1 UNITED STATES OF AMERICA BEFORE THE DEPARTMENT OF TRANSPORTATION

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COMMENTS OF THE AMERICAN ANTITRUST INSTITUTE ON TENTATIVE

FINDINGS AND CONCLUSIONS, TENTA TIVE DECISION, AND TENATIVE CONDITIONS ON APPROVAL ISSUED BY THE DEPARTMENT OF TRANSPORTATION The American Antitrust Institute (AAI) 1 appreciates this opport unity to comment on the Tentative Findings and Conclusions, Tentative Decision, and Tentative Conditions on Approval set forth in Order 2014-5-7 (“Orde r to Show Cause”). With resp ect to the competition issues raised in this proceeding, we understand the De partment to have broadly concluded (1) that adoption of a voluntary, nonexc lusive Extensible Mark-Up Language (XML) messaging standard, alone, is comp etitively unobjectionable, 2 and (2) that an agreement to standardize distribution would, at a minimum, require further scrutiny insofar as the structure of distribution in the airline industry should “ultimatel y be determined in the marketplace.” 3 While we agree with these overarching substantive conclusi ons, the Department’s Tentative Findings and Conclusions, Tentative Decision, and Tentativ e Conditions on Approval require important changes to avoid problematic misinterpret ation, as discussed in this submission.

1 The AAI’s Board of Directors alone has approved this filing for AAI. The individual views of members of the Advisory Board may differ from the AAI’s positions. 2 See Order to Show Cause at 10. 3 Id

.2 I. THE DEPARTMENT FACES A DIFFICU LT ADMINISTRATIVE CHALLENGE BECAUSE IT MUST CARVE THE NDC DI STRIBUTION STANDARD OUT OF ITS APPROVAL OF RESOLUTION 787 Many stakeholders, including IATA, apparen tly embrace the substantive conclusions reflected in the Department’s Order to Show Caus e, and thus the Department is now in the more agreeable position of being asked only to effect uate an accord between IATA and one of the leading critics of the orig inal Resolution 787 proposal. 4 Because the Department has tentatively approved this accord, subject to certai n modifications and clarifications, 5 its primary challenge at this stage of the proceedings is to clearly arti culate the nature and scope of its approval in writing. This task is made very difficult, and critically important, by th e iterative nature of IATA’s request for approval, which is cumulativ ely incorporated into a series of disparate submissions, including Resolution 787 itself, IATA ’s original applicatio n seeking approval of Resolution 787, the modifications to IATA’s pr oposal reflected in IATA’s reply to public comments, and the modifications to those modifi cations reflected in IATA’s Joint Motion with Open Allies for Airfare Transparency (“Joint Motion”). 6 The AAI offers these brief comments to make two suggestions to clarify the nature and scope of approval that would be c onferred in the Department’s written final order. First, insofar as the Department has determined that the agr eement to institute a ne w distribution standard

described in IATA’s New Distri bution Capability (NDC) proposal is not part of the overall Resolution 787 proposal that is be fore it for approval, but rather is merely a description of “goals,” the Department should gr ound its approval of Resolution 787 in the public benefits that

4 See IATA and Open Allies’ Joint Motion for L eave to File Agreed Limitations Concerning Resolution 787. 5 See Order to Show Cause at 9. 6 See AAI Response to IATA Reply at 3-4 (discussing problems associated with submitting a “moving target” for approval).3 would flow from the mode rnized communication sta ndard it is approving, not any claimed

benefits that would fl ow from the NDC distribution standa rd. Second, to avoid problematic misinterpretations of the scope of its approval, and the attenda nt tax on Department resources that would flow from future disputes caused by the ensuing confusion, the Department should state affirmatively that approval of Resolution 787 constitutes approval only to implement a new

communications standard.

