight number, 
flight date, class of service, and type of CRS booking.
    (d) No system may require a carrier (other than a carrier that owns 
or markets, or is an affiliate of a person that owns or markets, a 
foreign or domestic computerized reservations system) to maintain any 
particular level of participation or buy any enhancements in its system 
on the basis of participation levels or enhancements selected by that 
carrier in any other foreign or domestic computerized reservations 
system. A system may not compel a carrier that owns or markets, or is 
an affiliate of a person that owns or markets, a foreign or domestic 
computerized reservations system, to maintain a particular level of 
participation or buy an enhancements in its system on the basis of 
participation levels or enhancements selected by that carrier in 
another foreign or domestic computerized reservations system, until 14 
days after it has given the Department and such carrier written notice 
of its intent to take such action.
    (e) No system may bar a carrier from treating its subscribers 
differently from subscribers to other systems, if the difference in 
treatment is based on the system charging higher booking fees or 
offering poorer service to participating airlines than other systems, 
unless that carrier owns or markets, or is an affiliate of a person 
that owns or markets, a foreign or domestic computerized reservations 
system. No system may require any carrier as a condition to 
participation to provide it with fares that the carrier has chosen not 
to sell through any other system.


Sec.  255.7  Contracts with subscribers.

    (a) No subscriber contract may have a term in excess of five years. 
No system may offer a subscriber or potential subscriber a subscriber 
contract with a term in excess of three years unless the system 
simultaneously offers such subscriber or potential subscriber a 
subscriber contract with a term no longer than three years. No contract 
may contain any provision that automatically extends the contract 
beyond its stated date of termination, whether because of the addition 
or deletion of equipment or because of some other event. No contract 
may require a subscriber to pay damages for breach that are based upon 
any estimate or expectation that the subscriber would have used the 
system for any specified number of bookings during the remainder of the 
contract term.
    (b) No system may directly or indirectly impede a subscriber from 
obtaining or using any other system. Among other things, no subscriber 
contract or contract offer may require the subscriber to use a system 
for a minimum volume of transactions, and no subscriber contract or 
contract offer may require the subscriber to lease a minimum number or 
ratio of system components based upon or related to:
    (1) The number of system components leased from another system 
vendor or
    (2) The volume of transactions conducted on any other system.
    (c) No system may offer a subscriber either a payment of any kind 
or a discount from its fees for a subscriber's use of system services 
or equipment that is conditioned upon such subscriber's use of the 
system for a minimum share of the subscriber's total transactions. No 
system may directly or indirectly offer a subscriber any financial 
inducement designed or intended to encourage the subscriber to use a 
system for a minimum share of the subscriber's total transactions. No 
system may impose a penalty or liability of any kind on a subscriber as 
a result of such subscriber's failure to use the system for a minimum 
share of the subscriber's total transactions.
    (d) No system owner or carrier that directly or through an 
affiliate markets a system in the United States may require use of its 
system by the subscriber in any sale of its air transportation 
services.
    (e) No system owner or carrier that directly or through an 
affiliate markets a system in the United States may require that a 
travel agent use or subscribe to its system as a condition for the 
receipt of any commission for the sale of its air transportation 
services.
    (f) No system may charge prices to subscribers conditioned in whole 
or in part on the identity of carriers whose flights are sold by the 
subscriber.


Sec.  255.8  Use of third-party hardware, software and databases.

    (a) No system may prohibit or restrict, directly or indirectly:
    (1) The use of third-party computer hardware or software in 
conjunction with CRS services, except as necessary to protect the 
integrity of the system,
    (2) The use of a CRS terminal to access directly any other system 
or database providing information on airline services, or
    (3) The use of a back-office accounting system in conjunction with 
bookings made outside that system.
    (b) This section prohibits, among other things:
    (1) A system's imposition of fees in excess of commercially 
reasonable levels to certify third-party equipment;
    (2) A system's undue delays or redundant or unnecessary testing 
before certifying such equipment;
    (3) A system's refusal to provide any services normally provided 
subscribers because of a subscriber's use of third-party equipment or 
because of the subscriber's using the same equipment for access to both 
the system and to another system or database;
    (4) The system's termination of a subscriber contract because of 
the subscriber's use of third-party equipment or use of the same 
equipment for access to the system and to another system or database; 
and
    (5) The pricing of system services for subscribers using third-
party hardware and software at a level which is disproportionately high 
in relation to the pricing of services for subscribers that do not use 
third-party hardware and software.
    (c) A system shall make available to developers of third-party 
hardware and software on commercially reasonable terms the 
nonproprietary system architecture specifications and other 
nonproprietary technical information needed to enable such developers 
to create products that will be compatible with the system.
    (d) Nothing in this section shall be construed to require any 
system or system owner:
    (1) To develop or supply any particular product, device, hardware 
or software to enable a subscriber to use another system, or
    (2) To provide service or support with respect to any product, 
device, hardware, software, or service not provided to a susbscriber by 
the system or system owner.