II. THE DEPARTMENT’S BASES FOR APPROVAL SHOULD BE GROUNDED IN THE PUBLIC BENEFITS OF THE XML MESSAGING STANDARD IT IS APPROVING, NOT ALLEGED PUBLIC BENEFITS OF NDC In its Order to Show Cause, the Depart ment’s Summary states that Resolution 787 establishes a process for developi ng a technical standard for data exchange using XML, and that it “additionally establishes certain goals associated with using the new technical standard . . . . These goals are called the ‘New Distribution Capability’ (NDC).” 7 It then states that “IATA seeks Department approval of IATA Resolution 787.” 8 According to this formulation, IATA implicitly seeks approval of NDC, but only insofar as it describes “goals” rather than a formal agreement to standard ize distribution. In its Tentative Decision, the Department rules only on IATA’s concrete proposal to

institute a new technical standard for data exchange, and it does not accept IATA’s invitation to approve any abstract “goals,” le t alone a new distribution standar d. However, the Department’s Tentative Decision is suscepti ble to misinterpretation, name ly as embracing the purported “goals” of NDC, rather than the goals of th e new XML messaging standard, as its bases for

7 Order to Show Cause at 1. 8 Id

.4 approving the XML messaging standard. 9 In the “Public Benefits” subsection, for example, the Department explains the second of two “broad ca tegories of public benefits” justifying overall approval of Resolution 787 as follows: [T]he use of common technical standards could facilitate the marketplace development of distribution practices and cha nnels that would make it easier for consumers to compare competing carriers’ fares and ancillary products across multiple distribution channels, make purchasing more convenient, allow ca rriers to customize service and amenity offers, and increase transparency, efficiency, and competition. 10 AAI submits that this second category of public benefits should be eliminated, or altered, as a basis for approving Resolution 787, because IA TA claims this category of benefits would

arise from implementing NDC , not from adopting an XML messa ging standard. In a subsection of its application describing NDC as “A Vision for the Future,” IATA’s application clearly states, optimistically, that the same benefits quoted in the Department’s language above would arise upon implementation of NDC, after XML has already been adopted, which process “is expected to take at least a full year to complete.” 11 By grounding approval of Resolution 787 in a purported benefit of implementing NDC, yet e xpressly not approving NDC insofar as it describes an agreement to institute a new dist ribution standard, the Department’s Tentative Decision threatens to convey the mistaken message that adoption en masse of a single, industrywide distribution standard, other than by express agreement, would be beneficial for consumers. The Department can correct for this problem by e liminating this second category of benefits as a basis for approving Resolution 787, or altering it to cl arify that such benefits are capable of being

9 Id . at 9. 10 Id

. 11 See IATA Application at 5-6 (asserting “hope” that post-XML implementation of NDC would lead to three benefits: “(1) allowing a custom er to shop, select and purchase ancillary services or fares packaged with ancillaries, (2) the abilit y to see and weigh differences in competing products, such as more leg room, lie-flat premium seats, in-flight entertainment or WiFi along with price, and (3) customized service and amen ity packages and pricing based on attributes such as loyalty program status that the customer is willing to share in the shopping process.”)5 realized insofar as the Departme nt’s Conditions on Approval help en sure they do not come at the expense of distribution competition.

III. ADEQUATE COMPETITION AND CONS UMER PROTECTION WITHIN A DISTRIBUTION SYSTEM IS NOT A FUNCTION OF WHETHER THAT SYSTEM EMPLOYS AN XML MESSAGING STANDARD After the airline industry institutes mode rn, industry-wide tec hnical standards and protocols for data exchange, the current mechan isms for distribution of airline products could undergo a wide variety of changes. As the Order to Show Cause expressly states, one result of instituting XML “could” be that procompe titive distribution practices emerge through “marketplace development.” 12 As the Order to Show Cause also implicitly recognizes, however,

another result is that the indus try could use the adoption of a new technical st andard as an occasion to collusively agree to institute a single new distribution model, which would soften or eliminate intra-channel and inter-channel distribution competition to the detriment of

consumers. 13 We note that, importantly, this result is foreclosed by Section 1(a) of the Department’s Tentative Conditions on Approval, which expressly states that no formal agreement as such would be hereby approved. Still other results are possi ble, however. A third result could be that the industry coalesces around a single distributio n model through tacit rather than express coordination. The airlines, for example, could use the plain text of Resolution 787 as a roadmap to individually but uniformly adopt the industry-wide distribution model contemplated by NDC , with only a (tacit) wink and a nod rather than a formal agreement approved by the Department. Collusion has been