Sec.  255.9  Marketing and booking information.

    (a) Each system shall make available to all U.S. participating 
carriers on nondiscriminatory terms all marketing, booking, and sales 
data relating to carriers that it elects to generate from its system. 
The data made available shall be as complete and accurate as the data 
provided a system owner.
    (b) Each system shall make available to all foreign participating 
carriers on nondiscriminatory terms all marketing, booking, and sales 
data relating to bookings on international services that it elects to 
generate from its system, provided that no system may provide such data 
to a foreign carrier if the foreign carrier or an affiliate owns, 
operates, or controls a system in a foreign country, unless such 
carrier or

[[Page 69428]]

system provides comparable data to all U.S. carriers on 
nondiscriminatory terms. Before a system provides such data to a 
foreign carrier, it shall give written notice to each of the U.S. 
participating carriers in its system that it will provide such data to 
such foreign carrier. The data made available by a system shall be as 
complete and accurate as the data provided a system owner.
    (c) Any U.S. or foreign carrier receiving data on international 
bookings from a system must ensure that no one has access to the data 
except its own personnel and the personnel of any outside firm used for 
processing the data on its behalf, except to the extent that the system 
or a system owner provides such access to other persons.
    (d) Notwithstanding paragraphs (a) and (b) of this section, no 
system may sell, and no carrier may buy or obtain, directly or 
indirectly, any marketing, booking, or sales data relating to carriers 
generated by a system insofar as the data include data identifying 
sales by individual subscribers, provided, that a system may sell, and 
a carrier may buy, data on sales or bookings in which that carrier will 
provide all or part of the transportation that identifies the 
individual subscriber making that sale or booking.
    (e) Notwithstanding paragraphs (a) and (b) of this section, no 
system may sell, and no carrier may buy or obtain, directly or 
indirectly, any marketing, booking, or sales data relating to carriers 
generated by a system insofar as the data include data generated from 
sales or bookings on any carrier that has not consented to the 
inclusion of data on its sales or bookings in the data being sold under 
this section.


Sec.  255.10  Exceptions.

    (a) The obligations of a system under Sec.  255.4 shall not apply 
with respect to a carrier that refuses to enter into a contract that 
complies with this part or fails to pay a nondiscriminatory fee. A 
system shall apply its policy concerning treatment of non-paying 
carriers on a uniform basis to all such carriers, and shall not receive 
payment from any carrier for system-related services unless such 
payments are made pursuant to a contract complying with this part.
    (b) The obligations of a system under this part shall not apply to 
any foreign carrier that operates or whose affiliate operates an 
airline computer reservations system for travel agents outside the 
United States, if that system discriminates against the display of 
flights of any United States carrier or imposes discriminatory terms 
for participation by any United States carrier in its computer 
reservations system, provided that a system must continue complying 
with its obligations under this part until 14 days after it has given 
the Department and such foreign carrier written notice of its intent to 
deny such foreign carrier any or all of the protections of this part.


Sec.  255.11  Prohibition against carrier bias.

    (a) No carrier may induce or attempt to induce a system to create a 
display that would not comply with the requirements of Sec.  255.4.
    (b) No system or carrier may make available to subscribers (by 
itself or in conjunction with a third party) any computer hardware or 
software that reorders an integrated system display on the basis of 
carrier identity.
    2. The authority citation for 14 CFR Part 399 continues to read as 
follows:

    Authority: 49 U.S.C. 40101 et seq.

    3. 14 CFR 399.84 is proposed to be revised to read as follows:


Sec.  399.84.  Price advertising

    (a) The Department considers any advertising or solicitation by a 
direct air carrier, indirect air carrier, or an agent of either, or a 
system (as defined by 14 CFR 255.3) for passenger air transportation, a 
tour i.e., a combination of air transportation and ground 
accommodations), or a tour component (e.g., a hotel stay) that states a 
price for such air transportation, tour, or tour component to be an 
unfair or deceptive practice, unless the price stated is the entire 
price to be paid by the customer to the air carrier, or agent, for such 
air transportation, tour, or tour component.
    (b) In any advertising or solicitation by an agent of an air 
carrier or indirect air carrier, the agent must separately list its 
service fees, if any, from the price for the air transportation, tour, 
or tour component, provided, that any offer to sell specific air 
transportation, tour, or tour component services must also state the 
entire price to be paid by the customer to the agent for such air 
transportation, tour, or tour component, including any service fee 
charged by the agent, and provided further, that such separate listing 
of a service fee will be considered an unfair and deceptive practice if 
the service fee is ad valorem in nature, if the fee exceeds the greater 
of $20 or ten percent of the price for the air transportation, tour, or 
tour component, and if the amount of the fee is not prominently 
disclosed and placed near the advertised fare or price.

    Issued in Washington, DC on October 29, 2002.
Norman Y. Mineta,
Secretary of Transportation.
[FR Doc. 02-28645 Filed 11-12-02; 8:45 am]

BILLING CODE 4910-62-P