12 Order to Show Cause at 9. 13 See id . (adopting language from Joint Motion in response to concern that NDC “would establish a mandatory business process for all airlines th at wish to distribute enhanced content”).6 called “the supreme evil of antitrust,” 14 but “[t]acit coordination is f eared by antitrust policy even more than express collusion, for tacit coordina tion, even when observed, cannot easily be controlled directly by the antitrust laws.” 15 If the airlines were to “individually” switch to NDC’s single, industry-wide distribution mode l in unison, the competitive effects on intrachannel and inter-channel distri bution likely would be indistingui shable, from the consumer’s perspective, from the competitive effects that w ould result after an express agreement. Even worse, they would be more difficult to prosecute under the antitrust laws. If a distribution system that constrains competition is allowed to develop after the institution of common technical standards, the hi gher prices and reduced choice flowing from the softening or elimination of distribution-ch annel competition likely would dwarf any public benefits flowing from easier comparison shopping, customized offers, and increased transparency. Consumers likely would be co mparing, customizing, and discovering degraded and more expensive products. If the Depa rtment’s approval of Resolution 787 could be misinterpreted as approval of the goals or aspirations of NDC , the Department would send a dangerous message that could signal approval of the NDC vision for a single, coordinated distribution standard. As many pa rties noted in earlier comments, this is one of the alarming NDC “aspirations” under the plai n text of Resolution 787. Whether improved comparison shopping, customization and transp arency are a net public benef it depends entirely on the competitive characteristics of the distribution syst em that develops in the wake of the new XML messaging standard. As the Depa rtment has noted, any such syst em(s) should be the product of market forces. The Department should take care to ensure that its final written order does not

14 Verizon Communs., Inc. v. Law Offices of Curtis V. Trinko, LLP , 540 U.S. 398, 408 (2004). 15 FTC v. H.J. Heinz Co. , 246 F.3d 708, 716 (D.C. Cir. 2001).7 encourage the airline industry to pursue the functional equivalent of the NDC model insofar as that model contemplates a single, non-competitive distribution system.

IV. THE DEPARTMENT’S FINAL ORDER SHOULD AFFIRMATIVELY STATE THAT IT APPROVES ONLY THE XML STANDARD The complexities posed by the Department’s approval of Resolution 787 flow from the

dissonance between the text of th e resolution and the text of IATA ’s application for approval. The latter insists that IATA seeks approval only for a technical messaging standard, whereas the former intertwines that messaging standard with “[b]usiness . . . standards . . . to distribute products.” 16 The Department’s Tentative Decision treats NDC as an explanation of “goals,” and not as an agreement to institute a new distribution standard. It has determined that an agreement

to institute a new distribution standard is not part of the overall Resolution 787 proposal, and accordingly, is not before the Department for ap proval. The Department’s Tentative Conditions on Approval also go a long way toward allevia ting the most obvious concerns posed by the overall proposal. However, the Department’s Tentative Conditions primarily address what approval of Resolution 787 does not constitute, 17 and legitimate questions remain, including those discussed above, as to precisely what it does constitute. To avoid unintentionally communicating a pproval of any aspects of a potentially anticompetitive distribution system, and creati ng confusion which leads to disputes that unnecessarily tax the Department’s resources, the Department should affirmatively describe – in positive, rather than only negative, language – the boundaries of its approval of Resolution 787.

16 Resolution 787, Sec. 1.2.1 (“Key Principles”). 17 See, e.g. , Appendix at 1(a), 2, 3(b)-(c), 4, 5 (repeat edly referring to what agreement “does not constitute approval of”).8 This could be accomplished through an addition to the Tentative Conditions on Approval in the Appendix as follows: Resolution 787 is approved only insofar as it constitutes a reque st to implement a voluntary, non-exclusive XML me ssaging standard that could have been filed under Tier 1 of the Department’s three-tiered syst em for the filing and implementation of IATA agreements, and would have qualified fo r an exemption to Condition #2 to the IATA by-laws under Order 2012-4-18.

Respectfully submitted, Randy M. Stutz

Senior Counsel & Director of Special Projects American Antitrust Institute 202-905-9420 rstutz@antitrustinstitute.org Diana L. Moss, Ph.D.

Vice President American Antitrust Institute 720-233-5971 dmoss@antitrustinstitute.org June 11, 2014